Thursday, January 12, 2012

Return of Fannie & Freddie

They gave you life
And in return you gave them hell
As cold as ice
I hope we live to tell the tale
--Tears for Fears

Fannie Mae and Freddie Mac were at ground zero in the mortgage market meltdown. These government sponsored entities (GSEs), with their implicit backing from the federal government, helped push borrowing rates below market and foster risk taking on a broad scale.

That all came crashing down in 2007-2008 when market forces began correcting the excesses.

In late 2010/early 2011, it appeared bureaucrats had a rare moment of clarity, with many Congresspeople floating proposals to wind down the GSEs.

That moment was fleeting, however. The end of 2011 found Congress taking steps to increase, not decrease, the Federal Housing Authority's influence on the mortgage market. Increased revenue streams from Fannie/Freddie fees, increase in max FHA loan size, and expiry of tax deductions to private mortgage insurers are all likely to push more biz toward the GSEs.

Moreover, the FHA has been stepping in to back more mortgages. The volume of FHA backed loans has more than tripled over the past 4 years.

When Fannie and Freddie collapsed, each was carrying more than a $trillion in assets against a sliver (~$20-30 billion) in equity. With that much leverage, housing prices did not have to decline much to render the GSEs insolvent and push them into government receivership.

These new actions finds federally sponsored housing entities levering up again.

You can bet that, once again, when these institutions inevitably lock up again, the feds will surely be pointing fingers at the other guy.

position in SPX

1 comment:

dgeorge12358 said...

In December the Pimco Total Return Fund doubled down by "borrowing" even more cash, or a record $78 billion, using the proceeds to buy even more MBS, as well as Treasurys, which hit a combined 31% of the TRF's holdings.