Nov 7, 2010

How Can You Tell That Fannie and Freddie Are Government Owned? They Keep Asking For More

Fannie says they would be close to profitable if they didn’t have to pay interest on the money they received in the bailout. Isn’t that like a home owner not going into foreclosure if they didn’t have to repay their loan.

I started a thread about Fannie Mae nearly three years ago but stopped because the story was always the same. There was a single line is this AP article that inspired me. The article: Fannie Mae asks for $2.5 billion in new US aid. And the line from that article: “Fannie and Freddie together have repaid $16.7 billion as dividends to the Treasury Department.”

The reason I found that line so interesting was that the AP writer, Marcy Gordon, said that they have “repaid…as dividends” quite a bit of money. Dividends are like interest, it is earned off of the principle. They have yet to repay any of the principle. Fannie issued a statement last week saying that they would have been profitable if they didn’t have to pay back the government.

From Fannie Mae’s November 5, 2010 Press Release:

WASHINGTON DC – Fannie Mae (FNMA/OTC) today reported a net loss of $1.3 billion in the third quarter of 2010, compared to a net loss of $1.2 billion in the second quarter of the year. The company continues to focus on building a strong new book of business and returning to profitability (excluding Treasury dividend payments)”

In fact they haven’t “repaid” the government anything, all they have done is to pay the dividends on the money they needed to keep them from going under. Since the government takeover and they received their bailout money, Fannie and Freddie have been asking for billions every quarter. Yet they have the nerve to suggest that it’s the governments fault their not making money.

In order not to mislead, Fannie has announced the repurchase of $1.3 billion of notes on the 15th. So they need $2.5 billion more so they can repay $1.5 billion.  Now that is how you get ahead.

Fannie Mae and Freddie Mac hold 70% of all mortgages in the U.S. and FHA hold another 20%. In the last two years they have lost $249 billion. or $1768 for every taxpayer. Notice I said taxpayer because if you don’t pay taxes they haven’t cost you anything.

Over that same period the Treasury has purchased $1.25 trillion in MBO’s (Mortgage Backed Obligations) leaving almost no private mortgage market. It is all government owned or backed.

Both the Federal Reserve and the Treasury have well over a trillion dollars each to use to ease the credit markets. So why are they printing another $600 billion?

The media is saying that it is to stimulate the economy by spreading some money around and to create jobs by making our exports more attractive. The money spreading helps the financial markets and the cheaper dollar only helps the multi-nationals. Aren’t those the same ones they have been blaming for our situation.

The Fed is putting the money into the economy by buying (with newly printed money)$75 billion in Treasury Notes each month for eight months. The question is why are they doing it this way. Why is the government borrowing money from the government and not in a way that that gets the money into the pockets of consumers. You and I, the consumers, represent 70% of the economy. Or into an investment tax credit that motivates business to upgrade and hire.

The answer is in the housing market. There has never been a recovery that didn’t include housing and the abnormally low rates we have had has not been enough to overcome the unemployment rate and the depressed wages it has caused. By purchasing $90 billion a month they will keep the price of Treasuries artificially low as to not effect mortgage rates.

That brings up the point that at these rates private enterprise would never be interested in funding home mortgages. So without Fannie, Freddie and FHA there would be no housing market.

If the recovery doesn’t kick-in in the next eight months, will they have to print more? As the dollar weakens because of this financial engineering will they have to raise rates to slow the economy to keep inflation from getting totally out of hand.

Again the winners are the major corporations that are flooding the debt markets with cheap paper. IBM just raised $1.6 billion at ¾ of one percent. Unbelievable. Did you ever think that companies could borrow money at less than 1%.

The government, in their politically expedient effort to make home ownership available to everyone, caused this recession. They loosened the rules and demanded that the banks make loans that they would of never done in the past. The banks stood to lose little with Fannie and Freddie either buying or securing them.

If the government would of let the chips fall, the housing crisis would have been washed out by now. Because of government intervention there is still 3 million homes that still need to go through foreclosure. That is as many as been foreclosed on in the last two years.

The result of this financial engineering could be worse. Bye replacing the mortgage bubble with a Treasury or liquidity bubble we could end up with a devalued dollar, devastating debt payments, crippling inflation and soaring interest rates. The Federal Reserve seems to be making all of their long term assumptions that foreign entities will continue to want Treasuries. If the dollar falls any more they will accelerate the rate at which they have been pulling their money out of the U.S..

It’s not too late for Washington to change direction and make some sound decisions instead of taking the path that produces the best sound bite. The media needs to stop reporting political sound bites as fact. The President needs to stop social engineering.