Posted on11 March 2010.
Posted Mar 08, 2010 03:34pm EST by Aaron Task in Investing, Recession, Banking, Housing, Politics
House Financial Services Chairman Barney Frank caused a bit of an uproar Friday when he suggested the U.S. government does not guarantee the debts of Fannie Mae and Freddie Mac.
Rep. Frank later recanted and backed a Treasury Department statement reassuring investors that, yes, Fannie and Freddie Mae debt is guaranteed by the U.S. government. “Going forward,” he said in a statement, we “will make sure that there are no implicit guarantees, hints, suggestions, or winks and nods…we will be explicit about what is and is not an obligation of the federal government.”
But after years of winks and nods, there’s no doubt that Fannie and Freddie now enjoy an explicit guarantee, according to most observers. The U.S. government placed Fannie Mae and Freddie Mac in conservatorship in September 2008: “This means that the U.S. Taxpayer now stands behind $5 trillion of GSE debt,” according to the Congressional Research Service.
The problem is that $5 trillion of so-called agency paper is not treated as if it is a debt of Uncle Sam for accounting purposes, says Richard Suttmeier, chief market strategist at Niagara International Capital and ValueEngine.com.
“Get it on the balance sheet – that’s where it belongs,” Suttmeier says. “Add it to the $14.2 trillion in [federal] debt and let’s move on.”
Another Time Bomb Ticking But $5 trillion is a lot of money – even by government standards — and moving on may be the problem because of ongoing problems in the housing market, Suttmeier says. “There’s a general concern on Main Street U.S.A. that ‘my neighbors are throwing in their keys, there’s more for sale signs in my community…do I want to buy a new home, risking there’s still downside risk to housing?’ ”
Noting the Case-Shiller 20-City Home Price Index is still 50% above 1999 levels and mortgage delinquencies are still rising despite the rebound in GDP, Suttmeier says “victory is nowhere in sight, particularly when the drain we’re going to see from Fannie and Freddie is unlimited losses between now and the end of 2012 — on top of the $400 billion that’s already been allocated.”
Coincidentally (or not), the FDIC is allowing U.S. banks until 2012 before forcing them to fully write-down bad or toxic loans, which is “another time bomb ticking,” Suttmeier says. “They’re hoping the public market comes back into the mortgage arena, which is going to be hard to do.”
Unlimited losses from Fannie and Freddie? Keeping zombie banks alive on the backs of the taxpayer? Suttmeier’s right: There’s no accounting for that.
(Reuters) - The government's mortgage buyer Fannie Mae on Friday sought a further $5.1 billion from taxpayers, as the Obama administration struggled to keep Americans in their homes.
With high unemployment and foreclosures expected to put more downward pressure on home prices, the government's efforts to help the housing market has had little impact.
Federal housing authorities said it had "much more work to do to help the market recover and to reach the many households...across the nation who still face trouble."
Under the administration's premier housing program that provides financial incentives for banks to help borrowers rework their loans, nearly 32,000 homeowners won lower mortgage payments in June.
So far that program has provided 763,071 borrowers with permanent loan modifications, far fewer than the administration's initial goal of helping up to four million homeowners.
The administration has been mulling ways to help the housing market and recently unveiled plans to give unemployed borrowers and their bankers more time to delay home foreclosures.
But economists see little relief ahead.
"The housing market problem is simple - too much supply against demand," said Steve Blitz, senior economist with ITG Investment Research in New York. "The weak economy has made lots of people anxious to sell but they are holding off waiting for a better bid."
FANNIE LOSS ON MORTGAGE MARKET WEAKNESS
Earlier on Friday, the largest U.S. residential mortgage funds provider reported a second-quarter net loss attributable to common shareholders of $5.2 billion, or 90 cents per share.
Fannie Mae said its second-quarter loss "reflects the continued weakness in the housing and mortgage markets" as well as expenses related to mortgage modifications to keep struggling borrowers in their homes.
Continued economic weakness and mounting foreclosures have caused U.S. home prices to fall this year, and it is unclear when they will finally bottom.
"I think it's going to continue to be a bumpy ride for a while," Fannie Mae Chief Financial Officer Susan McFarland told Reuters. "We've got to clear the mortgage market of the excess inventory and employment needs to recover, I believe, before we're going to see a stabilization of home prices," she said.
Fannie Mae and sister entity Freddie Mac were seized by the government in September 2008 as losses mounted from mortgages gone bad. To stay solvent, the two firms together have needed about $169 billion in taxpayer bailout funds, including Fannie Mae's latest request. Their net capital draw has been about $143 billion after paying back dividends to the U.S. Treasury.
(Editing by Chizu Nomiyama)