-
The Wall Street Journal – Rising Cost of Debt Stokes Fears On Freddie’s Prospects
Freddie Mac was forced to offer unusually rich terms to investors in a $3 billion auction of its debt, raising anew concerns about the health of the mortgage giant, a vital prop for the U.S. housing market. Investors increasingly believe the U.S. government will take steps to rescue Freddie Mac and its sibling, Fannie Mae. The Treasury Department recently received authority from Congress to bail out the two companies, although it stopped short of doing so. Both now play a dominant role in financing mortgages. A rise in the companies’ borrowing costs could translate into higher mortgage rates for consumers, prolonging the housing slump. -
Bloomberg.com – Fannie, Freddie Bailouts May Hinge on Debt Rollover
Fannie Mae and Freddie Mac’s success in repaying $223 billion of bonds due by the end of the quarter may determine whether they can avoid a federal bailout. Fannie, based in Washington, has about $120 billion of debt maturing through Sept. 30, while McLean, Virginia-based Freddie has $103 billion, according to figures provided by the government-chartered companies and data compiled by Bloomberg. Rising borrowing costs and evidence that demand for their debt was waning last month led Treasury Secretary Henry Paulson to seek the authority to pump unlimited amounts of capital in Fannie and Freddie in an emergency. Their interest costs are again increasing amid concern that credit losses are depleting the capital of the beleaguered mortgage-finance companies. Rolling over the debt “is the single most important factor to their ability to remain liquid,” said Moshe Orenbuch, an analyst at Credit Suisse in New York. “So far, they’ve been able to do that.” -
The Wall Street Journal – Reliving the S&L Meltdown
For their part, Fannie and Freddie demonstrate why these two are now the cleanup’s biggest foot draggers, posing a giant risk to taxpayers…In effect, we are reliving the S&L crisis, with two giant S&Ls gambling on survival with taxpayer funds while politicians summon the will to act. Fannie and Freddie have started lending new money to delinquents to avoid foreclosures; they’re dangling cash incentives in front of loan servicers to delay recognition of hopeless cases. To preserve their mostly symbolic capital, the duo also are cutting funding for new mortgages (or at least saying so to drive up mortgage spreads) just when public policy has delivered us into total dependence on them to finance home sales. Who knows when the terminal market panic will come, forcing Mr. Paulson’s hand, but it surely was helped by this week’s Barron’s story pronouncing Fannie and Freddie doomed. In the meantime, the cost to taxpayers can only go higher — Mr. Paulson would be unwise to assume Fannie and Freddie’s current managements are doing a better job of earning their way out of trouble than a government receivership would. -
Bloomberg.com – Fed’s Lacker Clashes With Paulson on Fannie, Freddie
Richmond Federal Reserve Bank President Jeffrey Lacker called for “demonstrably” privatizing Fannie Mae and Freddie Mac, becoming the first Fed official to publicly clash with the Bush administration’s strategy of keeping them as federally backed firms. “I would prefer to see them credibly and demonstrably privatized,” Lacker said today in an interview with Bloomberg Television. He agreed with former Fed Chairman Alan Greenspan’s view that the two largest U.S. mortgage finance firms ought to be nationalized, then split up and sold off. -
The Financial Times – Lex: Mortgaged hope
The most surprising aspect of the rout in Fannie Mae’s and Freddie Mac’s shares this week is that there were still investors holding out hope for their equity in the government sponsored enterprises. This optimistic crowd have enjoyed brief periods of respite during a year in which Fannie and Freddie have shed more than 80 per cent of their value. Given that the two GSEs ought to be using any uptick to try to raise fresh capital, a process that would dilute existing investors, holding on at this point is an exercise in masochism. Even if the prospect of raising fresh equity in the usual way is moot when Fannie’s and Freddie’s combined market capitalisation amounts to all of $9bn, their free-falling stock prices help bring forward the day that the Treasury Department has to step in, wiping out equity holders completely.
Comment A few weeks ago we discussed why the market thinks Freddie is insolvent:
We believe the answer lies in Fannie and Freddie’s financial statements themselves. Recall that both Fannie and Freddie were involved in an accounting scandal. As part of the settlement with their regulator OFHEO, they were required to present a “fair value” balance sheet (a balance sheet marked at market prices and not at their “model prices”).
Freddie Mac’s fair value balance sheet shows a negative equity position for the second quarter in a row. As of June 30, “net assets” were -$5.6 billion, down from -$5.2 billion on March 31.
Mention the fair value balance sheet and the company will point to the pages of notes in their financial statement showing you why this is a meaningless indicator. They will point out that this is an inherently volatile measure. This is all true.
However, when the fair value balance starts to trend, as it is now and heading into negative territory, it tends to be a leading indicator of where its regulatory capital measures are going. Freddie has been very quiet in the idea that the fair value balance is telling us what is to come.
Tangible Book Value
A second measure of Freddie’s insolvency is their “Tangible Book Value.” This can be found here (page 2) in their Consolidated Balance Sheet. This measure shows net assets of $12.9 billion (this is also shown in the fair value balance sheet above under “Carrying Amount”). However, Freddie Mac is also carrying a “Deferred Tax Asset” of $18.399 billion. This means they can save $18.399 billion in taxes once they start making money again. Take this out of the equation and that gives a negative Tangible Book Value as of June 30.