News and commentary

Fannie & Freddie – The “Frick & Frack” of the Mortgage Market

By Richard Suttmeier
Updated: Monday, August 04 2008 12:08:PM

The Housing Rescue Bill signed without fanfare Wednesday morning is probably the worst economically sensitive bill ever passed. In fact I question the bill’s constitutionality! The bill puts the Fannie and Freddie $5.2 trillion in mortgages on the back of US taxpayers, as this debt can now be assumed be unconditionally backed by the full faith and credit of the United States Government.
 
The national debt was recently given a permanent increase to $10.6 trillion from current cap of $9.8 trillion – up $800 billion. Current national debt stands at $9.6 trillion. In my judgment the national debt should be raised to a temporary $15.8 trillion to accommodate Fannie & Freddie, because the Housing Rescue Bill buts their entire debt of these GSEs on the back of the United States Government for the next eighteen months. ($9.6 + $5.2 = $14.8, well above the permanent ceiling).
 
The bill breaks the pledge that President Bush made when the subprime mess first surfaced, “The Government will not bail out lenders or speculators”! When he made that pledge I predicted that it would be just like his dad’s pledge, “Read my lips, no new taxes.”
 
Now “Frick & Frack” are set to report additional credit losses in their second quarter earnings. Some view the two as not having enough capital to offset losses and maintain their roles as mortgage underwriters.
  • Payouts on mortgage loans they guarantee are forcing the companies to raise funds through debt issuance to make interest and principal payments, as defaults and foreclosures rise.
  • Now the US Government and hence taxpayers are on the hook for these payments if necessary.
  • Both Frick & Frack face downgrades by S&P, which will only make matters worse.
  • Keep in mind that Frick & Frack own or guarantee nearly half of the $12 trillion mortgage market.
  • The Housing Bill gives the US Treasury provisions to buy equity capital in the two and extend credit to them.
 
More mortgage defaults are on the way and predictions are that up to $450 billion or 85% of “AAA” rated Alt-A mortgages will fail to default. As this chart shows there are mortgage resets right through 2011.