Fannie & Freddie fears hit market

John Dimsdale Jul 10, 2008

Fannie & Freddie fears hit market

John Dimsdale Jul 10, 2008


Kai Ryssdal: And so to take the days rumors in sequence, the first was that Fannie Mae and Freddie Mac are in deep and serious trouble — never mind that a Fannie Mae spokesman and its main government regulator came out this afternoon and said everything’s fine.

Wall Street deducted almost 14 percent from that company’s stock price today, 22 percent from Freddie Mac’s, and here’s why: Between them they’ve got $5 trillion worth of outstanding mortgages and billions in losses.

The Wall Street Journal reports the Treasury Department’s so worried it’s putting a contingency plan together — you know, just in case.

Our Washington bureau chief John Dimsdale reports there’s really no other way out for the government since Fannie and Freddie might be the very definition of too big to fail.

John Dimsdale: On Capitol Hill today, both Ben Bernanke and Henry Paulson downplayed talk of a looming government bailout. Here’s Paulson:

Henry Paulson: I don’t think we should be speculating or talking about what ifs with any particular institutions.

Fannie and Freddie are government sponsored companies that buy mortgages from banks so they can keep on lending. Fannie and Freddie underwrite half the nation’s mortgages and as housing crisis deepens, investors wonder if these giants have the capital to cover their loans.

The Milken Institute’s James Barth says there’s added anxiety because Fannie and Freddie are supposed to be the mortgage mess solution, not the problem.

James Barth: We know the Congress has been trying to shift a greater burden onto Freddie Mac and Fannie Mae to deal with the housing problems. The marketplace knows that and becomes wary of that sort of push.

Peter Wallison: To me, it is unimaginable that the government will not bail them out if they get into difficulty.

Peter Wallison follows Fannie and Freddie for the American Enterprise Institute. He says they’ve become so integral to the mortgage market, the government has no choice but to backstop them.

Wallison: If now the federal government steps away from these obligations, it would reduce substantially the capital of all commercial banks and have a huge adverse impact on lending in the United States at a time when that’s not what we need for our economy.

But the bill will go to taxpayers, who’ll be underwriting Fannie and Freddie’s capital and that would let them to continue buying out bank mortgages.

Mortgage industry analyst Tom Lamalfa says it’s Fannie and Freddie’s dominance of the mortgage market that caused the problem in the first place.

Tom Lamalfa: Because of their center stage position if you will, they began to push more and more private sector lenders into niche markets. Ultimately, that led to the bubble we’ve been experiencing.

Lamalfa says he and other analysts have been warning regulators for years that Fannie and Freddie had become the problem and not the solution for the mortgage industry.

In Washington, I’m John Dimsdale for Marketplace.

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