Fannie and Freddie moving market

A new era in mortgage lending begins today as Fannie Mae and Freddie Mac transition from Government Sponsored Enterprises to "government owned" and managed entities. The implicit guarantee behind Fannie and Freddie that we've known for decades is now explicit. The CEOs of both companies have been replaced and the companies have been moved into conservatorship by the U.S. Government. So this means the US government owns more of your home than most home owners do.

There are many unknowns, but one thing is clear... for now, the international and domestic stock markets have greeted the "mother of all bailouts" as positive. Stocks are moving significantly higher and treasuries are getting crushed in the stampede to equities. In fact, trading volume was so high in London this morning that the computer system at the London Stock Exchange melted down. London traders have been without access to their computerized pricing system for more than six hours.


Secretary Paulson and James Lockhart, the head of the Federal Housing Finance Agency (FHFA), have indicated that the portfolios of the "former GSEs" must shrink to reduce future risk to taxpayers. That's a nice idea, but who will buy mortgages in this environment if Fannie and Freddie decelerate their purchase activity? And, what kind of mortgages will Fannie and Freddie be buying in the future? Will they take on more or less risk? Will they continue to be saddled with the obviously impossible dual responsibilities of creating shareholder value while meeting the affordable housing goals of our government? Congress needs to define the roles of these two companies for the long term.

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Aug 20 2008 Emini S&P 500 futures ES hourly close

Stayed in the range. Tomorrow could see it close the gap.

Fannie and Freddie moving market, bonds, oil

Fannie Mae and Freddie Mac tumbled in New York trading to the lowest valuations since at least 1990 as speculation increased that the U.S. Treasury will bail out the mortgage-finance companies, wiping out shareholders. Fannie, based in Washington, slumped as much as 20 percent and McLean, Virginia-based Freddie dropped as much as 32 percent, extending its losses to 90 percent for the year. 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. Freddie paid its highest yields on record in a debt sale yesterday amid concern that credit losses are depleting the capital of the beleaguered mortgage-finance companies.

Fannie and Freddie have $223 billion of bonds due by the end of the quarter and their success in rolling over that debt may determine whether they can avoid a federal bailout. Fannie has about $120 billion of debt maturing through Sept. 30, while Freddie has $103 billion.
Treasuries rose after a report that Freddie Mac will meet with government officials, fueling concern a takeover of the mortgage-finance provider is imminent and leading investors to the safety of government debt.

Oil prices began creeping upward this morning, but a government report that reflected a surprising increase in crude supply stalled the oil rally and allowed The Dow to climb as much as 80 points before falling back. Treasuries are steady with the 10 Year yielding 3.80%.

Aug 6 economy today

Freddie Mac, the U.S. mortgage-finance company hobbled by record foreclosures, slashed its dividend at least 80 percent after posting a quarterly loss that was three times wider than analysts' estimates. Freddie dropped as much as 17 percent in New York trading and the larger Fannie Mae declined 14 percent on mounting concern that the government-chartered companies will sacrifice shareholders to bolster capital and avoid a bailout by the Treasury. Freddie doubled its reserves for future home-loan losses to $2.8 billion. Freddie has 22,000 properties in foreclosure, the most since the company was created in 1970 during the Vietnam War, and now anticipates losing 26 percent on each loan, up from 22 percent. McLean, Virginia-based Freddie has plunged 76 percent this year on concern the company may not have enough capital to overcome delinquencies on the $2.2 trillion of mortgages it owns and guarantees.

Crude oil futures have tumbled more than 20 percent since touching a record $147.27 a barrel in New York on July 11, a threshold often seen as the start of a bear market. Oil fell as low as $117.50 a barrel, amid signs of a global economic slowdown likely to curtail already weakening demand. The dollar today touched its highest in more than seven weeks against the euro, lessening the appeal of commodities as an inflation hedge. The decline follows a one-year doubling of prices as the dollar weakened, demand in Asia grew and Iran's nuclear program spurred concern that the country, the Middle-East's second- biggest oil producer, might face a military attack from Israel.

When will rates get better? S&P 500 is starting to fall.

Looking back to Friday, we had a nice improvement in both Treasury rates and mortgage prices after the payroll numbers indicated that labor is indeed slowing. The market believes that the Fed will lower overnight interest rates by 75 bps at the FOMC meeting next Tuesday, and some think that Fed Funds may eventually hit 2.0%. Friday's job report had very little "good" news for the economy, as NonFarm payrolls dropped for the second consecutive month, with back-month revisions downward, and most industries showed job losses.

This week we'll see the US trade deficit report tomorrow (expected -$59 billion), Thursday's weekly jobless claims (expected +4k to 355k), February Retail Sales (expected +0.8%), and then on Friday the Consumer Price Index for February (expected +0.3%) and the University of Michigan's Consumer Confidence report (expected -0.4). Currently the 10-yr is at 3.53% and mortgages are roughly unchanged from Friday.


So here's the $100 million question.... When the heck are mortgage prices going to improve? Why is the 10-yr Treasury down into the 3.5% range, yet conforming/conventional 30-yr loans, eligible for FNMA & FHLMC, back up into the 6% range? The widening that is occurring out to these levels, which statistically speaking happens once every 4,000 years, is a combination of several factors.

First, investors and money managers feel safer putting their money into Treasury securities rather than mortgage-related securities (right now, that seems like a "no brainer") Subjecting their money to the potential of borrowers defaulting and property depreciation is something that many prefer not to do. These two factors have led to losses for FNMA & FHLMC, along with others, and some investors have been selling mortgage securities in order to meet capital requirements. And selling has led to lower prices, and thus higher rates. That's it in a nut shell.

Treasuries rose, with three-month bill rates dropping to the lowest since 2004, as reports showed the economy's fourth-quarter growth was less than forecast and first-time claims for jobless benefits increased last week.

U.S. government debt also advanced as stocks declined and phone company Sprint Nextel Corp. and mortgage financier Freddie Mac said they lost almost $32 billion last quarter. Federal Reserve Chairman Ben S. Bernanke told a Senate committee today that it's ``fair'' to say the bank has a tougher time responding to the current slowdown compared with the recession of 2001. Initial jobless claims increased by 19,000 to 373,000 in the week ended Feb. 23, from a revised 354,000 a week earlier that was higher than previously reported.


Traders increased bets that the central bank will reduce the target rate for overnight lending between banks by more than a half-percentage point next month. Bernanke signaled he's ready to lower interest rates again in testimony to a Senate panel today. Ten-year note yields may fall to 3.55 percent by the end of June with the most recent forecasts given the heaviest weighting. Two-year yields may rise to 2.06 percent, from 1.86 percent today.


Freddie Mac, the second-largest mortgage-finance company, posted a record $2.45 billion fourth- quarter loss as rising defaults sent credit costs soaring. Freddie Mac, which buys and guarantees home loans, had predicted the results would be similar to the third-quarter's $2 billion loss.