Fannie/Freddie To Be Backed By Fed, Treasury

As I sat down at my desk this morning to write this, I glanced over at my Aurora mouse pad, my First Magnus coffee mug, my American Home pencil holder, my Indymac calendar, my Paul Financial paper clips, as my Greenpoint duck looked down from the computer. I thought to myself, “I hope that my Freddie coffee mug and Fannie Mae briefs are in good shape!” (No comments, please.) Over the weekend the government confirmed that they will do everything it can to avert a meltdown in the conforming mortgage market and will continue to stand behind the government-sponsored enterprises – not individual mortgage companies.

FANNIE/FREDDIE UPDATES
Do Capital Markets guys, and Secondary guys, have some secret pleasure in watching a company go belly up that agents were always asking to get approved with, or re-approved with? Never! In this case, not only did Indymac stop buying mortgages, but then their bank went under.

“On, Friday, July 11, 2008, IndyMac Bank, FSB was closed by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation was appointed as Receiver. The Receiver is charged with the duty of winding up the affairs of IndyMac Bank. On the same date, a new institution was chartered, IndyMac Federal Bank, FSB (“IndyMac Federal Bank”), and the OTS immediately placed IndyMac Federal Bank into conservatorship and appointed the FDIC as Conservator.”

Based on preliminary analysis, the estimated cost of the resolution to the Deposit Insurance Fund is between $4 and $8 billion. IndyMac Bank is the fifth FDIC-insured failure of the year and the first in California since Southern Pacific Bank in 2003.

Forget that on Friday the U.S. trade gap narrowed, U.S. import prices increased 2.6%, and the University of Michigan Consumer Sentiment rose to 56.6 from 56.4. Rates went up because of speculation that the government will support Fannie, Freddie – which turned out to be the case! Security prices fell, and rates rose, with speculation the U.S. government wouldn’t allow Fannie Mae and Freddie Mac to fail, reducing demand for the relative safety of government debt. The possibility that the U.S. Treasury could lose its top AAA credit rating if it’s forced to bail out the two government-sponsored enterprises may cause credit-default swaps on government debt to widen while contracts tied to the senior debt of Fannie and Freddie narrow. Last week Fannie Mae stock dropped 45%, and Freddie Mac sank 47%, on concern the two companies, which own or guarantee about half of the $12 trillion of U.S. mortgages, may require a bailout that would wipe out shareholders.

Over the weekend the Fed announced 3 broad measures:

First, it authorized Federal Reserve Bank of New York to lend directly to Fannie Mae and Freddie Mac, should it become necessary, at the prime rate and collateralized by federal agency and Treasury securities, and for up to 18 months. (This step does not require legislative approval.) Of course, in exchange for the privilege of borrowing at the discount window, the Federal Reserve will now have a consultative role in setting prudential standards and capital requirements for the GSEs, which has implications for the GSE business model. (“Beggars can’t be choosers.”)

Second, the Treasury will seek Congressional approval to temporarily increase the GSEs’ line of credit, which currently stands at $2.25 billion, for 18 months. This should ease any worries among foreign central banks and other investors about whether the senior debt is backed. The implicit guarantee is in place, and this helps alleviate fears of a U.S. recession.

Third, the Treasury is also seeking authority for a temporary equity infusion into the companies, if necessary. Both of these moves are likely to be inserted into the Housing Bill that is making its way through Congress, and are likely to be “swiftly approved” by the end of the week, according to press reports.

Experts continue to believe that the US government will do whatever is needed to stabilize the ability of Fannie Mae and Freddie Mac to maintain their current role in the mortgage market. But before you break out the champagne, and buy that REO you’ve had your eye on, most economists do not view these measures as a turning point for the US housing market. They confirm that the government will do everything it can to avert a meltdown in the conforming mortgage market and will continue to stand behind the government-sponsored enterprises – not individual mortgage companies.

The 3 best stories I’ve seen on FNMA/FHLMC are here, here, and here.

HOUSE MORTGAGE AID BILL
Speaking of the Housing Bill, the U.S. Senate completed work Friday on its plan and sent it to the House of Representatives. The legislation is opposed by the White House, and a veto is likely in its current form. Differences with the House’s version must be resolved before a final bill can be sent to President George W. Bush in the hope he will sign it into law.

CAN THE FED BAN PREPAYMENT PENALTIES?
This story appeared over the weekend: “The Federal Reserve, in a bid to end abusive lending practices, will ban penalties on some high-cost mortgages that make it harder for people to refinance, a person familiar with the decision said. The prohibition on prepayment penalties, part of a broader Fed response to the collapse of the subprime mortgage market, targets high-cost loans with interest rates that reset in the first four years, the person said. Rules also would limit charges when borrowers seek to pay off mortgages in the first two years on other types of high-priced loans, the person said. The Federal Reserve Board of Governors will vote July 14 on a series of rules to strengthen protections for borrowers taking out subprime home loans. Lenders use prepayment penalties to discourage borrowers from refinancing their loans and can trap borrowers in loans they can’t afford, consumer advocates said.”

MARKET REACTION
What has all of this done to our dear ol’ mortgage rates this morning? The 10-yr is currently at 3.95%, and mortgages are a tad better than Friday afternoon – but have improved relative to Treasury securities. The news of the government stepping in certainly has helped the stock market, pre-opening. There are no scheduled announcements today, but the rest of the week will be a busy: Tuesday’s June PPI (expected +1.3% overall and +0.3% core), Wednesday’s June CPI (expected +0.7% overall and +0.2% core), and Thursday’s weekly jobless claims & June’s housing starts (expected -1.0%).

JOKE OF THE DAY
Thank you Cindy E:
A blonde calls her boyfriend and says, “Please come over here and help me. I have a killer jigsaw puzzle, and I can’t figure out how to get started.”
Her boyfriend asks, “What is it supposed to be when it’s finished?”
The blonde says, “According to the picture on the box, it’s a rooster.”
Her boyfriend decides to go over and help with the puzzle. She lets him in and shows him where she has the puzzle spread all over the table.
He studies the pieces for a moment, then looks at the box, then turns to her and says, “First of all, no matter what we do, we’re not going to be able to assemble these pieces into anything resembling a rooster.”
He takes her hand and says, “Second, I want you to relax. Let’s have a nice cup of tea,” and then, he said with a deep sigh, “Let’s put all the Corn Flakes back in the box.”