Doubts raised about the future of Federal Lenders (updated)

Rick Moran
I don't pretend to fully understand the workings of the government's big housing lenders Fannie Mae and Freddie Mac. But when many experts start to worry about their future solvency, I find that extremely troubling:

But with mortgage defaults and foreclosures rising, Bush administration officials, regulators and lawmakers are nervously asking whether these two companies, would-be saviors of the housing market, will soon need saving themselves.

The companies, which say fears that they might falter are baseless, have recently received broad new powers and billions of dollars of investing authority from the federal government. And as Wall Street all but abandons the mortgage business, Fannie Mae and Freddie Mac now overwhelmingly dominate it, handling more than 80 percent of all mortgages bought by investors in the first quarter of this year. That is more than double their market share in 2006.

But some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion - the capital that their regulator requires them to hold - underpins a colossal $5 trillion in debt and other financial commitments.

It is thought that Fannie Mae alone is sitting on another $19 billion in losses that it has yet to report. And if the credit crisis in housing continues and home values keep plummeting, a very large financial chasm could open up where taxpayers would be forced to bail out these giants making the Savings and Loan bailout look like a walk in the park.

The government is jawboning the two entities to acquire more capital --  and hurry up about it:

As a result, high-ranking government officials are now quietly threatening to publicly criticize the two companies if they do not soon raise large amounts of capital, people with firsthand knowledge of those threats say. William Poole, a president of a Federal Reserve bank who has since retired, has warned that companies like Fannie Mae and Freddie Mac are "at the top of my list of sources of potentially serious trouble."

A report last month by the agency overseeing the companies said that they pose "significant supervisory concerns" and that Freddie Mac suffers "internal control weaknesses."

Lawmakers are pushing to rein in the companies with new legislation. Senator Christopher J. Dodd, the Connecticut Democrat who leads the Banking Committee, will soon take up legislation giving the government broad authority over the companies. Lawmakers say it is likely a bill will pass this year.

"They are on real thin ice financially," said Senator Richard C. Shelby of Alabama, the senior Republican on the Banking Committee. "And the way the law is written right now, there is very little we can do to correct that."

This is one of those issues that lurks in the background and then suddenly comes to the fore. Let's hope these problems are addressed before that happens.

Update -- Thomas Lifson adds:

Freddie Mac and Fannie Mae use federal guarantees but are private corporations, and until the market in securitized mortgages turned south, made gazillions of dollars. There has long been a significant moral hazzard in their operations. But the underlying housing market is showing signs of bottoming out, as new house construction has been so low that underlying demand trends are catching up to the oversupply.

I think the mess at the two agencies enjoying access to federal guarantees needs to be straightened out, but the sky is most assuredly not falling.
I don't pretend to fully understand the workings of the government's big housing lenders Fannie Mae and Freddie Mac. But when many experts start to worry about their future solvency, I find that extremely troubling:

But with mortgage defaults and foreclosures rising, Bush administration officials, regulators and lawmakers are nervously asking whether these two companies, would-be saviors of the housing market, will soon need saving themselves.

The companies, which say fears that they might falter are baseless, have recently received broad new powers and billions of dollars of investing authority from the federal government. And as Wall Street all but abandons the mortgage business, Fannie Mae and Freddie Mac now overwhelmingly dominate it, handling more than 80 percent of all mortgages bought by investors in the first quarter of this year. That is more than double their market share in 2006.

But some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion - the capital that their regulator requires them to hold - underpins a colossal $5 trillion in debt and other financial commitments.

It is thought that Fannie Mae alone is sitting on another $19 billion in losses that it has yet to report. And if the credit crisis in housing continues and home values keep plummeting, a very large financial chasm could open up where taxpayers would be forced to bail out these giants making the Savings and Loan bailout look like a walk in the park.

The government is jawboning the two entities to acquire more capital --  and hurry up about it:

As a result, high-ranking government officials are now quietly threatening to publicly criticize the two companies if they do not soon raise large amounts of capital, people with firsthand knowledge of those threats say. William Poole, a president of a Federal Reserve bank who has since retired, has warned that companies like Fannie Mae and Freddie Mac are "at the top of my list of sources of potentially serious trouble."

A report last month by the agency overseeing the companies said that they pose "significant supervisory concerns" and that Freddie Mac suffers "internal control weaknesses."

Lawmakers are pushing to rein in the companies with new legislation. Senator Christopher J. Dodd, the Connecticut Democrat who leads the Banking Committee, will soon take up legislation giving the government broad authority over the companies. Lawmakers say it is likely a bill will pass this year.

"They are on real thin ice financially," said Senator Richard C. Shelby of Alabama, the senior Republican on the Banking Committee. "And the way the law is written right now, there is very little we can do to correct that."

This is one of those issues that lurks in the background and then suddenly comes to the fore. Let's hope these problems are addressed before that happens.

Update -- Thomas Lifson adds:

Freddie Mac and Fannie Mae use federal guarantees but are private corporations, and until the market in securitized mortgages turned south, made gazillions of dollars. There has long been a significant moral hazzard in their operations. But the underlying housing market is showing signs of bottoming out, as new house construction has been so low that underlying demand trends are catching up to the oversupply.

I think the mess at the two agencies enjoying access to federal guarantees needs to be straightened out, but the sky is most assuredly not falling.