Tuesday, November 20, 2007

Two mortgage funds are backed by investors, Chuck Schumer and taxpayers (like you and me)

They are commonly referred to as Fannie and Freddie:

Chuck Schumer is lucky Congress ignored him. We're referring to the New York Senator's idea, which he has loudly promoted for months, that Fannie Mae and Freddie Mac should ride to the rescue of the housing market by buying up unwanted mortgages and guaranteeing them. Now those two mortgage giants are themselves under scrutiny amid concerns that they'll report big losses.

Last week, Fortune magazine reported that Fannie had adjusted how it reports troubled mortgages in order to better meet its own projections. Fannie claims the accounting change was legitimate, but its explanations so far have done little to stem investor anxiety. (See chart below.) And whether you believe the new lower numbers or the old higher ones, delinquencies in Fannie's portfolio are rising fast.

This matters because Fannie and Freddie, owing to their special status as "government sponsored" mortgage securitizers, operate with a relatively small capital base. Fannie reported earnings for the first three quarters of this year on November 9, bringing its financial information up to date for the first time since it was hit with an accounting scandal in 2004.

According to those figures, Fannie has a capital base of $40 billion supporting a $2.8 trillion book of business, including more than $2 trillion in mortgage-backed securities it has guaranteed and sold to the public and over $700 billion more in mortgages it is holding on its balance sheet. That high degree of leverage means it would take only a small movement in the value of its assets to cause serious problems.

UPDATE: CNBC's Joe Kernen reporting possible dividend cuts.

UPDATE: John Carney points to the SEC's accounting scandal, i.e. the agency charged with accounting oversight. Priceless.

Hey, Chuck, sometimes more government is not the best answer. More often than not. On the other hand, if the U.S. can buy Canada, that might be a good opportunity for more government. Temporarily, of course.

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