Freddie and Fannie: Just the Beginning

I am convinced that Fannie and Freddie were the causes that led to the current recession.  I am sure that when incentives were created to give people money who had no or little ability to pay that money back, bad bad things were going to happen.

But somehow all of that got lost in all of the fall out.  What we heard was how evil those greedy corporations are.  What we heard was how Wall Street doesn’t look after Main Street.  What we heard was that it was Big Corporations that are somehow “Too Big To Fail” that brought this country to its knees.

What we didn’t hear was the story behind Fannie and Freddie:

NEW YORK (Reuters) – Freddie Mac, the second largest provider of U.S. residential mortgage funding, on Friday posted a loss of $5 billion in the third quarter and predicted it would need more government support amid a “prolonged deterioration” in housing.

And why is the company losing so much money?

delinquencies worsened on loans it guarantees.

Well, heck, what can ya expect?  The little brother of Fannie Mae is surly the runt of the litter and can only look on as big sister excels, right?  Right?

Its larger rival Fannie Mae on Thursday said it would need $15 billion from the U.S. Treasury after a whopping $18.9 billion third-quarter loss.

Whoops!  Didn’t see THAT one coming.

But hey, Fannie and Freddie–ya know, they are players but really, they aren’t THAT big; are they?  Or are they?

Results at Freddie Mac and Fannie Mae are widely watched as a barometer of the U.S. housing market since they own or back nearly half of outstanding mortgages.

Jeepers.  By golly, they ARE that of a player in the market!  And maybe, just maybe, when those two players begin to change the way in which they do business, the rest of the market attempts to adapt?

In other words,  I guess what I’m saying is that when Fannie and Freddie, backed by good Ol’ Unc [that’s the USofA to you and me], begin too incent market forces to provide mortgages to people who can’t afford mortgages, you end up with a bunch of:


But hey, what’s $51.7 billion between friends?  Or even $60.9 billion?  At least your good for it, right?

Starting in 2010, the company will begin accounting for $1.8 trillion in mortgage-backed securities it guarantees on its balance sheet to meet new guidelines. This will increase interest income and interest expenses, and could have a significant negative impact on net worth, it said.

Hmm, something smells in the State of Denmark.

Shares of Freddie Mac were flat at $1.23 in light after-hours trading following the results.

And if you’ll buy shares at a buck 23, I have some fertilizer for your garden…

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