Much Ado About Fannie and Freddie

Doug Marshall, CCIM
Market Assessment

From time to time I quote a well-written article verbatim. This is one of those times.

I found this insightful article on the Globe St. com blog discussing what’s currently happening with Fannie Mae and Freddie Mac. It was written by Sule Aygoren Carranza who is the New York City-based editor of the Real Estate Forum and multifamily editor for GlobeSt.com.

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Earlier this week, Senate Democrats voted down a bill that would have essentially dissolved Fannie Mae and Freddie Mac after their conservatorship period was over.

Introduced by Senate Republicans John McCain (AZ), Judd Gregg (NH) and Richard Shelby (AL), the amendment to the financial regulatory reform package would have taken the GSEs off of taxpayer support and mapped out a plan to wind down and dissolve them over 15 years.

At the same time, both GSEs in the past few days have reported substantial first-quarter losses due to continued weakness in the market. Freddie Mac posted a $6.7-billion net loss, up $2 billion from the prior quarter and down from $10 billion the same period a year ago.

Fannie Mae’s first-quarter loss came in at $11.5 billion, down from $15.2 billion in the final three months of 2009 and $23.2 billion in the first quarter. The losses were attributed to credit-related expenses and the impact of new accounting standards.

These losses resulted in a net worth deficit of $10.5 billion for Freddie and $8.4 billion for Fannie, for which the companies requested a combined $19 billion in additional funding from the Treasury in order to continue operations. If accepted, that would bring the GSEs’ total federal bailout to some $140 billion.

The good news for multifamily, though, is that the agencies’ losses were primarily on the single-family and guarantee segments of their business.

On the multifamily end, Freddie earned $221 million in the first quarter and Fannie earned $99 million. Those figures are minuscule in comparison to the billion in losses, but they’re better than nothing.

Another bright spot is that the delinquency rate for both firms. Freddie’s monthly delinquency rate fell for the first time in three years, to 4.13% in March (down from 4.2% in February) for single-family homes and 0.24% for multifamily, down one basis point from February.

Meanwhile, Fannie’s serious delinquency rate (that is, loans that were more than 90 days late) rose from 5.38% in the final quarter of 2009 to 5.47% in Q1. Although it registered an increase, Fannie officials said the figures show a slowing growth rate of delinquencies.

The improvement reflects the willingness of lenders to do workouts with borrowers, but with the continued weakness in the economy and the number of underwater mortgages out there growing, I don’t see how this could be a long-lasting trend.

It’s safe to say Congress is stuck between a rock and a hard place. On one hand, the mortgage giants played a large role in the housing market’s downturn and the bailouts, which have been sharply criticized, seem to be growing.

On the other hand, it’s no question that financial support from both Fannie and Freddie is also the primary—if not sole—reason the housing market hasn’t completely imploded.

Source:
Much Ado About Fannie & Freddie, Globe St.com Blog by Sule Aygoren Carranza, May 14, 2010.

Greece: Standing Alone?

Doug Marshall, CCIM
Market Assessment
Published May 4, 2010

On April 27, Greece had their bond status cut by Standard and Poor’s, downgraded to ‘junk’ status, which set off a chain reaction in stock markets throughout the world.

On the same day Portugal, too, had their bond rating reduced. A day later, Spain’s debt got classed lower, from AA+ to AA. Who’s next?

The critical question is whether the proposed bailout action being worked up now going to be sufficient to keep Greece out of default on its European Union obligations?

The approach to Greece seems to be attempting to redress two rather co-dependent issues: 1) how to keep the “contagion” from spreading, through a massive combined bailout effort and a drastic tightening of the Greek belt through austerity measures, and 2) how to infuse confidence in euro debt-holders around the world who have dropped European debt like they were holding hot coals.

Jean-Claude Trichet, European Central Bank president, said a Greek default was “out of the question”. But several market analysts with MarketWatch.com, of the Wall Street Journal, suggest that the EU go ahead and cut Greece loose.

It is being argued that expulsion from the EU is not a terrible or irresponsible idea, in that the contagion spreads no further and Greece learns a lesson over the next few years while it gets its collective house in order.

It’s clear that one whisper of default causes many debt-holders to run for the door. But people seem to question whether this situation should be seen as an emergency encompassing the entire EU, simply because EU confidence and influence create domino-like effects. Or should it be considered as Greece problem and spare the rest of the EU shares in its drama?

But while these analysts suggest that the Greek situation and its long-term effect on the euro and world stock markets may be exaggerated, there is no exaggerating the way in which institutional investors have responded to Greece’s financial woes.

The euro has dropped to a new one year low compared when compared to the dollar and is continuing to fall in value. Since mid-2008 the euro has lost a whopping 16 percent of its value when compared to the dollar.

More importantly, from our view point as Americans, investors around the world are buying U.S. Treasuries, which is the typical “flight to quality” that occurs during times of crisis. This increase in demand of U.S. Treasuries has caused interest rates to drop significantly during the past few weeks.

The 10 year treasury was recently above 4.0% and at the time of this writing is now at 3.59%. This bodes well in the short run for our economic recovery as the crisis in Greece will keep our interest rates lower than they would otherwise be.

One thing is certain: comparisons are easy, but the reality is harsh. Barring a removal from the EU by the governing body, a numbing idea, Greece and other nations will have no choice but to issue more and more debt holdings in order to survive.

And who is buying those these days?

Sources:
David Oakley, Alan Beattie, Kerin Hope; “IMF Looks At Offering Greece More Cash”, FT.com April 27 2010
Jon Markman, “Let Greece Default On Its Debts”, MarketWatch.com April 28 2010
Nicholas Kulish, “Europe Looks To Aid Package As Spain’s Debt Rating Is Cut”, The New York Times April 28 2010