[A-List] Fannie Mae/ Freddie Mac: Disclosure and Derivatives

[Sabri Oncu <soncu@xxxxxxxxxxx>]

If nobody objects, and if I can find the time, I may give you
some information about the US mortgage market later in the week.
Objections to my personal address please, not to the list. My
address is <soncu@xxxxxxxxxxx>, in case you subscribe to the list
in the no-mail mode and, hence, don't know my address. There is
also Ginnie, and offspring of Fannie, and the difference is that
whereas Fannie is a publicly traded company, Ginnie is owned by
the government and smaller than Fannie. The total outstanding
debt of Fannie and Freddie (plus Federal Home Loan bank) is at
about $3.4 trillion, about $1,5 trillion of which are guaranteed
mortgage loans by Fannie and Freddie. Guaranteed means this: if
the individual borrower fails to pay his/her debt, then these
agencies pick up the bill, if they can of course. Compare this to
the debt of the former largest borrower of the US, the US
Treasury: $2,5 trillion. Fannie and Freddie don't lend to the
borrowers directly but buy the loans from the banks and other
lenders if the loans meet certain criteria, that is, if the loans
are conforming as this is called. But once the loans are bought
by these agencies, the borrowers effectively owe their "souls to
these company stores".  These stores then bundle these loans
together and sell them to the investment community. What a
community! Once a Chinese mathematician friend said this: "These
Wall Street types would sell anything, including their mothers."

Anyway, I should stop here for the time being. But let me say
that these "company stores" seem to be in trouble, especially if
there is a housing bubble! And the debate over the
existence/non-existence of a housing bubble is getting hotter by
the day. By the way, there are also Sallie Mae (student loans)
and Farmer Mac (agricultural loans) and check the below link for
the trouble Farmer Mac is in:

http://www.nytimes.com/2002/04/28/business/yourmoney/28FARM.html

Best,
Sabri

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New York Times

April 25, 2002

Fannie Mae and Freddie Mac Pressed on Disclosure and Derivatives
By ALEX BERENSON

The simmering debate over Fannie Mae and Freddie Mac, the
government-sponsored companies that help finance home loans, is
heating up again, this time over the companies' disclosure
policies and exemptions from securities rules.

Banks and some lawmakers have long complained that Fannie and
Freddie get hidden government subsidies that give them an unfair
edge over other financial companies. Fannie and Freddie, which
were created by Congress but are owned by public shareholders,
buy mortgages from banks and other lenders and either hold the
mortgages themselves or resell them to investors with a guarantee
that they will not default.

The government does not guarantee the debt issued by Fannie and
Freddie. But it does provide the companies with some special
privileges, including exemption from state and local taxes, that
critics say leads investors to believe that Washington would step
in if the companies had financial trouble. As a result, Fannie
and Freddie can borrow more cheaply than almost any other
company, giving them a crucial edge.

But the subsidy issue has had little traction in Congress, where
Fannie Mae and Freddie Mac have convinced lawmakers that they
strengthen the housing market and lower mortgage rates for
homeowners by funneling money from investors around the world to
borrowers in the United States.

With housing among the brightest spots in the economy, Congress
is ill disposed to take any step that might make mortgages less
affordable. In 2000, a big effort to rein in the companies'
privileges went nowhere.

"The decision was made a long time ago to support the housing
market and home mortgages in the United States," said Alec
Crawford, an analyst at Deutsche Bank Securities.

Now, in the wake of the Enron collapse, the argument over the
companies has taken a new turn. Instead of taking on Fannie and
Freddie over subsidies, their critics are arguing that the
companies, which are exempt from Securities and Exchange
Commission disclosure rules, do not give enough information to
regulators or investors.

Together, Fannie and Freddie guarantee nearly $3 trillion in
mortgages. Because they are so large, even a small misstep by
them could be disastrous, said Representative Christopher Shays,
a Connecticut Republican. Mr. Shays has introduced legislation to
require Fannie and Freddie to register their bond issues with the
S.E.C.

"Disclosure is essential," he said. "It's just hard to justify
why anyone would be against disclosure."

Alan Greenspan, the Federal Reserve chairman, expressed a related
concern in a speech Monday night to the Institute of
International Finance. The banks that sell derivatives to Fannie
and Freddie, he said, might take on too much risk because they
believe that Fannie and Freddie are implicitly supported by the
government.

Because the two companies carry a triple-A credit rating, they
usually do not put up collateral for their derivatives positions.
Lower-rated institutions, including most big commercial and
investment banks, generally do put up collateral.

"The broader risks for financial markets and the economy result
from the perception of government support for these
corporations," Mr. Greenspan said.

Fannie Mae and Freddie Mac respond that they already disclose
huge amounts of information about their portfolios and derivative
exposure, and that the fuss over the implicit government support
and the companies' use of derivatives is a red herring. "There's
not a real systemic-risk concern here," said Arne Christenson,
Fannie's senior vice president for regulatory policy. "We are a
fundamentally very strong financial company."

Wall Street seems unworried about the new controversy. Though
shares in both companies fell Tuesday morning, after Mr.
Greenspan's comments, by day's end both stock and bond investors
had shrugged off the speech. Shares in Fannie closed slightly
higher, while Freddie was barely off. Yesterday, Fannie closed at
$80.63, down 7 cents, while Freddie finished at $66.03, up 26
cents.

"I don't think he said anything that was new," said Stephen
Mahoney, a portfolio manager at the Glenmede Trust Company in
Philadelphia who owns more than $400 million in Fannie and
Freddie bonds. "Most of the things that he talked about have
already been addressed."

Still, by making derivatives and disclosure, rather than the
subsidy itself, the center of debate, the critics have for the
first time in two years put some real pressure on Fannie and
Freddie.

In the last month, both companies have given investors more
information about their derivatives positions. And Fannie said in
March that it would begin to disclose insider stock sales and
purchases by its executives, something it had not done before.

Full at:
http://www.nytimes.com/2002/04/25/business/25PLAC.html?partner=MW
_CUSTOM