Posted on 07/13/2008 8:41:18 PM PDT by Captain Peter Blood
I have tried to analyze all the information concerning Fannie Mae & Freddie Mac financial situation. It looks now as though the Federal Government through the Treasury Department with help from The Fed are going to shore these entities up. With the Treasury Department even buying outright stock in both companies. Long term I would say, from what I read, that a takeover by the Government just might happen in some fashion to protect the mortgage market. What about short term though? Will all the jaw boning that has been bandied about all weekend will these stocks be going up in the short term, namely this week, or will they continue a downward slide. They really don't have much further to fall. The Treasury Department might have to step in and start buying as early as this week if a slide continues. So the bottom line question is there a buying opportinity here to make a quick buck???????????
The FNM/FRE news was released in the UK papers (FT) before the US, probably to calm Euro markets. In order to capture the opening pop, if any, you’re likely going to have to buy right the open of extended hours, not normal hours.
Let’s face it, $15 bil is about 1/50th of the depth of the black hole these two are looking at. That being said, the market loves stupid band-aid stuff, especially if it lasts say 45 minutes. As I opined and will reiterate, this is nothing but an opening gap play, and I would recommend a program of medications if you chose to hold these stocks past the close. Frankly, I myself don’t like the play because it’s likely to occupy too much of my attention on what promises to be a frenetic day. But that doesn’t mean anything for you. I just think there are a few too many wiseguys on this play with about a zillion times as much capital as I have...so I’d rather leave it alone.
I believe your right. Ultimately both of these stocks are going nowhere and we the taxpayers are on the hook.
I agree... The Fed does not have much ammo left and will talk big but, if anyone in Freddie & Fannie is saved, it will be the bondholders! Unfortunately a huge percentage of those bondholders are overseas!
Gotta protect the foreign investors in US fixed income debt (particularly anything governmental or quasi-governmental..., in other words, the GSE debt!!!)
While not explicitly backed by the "full faith and credit...", those GSEs have, since their inception, had an implicit guarantee (so long as the Fed itself has the ability to fulfill...?)
A financial trainwreck in slow motion!!!
Not to mention that, if you are with Scottrade, they eliminated internet trading in FRE and FNM last week as I found out when trying to buy FRE at $4.30 only to see it double while I continually got a busy signal calling the local Scottrade office!!!
quit trying to play with the big boys...only institutions can trade 24 hours...peon!!!
As for Freddie and Co...consider this:
The first 20% on any mortgage is covered either by the borrower or by Mortgage Insurance (which isn’t being bailed out) or a combination thereof.
Mortgages are front loaded interest-wise, so a $100,000 mortgage would be paid around $20,000 in interest (to the bank / investor in the first two years)
This leaves between $60 and $80k for the banker to make up on the market in the event they take control of the given property at $100k.
Selling at 65 cents on the dollar leaves at least a break even for the banks...they are asking that they take no loss whatsoever in the event they have to sell at 50 cents on the dollar (as in Florida condos and California).
What this all means is that even if there is no bail out whatsoever, Freddie Mae and Freddie Mac will emerge with a 5%-10% profit loss over the long run, which is much less then the doom and gloom on the news.
The only thing I know about the market tomorrow is that it will over react in either direction depending on the news, so look for a buying opportunity for the long term.
This is the same situation as when Martha Stuart was indicted, yet still held a viable company...only this time the company has the backing of the US Government under any circumstances.
A very fine analysis, m’friend.
OMG, I had enough bad experiences with them...from 1999...I ultimately had to drive to a local office to place a trade and lost about $800 doing so. Meanwhile, the broker in the lobby told me “hey it’s only opportunity cost”. Grrrr! I am glad I was able to restrain myself in their lobby.
In fast markets, even now, they don’t seem to be able to keep up. They also do not permit options spreads of ANY kind, no matter how well capitalized you are. They only permit “level 1” options = covered calls + long calls or puts. Had to leave!
The thing (and it’s not just one) that is so twisty weird about this is....
I believe Paulsen & Bernanke both claimed on Thursday/Friday last that both GSEs were “adequately capitalized”. I mean, just how far do we have to go before the conclusion that these two are lying under oath before Congress? Is it OK if your lies become apparent....SIX days after you state them, or do you have credibility if your statements only last THREE days before being proven wrong, LOL?
Secondly, and most ironically, this “bailout” is likely to achieve utterly NOTHING! Because true or false, the market already perceives these two to have government backing. Sure, nobody with functioning neurons who has done their research thinks so, but the market thinks so. So...what is this supposed to accomplish on any kind of long term basis? As a matter of financial prudence, the divs should be cancelled immediately. Now where do the stocks go?
This is just crazy unprecedented. I am almost sure the gov’t doesn’t have the legal authority to buy this stock in the open market, I mean, does the White House or the Fed have an Etrade account??
It should go to “0”!!!
That’s what it’s worth since they can’t come after the stockholders for a deficit.
In trying to understand this mess I have the following questions that even though I’ve searched around quite a bit, i haven’t been able to find any solid answers. Anybody in freepland know the answers?
1. I keep hearing that the default rate of the mortgages that freddie and fannie hold is about 1%. This doesn’t make any sense, because if it was only 1% they wouldn’t be bleeding so much red ink. (In fact if it was only 1% they’d have lot’s of positive cash flow!) So what are the actual default numbers?
2. Together they have something like $5trillion in mortgages - what is the value of the RE behind these mortgages?
3. It’s interesting that the fed plans to make available $15Bil for the two of them in exchange for their securities as collateral. This is exactly their current market value. So what does that do to the current shareholders - do they get a big fat zero? What am I missing? Sounds like the current shares will only be worth something if they go up from their current value - so who would buy them at their current values.
4. Their bonds are yielding 12-13%, and it looks like the fed is not going to default on them. Wouldn’t that be a fairly safe (and lucrative) play? Under what scenarios do you see a default on the bonds?
“The Treasury Department might have to step in and start buying as early as this week if a slide continues”
Treasury is not going to buy stock in the open market - they are going to be able to buy NEW stock straight from the companies, greatly diluting existing shareholders. The goal of Treas. is to make sure FRe/FNM still have sufficient funds, not to make the stock price not go lower.
Honestly, if FRE/FNM get big pops on the open, i am wondering if there might be an intraday short trade (paranoia-level stops, of course).
July 14 (Bloomberg) — European stock-index futures rose, after U.S. Treasury Secretary Henry Paulson said the government would support Fannie Mae and Freddie Mac to shore up confidence in financial markets.
Futures on the Dow Jones Euro Stoxx 50 Index, a benchmark for the euro region, added 33, or 1 percent, to 3,253 at 7:37 a.m. in London. The U.K.’s FTSE 100 Index may gain 42, according to CMC Markets.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aiNTbzMZ2LSw&refer=home
Late effort to answer SOME of your Qs:
1. I keep hearing that the default rate of the mortgages that freddie and fannie hold is about 1%. This doesn’t make any sense, because if it was only 1% they wouldn’t be bleeding so much red ink. (In fact if it was only 1% they’d have lot’s of positive cash flow!) So what are the actual default numbers?
I think you hear that 1% of **ALL** morts are in default. I think that number is lowish, but that’s just my opinion. I believe 1% is a standard benchmark default rate in good times, and that normal underwriting standards and risk mgmt would accomodate such a def rate without too much pain. Current default rates depend upon geographical area and are different for diff. classes of loans. Without explaining the already overexplained, the default rates are massively higher than that, between 3% and 26%. Do not forget that over the past year, a concerted effort was made to permit banks to dump their worst trash into FNM and FRE, yes, standards were in effect LOWERED in an effort to help the banks get this stuff off their books. You see, nobody thought FNM/FRE would undergo this much scrutiny this soon, and there is a tremendous bias in this whole scheme, driven by the Fed, to help out their buddies at the banks. There are also no crystal clear figures on default rates because many banks are resistant to listing defs [eg; non-performing loans] because it immediately reduces their capital reserve levels, which hurts their stock price which is part of their reserves, and often results in the kind of death spiral we saw in IMB IndyMac. If you are deriving the impression that I am accusing the banks of LYING, committing financial statement FRAUD, offloading bad loans into shadowy and ill-defined “related but not really related” entities, you would be 100% correct in that impression.
FNM and FRE are thought to hold roughly 80% of the home mort market. Their default rate is thought to be 20%. Can I prove it? No. Does their stock trade where their stock trades? Yes.
2: The value of the RE behind their mortgages is a soup consisting of screamingly inflated appraisals and 100% and 98% morts in areas of the country where RE has fallen between 15% and 50%. And 80% LTV performing loans. ANd everything in between. Nobody knows what the value of the collateral RE is. Not even Fannie knows. It only took them four years to almost submit financial statements, an SEC violation that would have caused any other company to be delisted automatically. Loans are increasingly difficult to get now, and it further looks like mort rates will be rising. So this value, whatever you’d feel happy with calling it today, is arguably declining.
3: Nobody can predict what will happen to their stock prices, but I bet they pop for at least half an hour tomorrow! Other than that, they have an appointment with ZERO at some future date. The lower the stk price, the more milions of shares they have to print to gather the capital they may need to remain solvent. And that means more and more dilution for the existing shareholders. As a matter of sound financial mgmt, they should cancel the dividends immediately. Errr, that typically doesn’t help the stock price.
I can’t comment on the bonds. They yield that much because the market is saying there is serious risk of default. The market has a way of being pretty canny about these things. “A deal too good to be true” is another way of saying it.
In short, I don’t believe any form of analysis can be said to be valid on these, because it is bound to change violently. These companies have very little idea of the hole they have dug for themselves and don’t have accurate financials. Thus I don’t consider them investable in any way, except as daytrading fodder. That’s my opinion only.
I would stay away from both. Government intervention is almost always guaranteed to screw things up big time.
What is that saying, “If you control a country currency, then there is no need to get involved with the politics”.
Well, you had about 28 minutes of green on Fannie and Freddie, LMAO. Sorry, I overestimated!
Let’s see....$15 billion for 28 minutes? Quite the deal, eh? Eliot Spitzer doesn’t seem like such a spendthrift now, does he?
Regretably, I share your opinion on FRE and FNM. This trainwreck has been years in the making. The problem was assured when banks were castigated for "red-lining" and required not to "discriminate" against uncreditworthy home buyers (many of whom are minorities). If you are not allowed to discriminate (def. "discern a difference") in the ability of a loan applicant to repay a loan, bad thing ultimately occur. The banks thought they "solved" their problem by securitizing their mortgage portfolios and selling them off to investors BUT, as is apparent that that only worked for a few years. The "innovations" of "No-Doc" and "Stated Income" mortgage lending accelerated the process!
Both political parties have trumpeted the high level of home ownership in the country while ignoring the fact that many "homeowners" are really just renting from their mortgage lender until the first economic downturn or personal financial crisis (then they are foreclosed upon and a new "homeowner" takes their place.) Millions of home buyers, besieged with real estate media hype, found it cheaper to "own" than to rent (for awhile).
Everyone has contributed to the real estate boom and most will suffer as home values revert to the longterm mean appreciation rate of 3%. The decline in relative home values will continue for years to "balance out" the bubble appreciation rate of recent years.
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