Posted on 12/22/2003 10:53:42 AM PST by AdamSelene235
WASHINGTON -(Dow Jones)- The U.S. Federal Reserve released a staff study Monday saying the federal subsidies bestowed on government-chartered companies Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News) are far higher than any previous estimates and the two do little to increase homebuying, lowering mortgage costs by just a fraction of previous estimates.
"Fannie Mae's and Freddie Mac's ambiguous relationship to the government imparts an implicit subsidy to GSE shareholders and homeowners," the study reads, placing a dollar value on that relationship at between $119 billion and $ 164 billion.
The report, prepared by staff economist Wayne Passmore, is the toughest analysis to date on the companies' federal benefits and on how much of that gets passed on to consumers. The two were created by Congress to provide liquidity to the U.S. mortgage markets and lower costs for homebuyers.
While the Federal Reserve Bank (News - Websites) of St. Louis has publicly criticized the companies in the past, the Passmore report is the first study on the companies' funding advantages by a staff economist at the Federal Reserve Board.
The study estimates that Fannie and Freddie's participation in the secondary mortgage markets only lower costs for borrowers by an average of 7 basis points, or seven-tenths of one percent. Previous estimates have placed the reduction in mortgage costs at about 25 basis points or one quarter of one percent.
"Attempting to use government-sponsored enterprises (GSEs) to lower mortgage rates is indirect and, perhaps, less effective than a direct subsidy would be," Passmore writes.
The report finds there is little evidence to suggest Fannie and Freddie actually increase homeownership. Their impact on mortgage rates isn't enough to qualify more people for financing, the study says, adding that rates would have to drop by at least 2 percentage points to boost homeownership levels.
The study estimates that Fannie and Freddie's impact on mortgage rates only lower consumer costs by between $46 a year and as much as $145 a year, based on a typical 30-year, fixed-rate mortgage in 2002. Passmore qualified those numbers by saying it is difficult to accurately estimate such small quantities with available data.
One study commissioned by Freddie Mac argues that the companies' low-down payment programs help more people to buy homes.
"However, the authors' analysis provides no explicit link between GSE activities and homeownership, nor does it address the role of other government and private-sector initiatives, such as the Community Reinvestment Act," the study says.
The report also increased upon previous estimates of the companies' funding advantages and subsidies given their ties to the federal government. Besides direct subsidies, such as exemptions from state and local income taxes as well as securities filing fees, the two companies enjoy a perceived advantage of being backed by the federal government if either should fail.
"The GSEs appear to have a substantial funding advantage at very long maturities because the implicit GSE guarantee seems to assure investors that the GSEs will not suffer a rating downgrade or default in the far future - an assurance that no other private corporations can provide," the study says.
The companies funding costs are also lower than most corporations because they are Triple-A rated.
"Without GSE status, the GSEs would be rated below AAA unless they raised substantial capital or took other actions to offset the loss of this status," the report says, adding that the median funding advantage for Fannie and Freddie's long-term debt is 43 basis points, with a high estimate of around 60 basis points. The funding advantage for the companies' short-term debt is much smaller, just 13 basis points. And the average subsidy embedded into the companies' mortgage-backed securities falls between 4.5 and 7 basis points, the study says.
Moreover, the study finds that most of the companies' funding advantages get passed on to their shareholders in the form of higher market values, estimating that anywhere between 42% to 81% of Fannie and Freddie's market values come from their federal benefits. Shareholders get between $50 billion and $97 billion of the gains from the companies' federal subsidies.
"Of course, if the GSEs implicit subsidy is eliminated, their market value may not fall as much as suggested by these estimates because they would reorganize themselves," the report says. "Indeed, without the `political risk' of changes to their GSE status, their price-to-earnings ratios may actually rise."
- By Dawn Kopecki, Dow Jones Newswires; 202-862-6637;
Upon being proclaimed useless by the Fed, Fannie and Fred rallied nearly 2%. I think Greenie broke the market. It makes no sense.
It makes perfect sense. The report states that the subsidy is worth much more than previously thought, and that the effect on rates is minimal. Thus, since Fannie and Freddie are in effect massively subsidized at no cost to them, the stock is worth more.
Imagine if a study showed that IBM's physical buildings were worth 3 times what they are listed on the books... IBM's stock would go up.
Franklin Delano II says its for the children. I'm sure he donates all his stock option profits to charity.
I am sure their War on Some Terror will go much better.
We've got the killing people/breaking things bit down pat.
Er, they are making a case to end the subsidy.
Chances of this happening are ... ?
Makes perfect sense. The only way the stock will collapse after this report is if the market interpreted this as bad news for Fannie and Fred because the government will stop subsidizing then. The market knows full well that not a dime of subsidy will be reduced because of this, just like no government welfare program has ever been cut. Don't hold your breath for Bush to defund Fred and Fannie. He hasn't ever seen a welfare program he doesn't like. BTW, I know Wayne. He is a top class economist.
Congress had a chance to pass feel-good reform last session but the Treasury and the Bush admin. called them on it. OFHEO has stipulated several criteria for radical reform of the GSEs. OFHEO's criteria has been met IMO.
I'd say odds are 50-50.
I will wait and see. When you poke Fannie/Freddie you are stirring some powerful behind-the-scenes forces... I would expect that if they get reorg'ed, we will see the NY Times et al. claim that minorities will be hardest hit by the changes, etc.
Finally took a vacation! Killed a dozen quail today but missed a boar who caught wind of me at a pathetic 70 meters....arrghh....
I don't how I missed it. Thanks.
missed a boar who caught wind of me at a pathetic 70 meters....
Always a problem with bikers. They never bathe.
Housing inflation hurts the poor the most.
Mortgage Giants Faulted on Not Passing on Gains - NY Times (12/23/2003 4:38 AM)
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