Out of the frying pan, into the Fannie Mae

Posted by: Peter Coy on May 6, 2008

Douglas Duncan.jpg
Douglas Duncan, who was chief economist of the Mortgage Bankers Association, sent a blast email today to all his business contacts saying that it’s his first day as chief economist of Fannie Mae.

Talk about jumping from the frying pan into the fire. Or bad timing. Or something. Today, Fannie Mae announced that it lost over $2 billion in the first quarter and is going to cut its dividend and raise $6 billion in fresh capital. The stock fell.

As a taxpayer, I’m happy that Fannie Mae (and Freddie Mac) are raising capital. That will enable them to buy more mortgages and keep the housing market from dying on the vine. At the same time, a thicker capital cushion will reduce the risk that Fan and Fred will require a taxpayer-financed bailout.

In fact, I think Fannie and Freddie should raise even more money from the private markets. The reason they don’t, of course, is that selling new shares dilutes the current shareholders, meaning lower earnings per share and thus a lower stock price. Here’s Felix Salmon’s take at Portfolio.com.

Let’s hope that Doug Duncan didn’t take most of his pay in the form of Fannie Mae stock options.

Reader Comments

jimmyk

May 6, 2008 5:23 PM

Fannie and Freddie are CLEARLY being set up for a TAX PAYER BAILOUT!!

Regulators are completely asleep at the wheel if they think loading the GSEs with the worst, most toxic mortgages on earth, AND simultaneously allowing them to REDUCE their capital requirements isn't an absolute recipie for DISASTER!! They back TRILLIONS in loans and have a meager 4.2B in capital!!

Only in the Bush administration would decisions like this be made....It is absolutely stomach turning to think our elected leaders are capable of such destruction!!

The only solution is to let housing prices fall to their natural levels-back in line with incomes and rents.

ballbuster

May 7, 2008 5:23 AM

Both Fannie Mae and Freddie Mac are pseudo Fed government agency because they were created by Congress. Because of that special status, both won't go under the ways of Enron, BearStearn, or CFC. Congress is reluctant to permanently authorize a higher loan ceiling for Fanny/Freddie mortgage, but on the other hand Fanny/Freddie has too much toxic mortgage papers in their portfolios making them quite nervous. Hence, both are trying to add liquidity in this liquidity crisis meltdown. The capital market is now more careful than the past because of incredible combined trillion dollars among: BearStearn, MerrillLynch, Citigroup, Carlylgroup, CreditSuisse, UBS, Wachovia, WaMu, HSBC, Deutshebank, and banks in France, etc, etc. In stead raising ceiling, lowering the loan ceiling would make Fanny/Freddie more secure because buyer would have to deposit a larger equity downpayment given todays housing prices. The negative consequence: existing housing prices will decline much faster.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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