Ray,
Sorry, someone else will have to deal with the Williams issues, BUT here is an interesting tidbit for the mortgage-fascinated crowd. The size & riskiness of Fannie and Freddie are coming to light (they've been well-known for some time now, actually) and being scrutinized in a report. Most investors seem to ignore things like creditworthiness with Fannie and Freddie, assuming (probably correctly) a sort of "put" to the government should these two wayward children lose the path in the forest.
In any event, to the extent that these two special kids get cut back a bit in size and scope, that should allow competitive lenders to compete on a more "normal" basis, and mortgage rates should rise a little more. Before anyone goes off the reservation about this, the alternative is to simply have Freddie and Fannie guarantee all mortgages, leaving the taxpayer holding the bag for the eventual bailout (which, see, S&L, Crisis, generally).
Kb
news.moneycentral.msn.com
Budget sees mortgage agency size as potential problem
February 04, 2002 3:03:00 PM ET
By Mark Felsenthal
WASHINGTON, Feb 4 (Reuters) - The Bush administration on Monday said in its 2003 budget that the size of the largest government-sponsored enterprises -- a clear reference to mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE) -- is a potential problem.
While the two companies are owned by shareholders, they operate under congressional charters and are among entities called government-sponsored enterprises, or GSEs.
"Financial trouble of a large GSE could cause strong repercussions in financial markets, affecting federally insured entities and economic activity," the administration said.
Fannie Mae and Freddie Mac in September 2001 had $2.6 trillion in mortgages outstanding that they had purchased or guaranteed, the administration said. They are among the largest of the GSEs.
The administration also said that while the two firms meet government-set goals for financing affordable housing and lending in areas with high concentrations of minority home owners, they fall short of the private market average for the conventional, or nongovernment, mortgage market they are allowed to participate in.
The Bush administration has yet to announce a policy or views on the mortgage companies, but in its 2003 budget proposal, the Bush team offers a glimpse of its views on the size, risks, and affordable housing and minority lending records of the GSEs.
SIZE A POTENTIAL PROBLEM
In a discussion of federal programs that support or enhance credit, the administration said the government should reassess such programs in the light of changing financial markets. For example, losses to the government from deposit insurance funds could be great in economic downturns, the administration said.
"The large size of some GSEs is also a potential problem," the administration said.
Freddie Mac and Fannie Mae buy mortgages from lenders and sell them as securities or hold them in their own portfolios as part of their objective to increase the flow of money in and out of the mortgage markets. Both firms have multibillion dollar lines of credit to the U.S. Treasury that they have never drawn on but are seen as symbolic of U.S. government support for home ownership.
While the two mortgage companies' debt is not explicitly backed by the government, multibillion dollar lines of credit and other benefits from their congressional charters lead investors to believe the government would not let the companies fail.
Fannie Mae and Freddie Mac derive benefits from their federal charter, but also bear responsibilities. These include improving homeownership for low and moderate income people.
The administration said the GSEs met their government-mandated targets, but fell short of the performance of the broader market.
"Fannie Mae and Freddie Mac have met or exceeded the affordable housing goals since they were established in 1996," the administration wrote. "The GSEs achievements, however, do not surpass the the level of affordable housing in the conventional market."
For the period from 1995-1998, the private market average for low and moderate income financing was 56 percent, and 33 percent for areas with high concentrations of minorities or low- and moderate-income inhabitants, the administration said, citing the latest data available from the Department of Housing and Urban Development.
In 2000, 50 percent of Freddie Mac's mortgages went to low and moderate income buyers and 29 percent went to geographically targeted areas, the administration said. For Fannie Mae, the rates were 49 percent to low and moderate income people and 31 percent to areas with high concentrations of minorities or less affluent borrowers.
RISK MANAGEMENT INCREASINGLY VITAL
Government goals for the GSEs were 42 percent of mortgages to low and moderate income borrowers and 24 percent to areas with high concentrations of minorities or less affluent borrowers.
Industry competitors and homeownership advocates have criticized the GSEs for their lending record in these market segments. Fannie Mae and Freddie Mac have defended themselves by pointing to their success in meeting government goals and saying that the broader market contains a pool of loans of riskier loans of poor credit quality that they avoid.
The authors of the analysis said special attention should be paid to how the mortgage finance firms shield their rapidly growing portfolios from risk.
"The GSEs management of counterparty risk is of increasing importance," the administration said. REUTERS
© 2002 Reuters |
