Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: MulhollandDrive who wrote (5586)	9/25/2002 1:54:54 PM
From: The Duke of URL©	Respond to of 306849

defaults as equity was depleted made much more risky if the property declines in value. ... And of course if the decline in [present] value would be somehow connected to a rise in interest rates one might have a situation similar to the "Portfolio Insurance" of the crash of 1987. You know kinda where everything is all right until Peter talks to Paul......

To: MulhollandDrive who wrote (5586)	9/25/2002 2:27:32 PM
From: TheStockFairy	Read Replies (1) \| Respond to of 306849

remember, they announced that they were having a spread problem with their assets and liabilities. This is a good way to have people stop redeeming their mortgages and stabalize their loan portfolio. The defaults are a convenient excuse but they are going to have to come up with some other, better explanations of why so many people are defaulting soon. That's when they start to tighten overall lending practices. Interest rates can remain low, but they will shave 10% of the population off from getting new mortgage loans.

To: MulhollandDrive who wrote (5586)	9/25/2002 3:24:35 PM
From: ild	Read Replies (2) \| Respond to of 306849

Fannie Mae's Risky Business We've caught heck from the sages of Wall Street for suggesting over the past year that Fannie Mae was exposed to too much interest-rate risk. Well, all of a sudden a lot of investors seem to agree with us. They've been selling off the nation's largest mortgage buyer after Fannie disclosed last week that what it once called its "superior" risk management is coming undone. Fannie shares closed off nearly 3% on Friday, to $64.60, despite a rising overall market and the continuing housing boom, and are now trading at levels not seen in two years. Louisiana's Richard Baker, Congress's leading Fannie overseer, is concerned enough that he's now asked the company's regulator to deliver weekly reports on the mortgage giant's status. Specifically, Fannie reported last week that its duration gap -- a measure of how successful its interest-rate risk is hedged -- has been widening beyond its target range of plus-or-minus six months. In July, Fannie's duration gap was a negative nine months; in August it careened to 14 months, the largest ever reported. (A negative number reflects falling interest rates, a positive number reflects rising ones.) So what happened? The problem is clear: Falling interest rates have encouraged a record number of home refinancings and therefore of mortgage prepayments. In other words, Fannie's assets are being paid off faster than expected by homeowners. Beyond this obvious fact, however, things get murky. Perhaps Fannie was caught without enough callable debt to keep pace with prepayments. Or perhaps Fannie's use of derivatives was inadequate, leaving the company under-hedged. Or perhaps its forecasting models are deeply flawed: Maybe Fannie tried to wait out low interest rates, figuring rates would pop up again or that there would be plenty of time to rebalance the maturities in its portfolio. Or perhaps Fan has been intentionally skimping on its overall hedging. Callable bonds are more expensive to issue than noncallable ones and, in times of volatile interest rates, it is more expensive to run a derivative position that "perfectly" or totally hedges risk. This is a company that has promised double-digit increases in earnings growth, so it has strong incentive to keep hedging costs down and risks up. The big point here is that only Fannie knows for sure what happened. Despite increasingly skeptical markets post-Enron, Fan's disclosure about its hedging remains scanty. Trust us, the company says. Even now Fannie and her boosters on Wall Street are pooh-pooing this latest evidence that something is wrong with its risk management and are discounting potential dangers. Well, investors are free to trust Fannie all they want. But taxpayers -- who are implicitly on the hook if this "government-sponsored enterprise" fails -- shouldn't have to backstop high-risk, roll the dice for higher earnings, practices. So we'd like to suggest a solution: Fannie (and her brother, Freddie Mac) should be forbidden to buy mortgage-backed securities. Here's the heart of the matter: In order to buy these securities, Fannie and Fred must issue debt. Currently the pair each hold more than 30% of their own mortgage-backed securities outstanding. In addition they hold nearly 7% of each other's securities, requiring them to issue more than a trillion dollars of debt. Moreover, the total trillion-plus dollars of mortgage securities represent interest-rate risk that Fannie and Fred must also hedge. But buying these securities does not aid Fan and Fred's original, Congress-endorsed mission to create a liquid secondary mortgage market. That market is now big enough and deep enough to prosper without them. Nor does buying securities lower interest rates since the companies must borrow to finance their buying. So why do Fannie and Fred purchase mortgage-backed securities? To boost earnings. Because of their implicit backing by the government, the duo can borrow cheaply -- a touch over what the federal government pays to borrow. They profit by the spread between their lower cost of borrowing and the higher interest rates on the mortgage-backed securities. The profits from their mortgage portfolios dwarf the profits they earn on their supposedly core business, which are the fees they get from guaranteeing principal and interest on the mortgages they securitize. Simply put, taxpayers are taking on enormous and unnecessary risk, just so Fan and Fred can fatten their earnings. This is called privatizing profit but socializing risk. Congress and the Bush Administration should take a close look at Fannie Mae and Freddie Mac's huge portfolios of mortgage-backed securities to see if they still serve any useful public purpose.