Bush Signs Housing Bill

President Bush signed the Housing bill at 7 AM ET Wednesday morning to little if no fanfare.
Treasury Secretary Henry Paulson and a couple of others were on hand to oversee the signing.

One can only surmise distaste of the bill on the part of the Republicans by the perfunctory manner in which such seminal legislation was passed by the White House. Not to mention the importance the legislation will play in helping the U.S. housing market, as well as the economy as a whole, in its attempt at recovery.

Leading up to the signing of the bill Republicans were objecting to the possibility of using taxpayer money to bail out the two GSEs (government sponsored enterprises) FNMA and Freddie Mac. $25 billion was the estimated amount of taxpayer money that may be required to bail out the two mortgage finance companies. The objection is heard and noted, however, why would the use of taxpayer funds be so objectionable if it is taxpayers as a whole that will most certainly benefit by a healthy mortgage secondary market as provided by the two GSEs? It is also understood that not all taxpayers are homeowners and therefore should not have to contribute their hard earned tax dollars to the bail out. True enough. However, most renters do aspire to be homeowners one day, and if they hope to achieve that goal, it will be reliant upon the existence of the two mortgage giants to make that happen. In essence, all taxpayers have a vested interest in the existence of the GSEs and if the tab were to be $25 billion or some other such amount, it doesn't sound like a price too high to pay.

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Think of NMZ Financial & Markenomics for residential mortgage and home loan needs for Lamorinda, Lafayette, Moraga, Orinda, Contra Costa County and all Bay Area and Califorina real estate.

Lawmakers Agree on Bill To Bail Out FNMA & Freddie Mac

On Wednesday, July 23, the House of Representatives is set to approve a bill aimed at alleviating the current housing crisis as well as rescuing FNMA & Freddie Mac, the two government sponsored enterprises (GSEs). Part of the bill will authorize Treasury Secretary Henry Paulson to bail out the two GSEs and place few restrictions on the two large mortgage finance providers.

Please click on the links below to go to the homepages of both FNMA and Freddie Mac.

http://www.fanniemae.com/index.jhtml

http://www.freddiemac.com/

A previous obstacle to the success of the bill was the veto threat by the Bush administration due to the bills provision to provide $3.9 billion to communities for the purchase of foreclosed properties.

The bill appears to leave the two GSEs basically intact as autonomous organizations with few additional limitations which would have possibly harmed common shareholders. The bill does not impose any restrictions on the GSEs abilities to continue to pay dividends to shareholders. Also important is the point that the Treasury will not receive preferential treatment over other shareholders if it decides to inject capital into the GSEs through the purchase of preferred shares of the GSEs.

The bill does add provisions for a stronger regulator of the two GSEs as well as additional oversight. The Fed has already begun reviewing the books of the GSEs to verify their capital position and liquidity. One goal of the bill is to enhance the market's confidence in the GSEs. FNMA and Freddie Mac common stock is down 66% and 72% this year, respectively. The importance of the companies to the American financial system and economy as a whole cannot be overstated. With the collapse of the secondary market for morgages and Wall Street's inability and unwillingness to participate in its recovery, FNMA and Freddie Mac remain two of the few options for creating a market for mortgages, along with lesser known GNMA and FHA.

One pleasing aspect of the bill to both borrowers and lenders in high cost housing markets, such as the Bay Area, is the higher cap on loan amounts that will result. The new conforming loan limit would become $625,000, or the median home price plus 15%, for both FNMA and Freddie Mac.

SEC's Unusual & Interesting Move On Short-Selling

On Tuesday, July 15th, the SEC made the unprecedented move of limiting short selling in certain stocks in the financial sector. Viewing the financial sector as already weakened, the SEC made the radical move to prevent further weakness to many beleaguered companies in the sector, most notably, FNMA and FHMLC, amongst others. The past week has seen massive selling in the stocks of the two GSEs (government sponsored enterprises) and brokerage firm Lehman Brothers. In an ironic twist, it should be noted that the two GSEs stock declines picked up intensity on a Lehman Brothers analyst's research report, that received much media attention over the July 4th weekend, regarding the two companies weak capital positions exacerbated by a FASB accounting rule change (which, again ironically, the analyst conceded would not even apply to the two GSEs).

Short selling is the act of selling a stock that is not owned but borrowed and then sold. The action the SEC is limiting is the act of "naked" short selling, that is, selling stock that is not owned while no attempt is made to borrower the stock. In short selling, money is made by selling at a higher price and buying the stock back at a lower price, the difference being the profit. The SEC is limiting naked short selling for the next 30 days, starting Monday, July 21st.

Because FNMA and FHMLC play such a significant role in the housing industry and are critical in the sector's recovery, the Federal government has been active in trying to shore up confidence in the two GSEs. Their declining stock values and eroding investor confidence make it harder for each to raise capital, and this week Moody's Ratings Agency downgraded the preferred stock and bank rating of each. One trader referred to the stock declines as "thermonuclear". The following url links to a Fortune magazine article on Moody's downgrade.

http://dailybriefing.blogs.fortune.cnn.com/2008/07/15/moodys-casts-jaundiced-eye-on-fannie-freddie/?source=yahoo_quote

Although the SEC's move seems dramatic and radical, it is believed that such a move will have little impact on curbing the short selling in the market place and will do little more than make it mildly more expensive for short sellers to operate. Many argue that short sellers are a necessary part of a healthy market as the action alerts the market to overpriced securities and naturally deflates inflating bubbles.

I think the US Government has stood by long enough and cannot afford to let the market dictate the fate of the two GSEs. I have never believed in a purely capitalistic model, and the Governments role, however limited, must exist as a safeguard in unusual circumstances, and these circumstances continue to become more and more unusual.

FNMA & Freddie Mac - Could They Really Fail?

On July 7th, FNMA (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) stock declined over 15% each to 14 year lows, primarily based on capitalization concerns. A Lehman Brother analyst surmised that an accounting rule change (FASB) would require the two GSEs (Government Sponsored Enterprises) raise as much as $75 billion in additional capital to meet the new capital requirements.

As it turned out, that same analyst conceded that the possible rule change would not apply to either GSE and that they would be exempt from having to raise the additional capital to meet the requirement. Unfortunately for investors of both GSEs and for the GSEs themselves, the damage had been done. On Wednesday, July 9th, FNMA issued $3 billion in two-year notes and paid the highest spread to date on those notes. The yield spread to comparable U.S. treasury securities was 74 basis points (0.74%). By way of comparison, last month FNMA issued $4 billion in two-year notes and the spread to comparable U.S. treasury securities was 65 basis points.

What does this mean? Basically, it is costing FNMA more to raise capital today compared to yesterday. This raises their cost of capital and to maintain their profit margin, it means higher rates for investors and therefore higher rates for borrowers who want to purchase a new home or refinance their current home.

If both GSEs have implied government backing, that presumably means the U.S. Government would not let them fail, why is there so much fear on the "Street" about their well-being? It could be that the "Street" does not believe the Government would come through and bail either out in the unlikely event that they fail. Or, it could be that the investing community views a worst-case scenario equating to a Government bail-out with no remaining equity for investors. I am not sure what, if anything, will come to pass, however, the credit markets are giving their own interpretation of FNMA's well-being and it's not very positive.