The Obama administration’s latest lifeline to Fannie and Freddie will cover unlimited losses through 2012, lifting an earlier cap of $400 billion. It also eases restrictions on the size of the companies’ investment portfolios. That’s a reversal of the Bush administration’s September 2008 plan to shrink the size of the companies’ holdings of mortgage-backed securities.
The action, which didn’t need the approval of Congress, could position Fannie and Freddie to get more aggressive in dealing with the housing crisis, perhaps taking troubled mortgage investments off banks’ books.
"They’ve cleared the decks to use Fannie and Freddie as a vessel for whatever they want," says Edward Pinto, a housing consultant who served as Fannie’s chief credit officer in the late 1980s.
Source: Yahoo/Associated Press
Unfortunately, Congress will continue to favor short term political gain over long term prosperity. My opinion is that we’ll continue to see this kind of news flow in 2010. I would call it a pretty safe bet.
This article about Fannie/Freddie is an example of why I have been putting together a secondary offering/recapitalization portfolio of troubled financials over the past few weeks. In a perfect world, Freddie/Fannie would be prohibited from owning mortgages on their books. Their charter would be limited to securitizing mortgages for investors. The original purpose of the GSEs. The government would not be in the business of owning mortgages.
But our government is far from perfect. This is a synthetic bet that Congress will continue to favor short term political gain over the country’s long term prosperity.
According to the article, banks with troubled mortgages may get a break by off loading their junk mortgages to the government. If the government buys the paper and refuses to exercise its remedies, the foreclosures stop and defaulting homeowners get another subsidy from the taxpayers. At least in the short term, this should also help stabilize housing values strengthening the loan portfolios of banks that keep their loans. Of course, banks also get cash for these mortgages which helps their balance sheet tremendously. With FRE/FNM creating a market for the loans, the value of these troubled loans will also go up even if the banks do not sell to FRE/FNM.
My point is not to trumpet this story as a reason to buy junky banks. This is just one news story. However, in my opinion, this kind of positive news flow is going to continue for sometime.
I wouldn’t bet the farm on FNM and FRE, but they look like pretty good lotto tickets at these levels. It seems unlikely that the government would pull the plug on the equity at this point. The equity to zero scenario seems low. Meanwhile, we saw a lot of volume coming into these names in August and we’ve seen volume again in December.
Both FRE and FNM have a confluence of support where the 20 day and 50 day SMAs converge. That is where I am looking to buy. We also have horizontal support and the 200/300 day SMAs just below those levels if the 20/50 day does not hold.
Perhaps I won’t get so angry the next time I read about Barney Frank picking my pocket if I own these stocks.