My friend over at Countrywid mortgage Mike Ca[puto sent this to me today and I wanted to share it.
While there have been concerns for months about the size of losses at Fannie Mae and Freddie Mac due to the credit crisis, the troubles at the two firms increased significantly during the week. Monday, a report from an investment bank suggested that the two firms would have to raise enormous amounts of capital to comply with revised accounting rules. Thursday, Former Fed member Poole claimed that the two firms are insolvent under standard accounting rules and warned that a government bailout might be needed in the future. Friday morning, there was speculation that the government was considering a takeover of the two firms.
The response from government officials was swift. The director of OFHEO, Fannie and Freddie’s regulator, reported that they both remained “well capitalized” based on their charters. On Thursday, Fed Chief Bernanke and Treasury Secretary Paulson attempted to reassure investors that the financial system was sound. Since Fannie and Freddie are government-sponsored enterprises, and together account for about 70% of mortgage originations and hold $5.3 trillion in home-loan debt, most investors believe that the government would step in to prevent the collapse of the firms. Friday, Treasury Secretary Paulson stated that he sees no bailout on the horizon for Fannie and Freddie and that the government is working to support them to carry out their “important mission” in their “current form”.
Bottom line, despite the negative headlines, comments from OFHEO, the Fed, and the Treasury eased investor concerns. While the stock prices of Fannie and Freddie plunged during the week, investors apparently were comfortable that the firms’ guarantees of the mortgage loans were not at risk, and mortgage rates ended the week moderately higher.
Next week should be interesting if nothing else. As a reminder, FHA risk-based pricing takes effect on Monday.