Fannie Mae – Freddie’s big brother now in trouble?

ONmoney.NET's recent investigative report on Fannie Mae.

Detractors from all over are starting to question Fannie and the almost 1 trillion on mortgage securitization it overseas. Fannie's stability is paramount because if issues are raised, investors may not be so apt in buying up those warehouse lines, and could lead to major shifts in less prized Alt-A and Sub prime secondary markets.

A few quick interesting facts about these GSE's (Government Sponsored Enterprises).
Both GSE's rates average .7% lower then conventional rates, a very small change in actual mortgage payment. They only provide 25% of first time home buyer funding. Fannie is the second largest issuer of debt, next to Uncle Sam; A very lucrative client for fee earning wall street banks. Fannie only holds 2% of assets to debt, compared to 8% for comparable banks. 6 out of 10 banks nation-wide hold their assets in GSE Debt (part of that 8% is actually invested in MORE debt) Fannie is the primary source of automated underwriting software used across the mortgage lending industry (could be used to help earnings growth by negating some of the risk for example). LTV as a whole has gone from 33% in 1979 to 58.7% in 2003 (industry wide), GSE specifically. A seemingly positive notion is that GSE mortgages run defaults of about .6% vs. FHA - at over 11%. Both of these end up being taxpayer bailout scenario's if the risk gets out of line.

A red flag SUDDENLY appears when Ofheo's small staff, headed by Armando Falcon is trying to get information out of Fannie, reluctantly. And that seems to be the effort of Mr. Howard of Fannie Mae. A recent report on findings from Ofheo was scathing, citing Mr. Howard of wearing too many hats, and neutering any checks and balances. Fannie was also criticized for creating an accounting cookie jar reserve, where debits and credits could be created to massage quarter ends. The industry also had to take not in the fact that lush compensation is created for executives at this company. But it seems as though the industry is brushing all this aside, and some say that Falcon is just fighting for his job. Let us not consider the breadth and debt of derivatives used by these lenders. CFO's everywhere are having to contend with this issue, and pricing these issues anyone's guess (black scholes).

If you have these issues cropping up at Fannie, Lets consider the rest of the marketplace for A paper. Lenders in this arena have shown a 400% increase in year over year offerings of interest-only products, which usually are Adjustable rates. "The industry has no recent experience with granting them to a broad range of borrowers and so no deep pools of data on default rates are available" says Doug Duncan, chief economist of the Mortgage Bankers Association. "We are flying Blind"

"My concern is that they're being used to sell people houses they can't afford, adds Sheila C. Bair, a former senior U.S. Treasury official who is now a finance professor at the University of Massachusetts, Amherst.

So what does all this mean; who really cares? Well for the average person with 2.1 kids, it doesn'tt mean too much RIGHT NOW. My belief is that these issues are pointing to a system problem in the future. Perhaps 10 years from today, when baby-boomers will be retiring and the entitlements and costs of healthcare cannot be ignored. For now, this carousel will continue unabated. Future indications will always be foretold from the stock price. Carefully monitor the stock charts for further insight into the future of this company.