Yeah, the taxpayer ends up holding the bag a lot. In this case, the good news is that so far they are a bit limited in what they can hand off. Companies can pass them a lot of the prime loans, but it’s going to be hard to just willy-nilly hand Fred/Fan the garbage. I’m not saying they won’t find a way to do it, just that it isn’t going to be easy.

I don’t think the fallout is over yet. Things are still on pretty shaky ground and I’m of the opinion that a lot of companies haven’t ‘fessed up completely.

When you started talking about raising the caps in order to get FNM and FRE to buy all the crap loans, I was again reminded of the S&L fallout and subsequent bailout, the bill for which came back to the American taxpayer if I’m not mistaken.

Seems we always pay in the end as far as these schemes are concerned.

http://www.businessweek.com/investor/content/nov2007/pi2007118_140083.htm?campaign_id=yhoo

In other words, yes, it was a bit of a social program in that the government (ie the taxpayer) was taking on the risk of a borrower that conventional lenders didn’t want to mess with. Their other function as I understand it is to buy loans from other conventional mortgages that fit their requirements, keeping a liquid market moving. (Many lenders sell their loans into pools–that is nothing new. One of the buyers of prime loans has always been Freddie and Fannie. These are then packaged and sold to investors as bonds, usually institutions such as state retirement accounts.)

But did that leave Fred/Fan in better shape after this mess? Technically, yes–by their rules they supposedly won’t buy loans from other banks that don’t meet their requirements. They also have a cap set by Congress that limits the amount of money in total that they can buy along with the size of loans (I don’t think they are allowed to by jumbo loans for example.) After this disaster, there’s been a push in Congress to raise that upper limit–in other words to keep the mortgage bonds ‘liquid’ give the banks a place to sell them to–the government (fannie and freddie). But in order to buy more loans and take up the slack, that cap would have to be raised. It was looked at as a quick fix to bring liquidity back in the market. It would give banks somewhere to sell the loans, allowing them to get the loans off their books and possibly leave them open to making more loans.

Couple of things that then happened. Almost immediately, I think it was Washington mutual–don’t quote me on that–was accused of sellling loans to the government that weren’t of the right quality/type. I’ll see if I can find the article. But basically, Freddie or Fannie said if that were the case, they’d review the loans and wouldn’t be stuck with them. So this “liquidity” is limited. Banks supposedly can’t just shovel subprime over to Freddie or Fannie so it moves the mortgages, but slowly and only the good ones–which is why you hear no one will do subprime anymore. There is no one that will buy them anymore.

Then there’s that cap on Fred/Fan that lenders wanted raised. When the idea was put out, everyone thought it was great–BUT because of past scandals at Freddie and Fannie, they were on a kind of probation–making it more difficult to just shovel such a cap-raise through. (They were in trouble for finessing the earnings–holding back some earnings from good quarters and putting it into bad ones to make things look good all the time.)

So I think the answer is that yes, they are in decent shape, but they already had to contend with management changes, the past scandal (which limits their ability for “growth”) and just a bad karma kind of thing going on.

It always seemed to me that Fannie and Freddie were there to push a social program – lending money to people who wouldn’t normally have been candidates for homeownership. Never really understood how well they were doing from a business accounting standpoint.

But Maria, what you’re saying (I think) is that Fannie and Freddie lending standards were a bit more stringent in recent times than the no money down crowd. Does that mean their loan portfolio is in better shape than the rest of this crowd?

As to why they got away with their other balance sheet problems in the past, that remains a mystery. I know they were orignally setup under the guise of lending to people that might not be able to get a conventional loan, but that was waaaay back in the day when conventional loans required 5 and 10 percent down and people with very low or no debt. These days, when fanny and freddie were requiring 2.5 percent down, that ended up at the other end of the spectrum–it was probably harder to get a fannie/freddie than an ARM or interest only or no money down from the nicely dressed guy calling out to you from the McDonald’s parking lot.

And how the former executives have gotten ‘get out of jail free’ cards after the accounting mess of the last few years is also beyond me.

What I DO know is – both stocks have been acting extremely poorly of late. And if the market’s forecasting antennae are picking up the right signals, there might be even more trouble in store for these two. If that true, that 40 level may not hold on FRE this time around.

It seems like for the past decade, these two quasi-governmental enterprises are in a constant cycle of confounding investors and onlookers (like myself) with their business model and accounting practices.

I’ll hear someone point out that they’re technically insolvent or that there’s some sketchy accounting on their balance sheet, and then 6-9 months later it will die down.

A year after that, a prominent investor or fund manager will appear in Barron’s saying that they really like FNM or FRE and I’ll be reading this and scratching my head.

It also seems like the shares of FRE are forever range bound between the $70 level on the high end, and the $40 level on the low end, when things are bad. Zuh?