Fannie Freddie Lawsuit and Risk Arbitrage

by Chidem Kurdas

Last week the Federal Housing Finance Agency filed suits against 17 major banks and mortgage businesses for misleading Fannie Mae and Freddie Mac regarding the risks of mortgage securities sold to these government-sponsored enterprises.  Though it targets banks, the litigation shows the mode of operation of Fannie and Freddie.

This development is best understood against the background provided by a revealing new book,  Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance, by V. Acharya, M. Richardson, S. van Nieuwerburgh and L. White, professors at New York University’s Stern School of Business. Here’s a quote taken from a decade-old American Enterprise Institute compilation of warnings regarding GSEs from free marketers and left-wingers alike. This is from a Fannie Mae executive:

“We’re not casual about managing our political risk.” 

By contrast, they were casual about managing their credit risk, Continue reading

Pain in the Fannie

by Chidem Kurdas

As Fannie Mae goes for its next withdrawal from the $200 billion kitty the US Treasury graciously made available to this government-created and -sustained mortgage financer, it may be useful to look beyond the current housing slump and consider what it augers for the future.

Having made yet another loss, the government-sponsored enterprise needs more money. A report Fannie filed with the Securities and Exchange Commission attributes the $19 billion third-quarter loss to the housing slump and mortgage defaults.  “We do not expect to operate profitably in the foreseeable future,” says  the company.

I always thought it was a great triumph of government public relations to come up with the sweet-sounding Fannie Mae moniker for an entity officially called the Federal National Mortgage Association.  Now I understand what the nickname really means—a pain in the taxpayers’ backside for the foreseeable future.

The business has been adversely affected by helping delinquent or imminently-in-default borrowers to modify their mortgages so as to reduce their monthly payments. As the economy recovers, defaults will decline, and presumably this aid will no longer be needed. But it is not clear when – or even if – the subsidy program will end.

In fact, it may be extended.  Fannie “may recommend supplementing the program with other initiatives that would allow us, pursuant to our mission, to assist more homeowners.” Continue reading