by Tom Vanderwell

Mortgage Officer

Author website

One of the important things that Paulson said in the press conference yesterday was that we (the government) don’t want Fannie and Freddie to stay public and that one of the things that the next administration and Congress has to figure out is “How in the world do we take them private again?”

In light of that, I thought I’d repost what I original wrote on July 22, 2008 about a potential bailout.   Not because I think I was right, but because I think we need to start thinking and talking about what happens now.   I certainly don’t want the Federal government “mucking around” in the mortgage world for a long time.

What do you think?

Tom Vanderwell

July 22, 2008  Barry Ritholz at The Big Picture had these two comics that brought to the forefront again the issue of moral hazard.   Check out the comics and then we’ll talk “on the other side.”

Okay, now some thoughts about moral hazard:

The definition of moral hazard (as taken from that scholarly journal, Wikipedia):

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.

Let’s break that down and look at it a little more closely in light of the current market environment:

a party insulated from risk may behave differently…. What that means is that, frankly, the people on Wall Street and the bankers on Main St. (including yours truly) might very well have done things differently over the last few years if we had been more fully exposed to the risk.  Will Fannie or Freddie buy it?   That’s all that most mortgage lenders really cared about when structuring a loan.   On Wall Street, the guys (I’m using that term in a gender neutral sense, okay?) who packaged these loans up and sold them as securities didn’t really care Read more

by Tom Vanderwell

Mortgage Officer

Author website

I promise I won’t take up so much space on here after the dust settles, but I’m having a hard time getting my mind around the enormity of what’s happening with Fannie and Freddie and what it means, so I figure the best thing I can do is share what I know with others……

I came across this article in the Wall Street Journal which lays out a good “story” of what has transpired.   I’m going to copy excerpts of it, but I’d urge you to read the whole thing…….

WASHINGTON — In the end, Fannie Mae and Freddie Mac had no choice.

Summoned to separate meetings on Sept. 5 with Treasury Secretary Henry Paulson and other top officials, the two mortgage giants were told they could either agree to a government takeover or one would be foisted upon them.

“We have the grounds to do this on an involuntary basis, and we will go that course if needed,” Mr. Paulson told senior executives at the two companies, who had little idea such a move was coming, according to three people familiar with the meetings.

There was no dramatic trigger, nor was there fear of imminent collapse. Instead, the sweeping government intervention stemmed from a growing realization by Treasury and Federal Reserve officials that the two companies couldn’t survive in their present forms, and that any collapse would be devastating to the economy.

The decision was hashed out over weeks of meetings…….

In the end, Mr. Paulson, Federal Reserve Chairman Ben Bernanke and James Lockhart, head of the companies’ regulator, the Federal Housing Finance Agency, concluded that the two companies had lost the confidence of the markets and couldn’t survive as currently structured. …..

Inside Treasury, the hope was that merely receiving authority to backstop the two companies would comfort markets enough that they could raise capital on their own. ……..

Two things would soon force Treasury’s hand. Uncertainty about Treasury’s plans and how any intervention would affect shareholders caused shares of Fannie and Freddie to fall sharply, making it all but impossible for them to raise equity. At the same Read more

by Tom Vanderwell

Mortgage Officer

Author website

If any of you have enjoyed the “give and take” between Sean and I about the Fannie Freddie death watch, it appears, based on reports in the Wall Street Journal and others that the bailout is happening this weekend.   What shape is it taking?   Lots of rumors, very few facts.

Here’s what I feel safe saying I know for now:

1. If you own common shares in Fannie or Freddie, you can probably use them for wallpaper.

2. If you own “debt” from Fannie or Freddie, you’ll be fine.

3. I’m still going to be writing mortgages next week.   The purpose of the bailout is to make sure the housing market stays moving and doesn’t precipitate a total financial collapse.

If I know more, I’ll write more later.

Tom Vanderwell