Fannie and Freddie - - - Gross!

  You guys were supposed to be the stable ones.  Instead, you both are misbehaving.  I hate this stuff.  Today I find Fannie and Freddie in teh spotlight for all of the wrong reasons.  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.  Don't we have the government in enough already?  Now wait...the government was involved because they are GSEs or "Government Sponsored Entities."  If the Government Sponsored Entity is failed, then what do we need to do to show that the Government is doing what they're supposed to be doing?   Maybe the government is and that's why this "quasi-governmental agencies" are failing. 

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 lower.