Here we are on the dawn of the first trading day following IndyMac's collapse and the Federal Government's prop up of Fannie Mae and Freddie Mac and I must say that I'm not sure how the market will react.
First, Fannie and Freddie have always had the implied backing of the Federal Government. And while they still say that don't need it, the Fed has made unprecidended statements about these GSE's access to fund through the Fed. Our founding fathers were wise - checks and balances work. And when Fannie and Freddie were created, the check and balance always was that the Government would step in if needed. Welcome to one of the most unique times their 80 year history!
Second, IndyMac is now in FDIC hands. Before today, I knew two things about IndyMac - they were notorious for delaying closings, and they wrote loans that really shouldn't be done. Three years ago I lost a 95% CLTV No Doc deal to IndyMac because they were a full 2 points better on rate - 2 points! At the time, their true No Doc was priced at the same level as my Stated Income, Full Asset loan! I think the credit score requirement was 660. Absolutely no risk premium on that loan. Since reading more about IndyMac this weekend, I find it interesting that the firm was established by Angelo Mozillo - founder of Countrywide. Now both Countrywide and IndyMac are no more (well, give BoA 90 days and they'll distance themselves from the Countrywide name). Just a coincidence?
To the Fannie and Freddie news - there should be no surprise that the Government has responded so aggressively. I've heard many people say that Fannie and Freddie are too big to go out of business. That is simply not accurate. More accurate is that they are too important. Fannie and Freddie are so critical that if they suddenly did not function the mechanics of the mortgage market would come to a quick halt striking a devasting blow to the economy.
Let's think about this for a moment... here in Nashville, sales are off about 30% from last year - pretty good compared to other markets. But imagine the only option people had to buy a home was private money or cash. Buyers wouldn't be able to secure funding, home prices would erode quickly, sellers would quickly be upside down.
But that's not the case. The system has checks and balances. If the Fed was willing to bail out Bear Stearns they certainly would be willing to prop up Fannie and Freddie. (I'm saying prop up because they both appear to have solid financials - today's Freddie auction will give some insight to the market's opinion of their financials.)
As for IndyMac, I have no love loss. I'm not bitter because I lost that deal 3 years ago. I'm tired of hearing lenders that made junk loans 3-5 years ago whine about their current state of affairs. Just once I'd like to hear someone say "we made bad deals and now we're going to have to improve our business in order to survive." But that is reality and the last thing a CEO wants to do is tell Wall Street the reality of their situation. So we'll continue to have this incredible volitility until things settle down.
Buckle up. The ride ahead looks to be bumpy. However, when we get to the other side of this thrill ride it will be all that much better.
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