Setting Up Fannie & Freddie To Fail

Mar 1st, 2008 @ 5:57 PM by Alden Smith

Recent bill proposals are to give Freddie Mac and Fannie Mae greater power in the mortgage market to increase the cap on jumbo loans.  Seen by many as a boon to the economy, some analysts fear it may be a wrong move.  The biggest risk, say analysts, is that Fannie and Freddie will become burdened with too much financial risk.

Let’s look at this.  Fannie and Freddie this week reported fourth-quarter losses totaling $6.1 billion.  They expect to lose even more throughout 2008.  Why, analysts say, should they be set up to take an even further tumble?  The government is making it easier for Fannie and Freddie to take on additional home-loan debt, and it is something they have sought.  Now they have the right to raise the past cap of $417,000.  The regulator for Fannie and Freddie is also seeking a relaxation of the federally mandated cash reserve, so that the companies can have more freedom to play in the market.  Not such a good idea, IMHO.

Although Bush and company feel that opening up parameters for Freddie and Fannie will help stimulate the economy, it is seen by financial experts irresponsible to allow them growth at this time.  Those in the know think that because they are billions of dollars below their $746 billion limit. That giving them more latitude is setting them up for failure.  It seems like throwing good money after bad.

Analysts feel that if Freddie and Fannie become even bigger, which they surely would do if they have more cash to play with, that a failure in their market place would be disastrous.  Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics, said “Neither of these organizations has enough capital to cover their risk, and they know it. I’m concerned about solvency for these entities.”

Joseph Mason, a finance professor at Drexel University in Philadelphia, said “Fannie and Freddie are really, really big. These recent changes make them even bigger.  At some point they become too big to save.”

What is that old saying?  “The bigger they are, the harder they fall?”  Are we looking at financial disaster looming on the horizon?  Guess we will need to wait ands see.  My money is on the people in the know.

One Response to “Setting Up Fannie & Freddie To Fail”

1. Mortgage says:

   March 1, 2008 at 11:47 pm

   Fannie and Freddie have already proved that they are in trouble so why not let them dig into a deeper hole. It wouldn’t surprise me if this is a cover up for a “bailout” where the top two government backed mortgage entities fail only to get bailed out.