Collapse scenario: Housing bubble: Fannie Mae in trouble

2005-09-29

Richard Moore

The smart money is leaving the housing market, the insiders
having had their fill while the bubble grew. This is known as
a 'looting event', like the Savings & Loan and Enron events
that preceded it - and the post-Katrina corporate
'reconstruction' feeding frenzy currently underway. The big
investors, banks, and corporations are the looters, and the
rest of us - taxpayers, mortgage holders, and energy users -
are the looted.

The oil shock continues to unfold, the housing bubble is
starting to collapse, and Greenspan is admitting that the
whole economy is out of control. Meanwhile the average U.S.
income, in real terms, continues to decline.

If you have a big mortgage, get out while you can, and rent
for a while. You can buy in cheap later, just like the big banks do.

rkm


--------------------------------------------------------
From: "Dstacey" <•••@••.•••>
Subject: HOUSING BUBBLE: Fannie Mae problems cause big sell off of stock
Date: Thu, 29 Sep 2005 01:50:04 -0400

The news on Fannie Mae is extremely important to everyone.
This country has experienced a massive housing bubble over the
past few years. Some communities have been affected only a
little but many have been substantially impacted with house
prices soaring. This has led to speculation which further
drives prices up. Feeding the mania has been extraordinary
loan terms: no down payment, interest only, negative
amortization and other imprudent loan terms. Fannie Mae has
been a major source of such madness. "...said (analyst) Edwin
Groshans. Fannie Mae..owns or guarantees almost half the $7.6
trillion mortgage market...."

 
Now Fannie is in deep trouble. It has to refinance $30 billion
of short term debt each week. Will the credit markets accept
the Fannie Mae debt? Don't forget, Fannie has been unable to
issue the required audited financial statements for months
now. Would you lend money to a company that can not provide an
audited financial statement and which has just disclosed major
issues with its accounting policies?

If a significant number of usual lenders refuse Fannie Mae,
then there will be a "bankruptcy" of the biggest lender in the
country. Shocking thought. Most people will shrug their
shoulders and say "don't worry. The government will bail them
out." And maybe it will but our government is spending an
awful lot of money it doesn't have these days. How long will
its creditors continue to lend it money?

What if Fannie Mae is unable to lend to home buyers or can
only lend a portion of what it usually lends to this market?
It won't take much to reverse the direction of housing markets
all over the country. Should this happen, we can expect
speculators to have to sell houses. Many have extended
themselves in the expectation that the housing prices would
continue to rise. When they conclude that prices are going to
fall rather than rise, they will in most cases have no option
other than to sell. Many will not be able to sell for
sufficient amounts to pay the mortgages on the houses and will
suffer foreclosure.

Be prepared. We are in for a mighty rough time as housing
prices fall.
 
Don Stacey
 
++++++++++++++
[source unknown - rkm]

FANNIE MAE (RT-ECN)
Symbol: FNM
Last Trade:                  41.85 7:19PM ET
After Hours Change:     0.14 (0.34%)
Today's Change:         4.85 (10.39%)
Bid:                           41.65
Ask:                          41.88

More Problems Cause Big Selloff In Fannie Mae

There is a shocking sell-off in Fannie Mae stock today. Here
is an update. "Shares in Fannie Mae plunged on Wednesday after
a report saying regulators found new accounting violations at
the mortgage finance enterprise, which is already under
scrutiny for bookkeeping distortions."

"A spokeswoman for the Office of Federal Housing Enterprise
Oversight, which oversees Fannie Mae's financial soundness,
would not confirm or deny on Wednesday a Dow Jones report that
the regulator has found extensive additional problems."

"Fannie Mae shares tumbled following the story, which said
investigators discovered evidence executives overvalued
assets, underreported credit losses, and misused tax credits.
The article cited unnamed sources close to, or who have been
involved in, the inquiries."

Fannie Mae stock had been down less than 1 percent before the
article was published at about 1320 EDT, but moved quickly
lower. By 1540 EDT , shares were down more than 9.6 percent in
their biggest one-day drop since the market crash of October
1987. The drop wiped out more than $4 billion of the stock's
market value."
 

A Look Back At Fannie Mae

The new problems at Fannie Mae are still being fleshed out.
"Fannie Mae may have bought so-called finite insurance
policies to hide earnings losses after they were incurred,
according to Dow Jones. 'If Fannie Mae is using finite
insurance to offload losses, that would generate a significant
amount of concern in the investor community,' said (analyst)
Edwin Groshans. Fannie Mae..owns or guarantees almost half the
$7.6 trillion mortgage market."

A little walk down memory lane is apt. "The President of the
Federal Reserve Bank of St. Louis gave a detailed list of the
risks facing GSEs like Fannie Mae and Freddie Mac ("F-F"). '4.
Liquidity Risk-"Fannie Mae and Freddie Mac must roll over
roughly 30 billion dollars of maturing short-term obligations
every week. At a time of disrupted financial markets, the
credit markets might refuse to accept the F-F paper. 5.
Operational Risk-In the past two years, there have been
surprising news reports of accounting irregularities."

About those irregularities. "The implementation of controls
surrounding accounting ledger journal entries,including
policies that prohibit the falsification of
signatures..adoption of internal controls that limit the
ability of personnel to overwrite database records.' As it
became known last week, Fannie employees have been 'falsifying
signatures and altering information in databases' and were
'not isolated incidents."

That's not all. "One major area of suspicion involves Fannie's
QSPEs (or qualified special-purpose entities, which the
company uses to issue mortgage-backed securities). Fannie has
$1.4 trillion of such securities in its off-balance-sheet
QSPEs. Janet Tavakoli said 'I would guess they are using them
a lot because they are wonderful tools for getting things off
your balance sheet.'"

And this little matter. "Falcon said his office obtained
testimony from an employee in Fannie Mae's controller's
division indicating the employee would change the books when
asked. The result of the changes was an increase
in..earnings..and the release of a $27.1 million bonus pool
for senior executives. 'We're looking into who did it and how
far up it went,' Falcon said."

The watchdogs, however, get paid by the watched. "Senator
Richard Shelby..two conflicts of interest in the credit rating
industry. First, the rating companies get the bulk of their
revenue from the fees that they charge the entities that they
are rating..second conflict of interest is the agencies sale
of consultant advisory services to ratings clients."

See, according to Fannies CEO, we should be grateful. "Fannie
Mae 'has drawn in billions of dollars from investors abroad to
expand the availability and lower the cost of housing for low-
and moderate-income Americans..It is not at all clear that
those foreign investors would place their money in the U.S.
housing market without the predictability and convenience
provided by' debt issued by Fannie Mae and smaller rival
Freddie Mac."

Even the trade groups say so. "Specific limits on the GSEs'
portfolios are overreaching and unnecessary in addressing
[Fannie and Freddie's] safety and soundness. David Wilson,
president of the National Association of Home Builders, said
proposals to reduce or limit the portfolios were 'misguided
and would have significant adverse effects on the housing
finance system. The chairman of the Mortgage Bankers
Association, told the Senate committee that a dollar cap on
the Fannie's and Freddie's portfolios could be 'disruptive.'"

What does this mean for the taxpayer? "Senior debt
ratings...include an assumption of support from the US
government that would be provided in the event of severe
financial stress. If there was a major problem in their
ability to issue debt, then the government would have to step
in in order to support not just the GSEs but the overall
economy as well. It's very similar to support that we view in
the money center banks in the United States."

Well, at least Jim Rogers had a good day. "Q: Fannie Mae and
Freddie Mac are at the center of a storm right now. Do you
think the firms pose a risk to the financial system? Yes. I am
short FNM."

 
-- 

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Richard Moore (rkm)
Wexford, Ireland

"Apocalypse Now and the Brave New World"
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