Cash Needed: Where Will Fannie, Freddie Find Capital?

[Purveyor]

Last year, and earlier this year, sovereign wealth funds were flocking to make investments in banks needing capital. But now, many have lost a bundle on those deals and are not inclined to be burned again.

Private investment capital that could be going to shore up balance sheets is being diverted to hard assets like the Chrysler building, which just attracted an $800 million investment from Abu Dhabi Investment Council.

Warren Buffett has yet to ride to the rescue, having learned his lesson from Salomon Brothers two decades ago and sworn off more Wall Street investments.

With no influential names jumping in with big-stake purchases, the Federal Reserve might have to step up again to support the financial system.

One big concern is Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ), the two government-sponsored entities that are the engines of the mortgage market. The two might have to raise $75 billion in new capital, after having already raised $20 billion this year, and that realization has sparked near-panic as investors try to beat each other to the door. There is talk about the government taking them over.

Late Friday, headlines hit that the two were eligible for access to the Federal Reserve's discount window, sending their stocks ricocheting skyward.

Offloading assets onto the Fed could help Fannie and Freddie work down their leverage--the culprit behind the credit crisis--but it's not the only answer. The Fed's available pool of Treasury securities for lending through its window is just $900 billion, compared to more than $1.5 trillion of direct debt at Fannie and Freddie combined. And investment banks have had access to the window since Bear Stearns imploded in March, further limiting the potential securities for loan.

The Fed and the U.S. Treasury have tried to walk a tightrope on the issue of government intervention when a firm is faltering, saying they want to avoid a moral hazard but limit the damage to the broader economy that would happen with the failure of a major financial firm.

Instead the Fed has been urging financial companies to raise capital to guard against a cash squeeze that did in Bear Stearns this year. Asset sales and dividend cuts are emerging as the more palatable option in the absence of a rush of investors.

MORE...

FORBES: http://www.forbes.com/business/2008/07/11/fannie-freddie-fed-biz-wall-cx_lm_0711loans.html

[nradisic]

1. Taxpayers...

Of course Bernake will just print more $$$$.

[The_Casual_Observer]

2. Not from mortgages. Housing prices are totally unafforable if conventional

financing is the rule. How many people can do a conventional loan for a 300K+ house?

[davsand]

5. This over-built market is gonna stagnate.

If they can't finance it they can't buy it. There were an awful lot of people who built "McMansions" rather than buy an older smaller home. Now those new suburban atrocities are gonna sit empty because nobody will be able to afford them. For that matter, I have to wonder how many people will even be able to qualify for a loan on this stuff if lenders actually return to the standards of the 60's and 70's.


I would NOT want to be sitting a bunch of spec houses right now.



On a plus side, there will maybe be an increased demand for rental properties because nobody will be ABLE to buy a house any more...



Laura

[Purveyor]

9. I have "Grapes of Wrath" visions of dozers coming in and leveling these McMansions

and the precious farmland that they were built on returned to crop production.

It is not just that one cannot afford a loan to purchase but most around here are miles from the city/jobs and who can afford to heat/cool this cheap plywood barns?

[SoCalDem]

10. Rents have to cover the mortgage, or the house gets foreclosed on

It's a mess, no matter what happens. Around here a decent apartment costs $1300 a month..(my son just moved into one)

do the math

1300 rent
200 electricity
350 gasoline
300 food
100 car insurance
60 phone
40 water
40 gas (stove, water heater,furnace)


Just the basics, and we're up to $2,390.00 take-home pay ...at $10 an hour, that's MORE than the weekly paycheck, and does not include child care or health insurance or any extras..

[CrispyQ]

12. The developers are still building them in my area.

They just dozed two different fields in the last few weeks. One development will be in the $300-400k range (not considered much around here) & the other $600-700k range.

I don't think my area has felt the effects of the economy yet. The other day I walked to the liquor store & there were two SUVs & one giant truck in the parking lot, left idling while the driver went inside. The windows were up so I assume they had their air going too.

[skooooo]

3. out of our hides

[DJ13]

4. instead the Fed has been urging financial companies to raise capital to guard against a cash squeeze

......which has compounded the problem as they stopped making loans to the lower 60% of the consumers who wanted loans, which leads to decreased consumer purchases, which leads to decreased profits in retail, which leads to more companies the banks have loaned money to going bankrupt, which leads to lower employment, which leads to even lower profits in the remaining retail stores, which leads to.....

(This could go on a good while....)

[A HERETIC I AM]

6. (This could go on a good while....)

Until it stops.

Then it will go the other way.

Just like it always has.

[flvegan]

7. It's not cash they need.

All lenders need to be empowered to embrace and pursue default resolution.

Here's a basic question. If I gave you the opportunity to make in profit, $10k/year for performing in some way you enjoyed, you'd take it. Let's say that went wrong, and you had an option. You can continue doing that, but only make $8k/year OR you could pay me $50k and take the loss, what would you do?

Right. Lenders should too.

[applegrove]

8. Apparently both Franny and Freddie were involved is safer loans than

the New York banks so they should be easy to bail out.

[Skink]

11. Avast...the starvation has begun..

Prepare to be privatized.

[elleng]

13. According to Dodd today,

they're well-capitalized; no emergency of that type.