Translated material
Mortgage state capitalism
Fannie Mae and Freddie Mac must pay $223 billion
The situation around mortgage giants Fannie Mae and Freddie Mac is heating up. More and more American financiers and officials believe that companies should be nationalized, since their debts will exceed $200 billion by the end of the third quarter. Against this background, investor concern is growing: in yesterday's trading, securities of mortgage agencies opened with a decline of more than 15%, although financial authorities deny intentions to transfer companies under state control.Yesterday, Richmond Federal Reserve Chairman Jeffrey Lacker said in an interview with Bloomberg Television that Fannie Mae and Freddie Mac "must be nationalized in a public and credible manner." Former Federal Reserve Chairman Alan Greenspan proposed roughly the same thing: nationalize these companies, then split them up and sell them. "There is no plausible argument for bailing out Bear Stearns and not bailing out these agencies," Mr. Greenspan said in an interview with The Wall Street Journal last week. He said there was no basis in fears that financial markets would react negatively if the US government nationalized companies and assumed their debts. “A law that says government-sponsored businesses are not backed by full government provision is incredible. The market believes that the government guarantee exists. Foreign investors believe that there is a guarantee,” he concluded.
However, rumors about the possible transfer of companies under full state control have already had a very painful impact on investor sentiment. They began selling the mortgage giants after financial newspaper Barron's reported over the weekend that the government's possible bailout of Fannie Mae and Freddie Mac could strip current common shareholders of their stake in the companies and hurt holders of other assets of the two mortgage agencies.
According to The Washington Post, the US Treasury Department said that the department “has no plans to use its powers to support the two mortgage companies.” However, it is known that these powers have increased significantly after US President George W. Bush approved a bill at the end of July, according to which the government's control over Fannie Mae and Freddie Mac is significantly increased.
In turn, Freddie Mac spokesperson Sharon McHale told Reuters that “the publication in Barron's newspaper misrepresents the company's financial situation.” “Our level of capitalization remains at an adequate level,” she assured. Despite this, at the opening of US trading yesterday, Fannie Mae shares fell by 16%, and Freddie Mac by 18%. In a week, their shares fell in price by 20%, and in a year - by more than 80%.
Bloomberg reported that at the end of the third quarter, these agencies, which guarantee 42% of the obligations in the US mortgage market, must repay $223 billion of debt. “It depends on how they cope with this whether the Ministry of Finance will have to invest federal budget funds in them or not,” the agency notes. Fannie Mae's bonds worth $120 billion expire at the end of September, and Freddie Mac's bonds worth $103 billion expire. Now the demand for Fannie Mae and Freddie Mac instruments is low, and investors are demanding higher yields on them. As The Wall Street Journal notes, on Tuesday Freddie Mac was forced to offer investors unusually favorable terms for a $3 billion debt offering, renewing concerns about the mortgage giant's financial health. Freddie Mac has demonstrated that it can raise capital on its own, but it will have to pay very high interest on the securities. The five-year yield is estimated at 4.172% per annum, 1.3 percentage points higher than US Treasuries. This is the largest spread ever recorded between US Treasury and Freddie Mac yields. Freddie Mac's increased costs of originating and servicing loans could lead to higher rates for consumers, which in turn threatens to prolong the crisis in the US housing market. According to many analysts, agencies may need injections totaling over $30 billion in the coming months to cover losses.
“Investors are trying to leave the mortgage and credit crisis somewhere in the past. They want to believe that we are at the last stage, but every time new news dispels these hopes,” Paul Nolt, director of investments at Hinsdale Associates, outlined the situation in the American market.
As Russian Deputy Finance Minister Dmitry Pankin said yesterday, the possible nationalization of US mortgage agencies Fannie Mae and Freddy Mac will not affect the National Welfare Fund and the Reserve Fund of Russia. “This will be an important event for the American financial market. I think that there will definitely be some changes in this market. For our financial authorities, for our investments, I think there will be no changes,” he said on the Vesti 24 TV channel. Mr. Pankin recalled that the rating of Fannie Mae and Freddy Mac remains at AAA level, and “there are no changes to this rating.” In his opinion, problems may arise for those who bought shares in companies: “They will really face difficult times, they will have losses in their assets.” But the Russian government does not have such assets, he added.