Thursday, October 27, 2011

FHLMC better than FNMA, but Both on Track For Full Recovery

Today's report from the Federal Housing Finance Agency (FHFA) shows FNMA and FHLMC's condition improving, on track to draw less from Treasury than originally predicted.  Click here to get report.

If you WANT a recovery - Net of the dividend repayments, the GSE's are on the fast track to return to solvency, even in a "worst case" scenario. 

Don't Confuse me With Facts

If you are a fan of the mortgage industry, FHFA head Edward DeMarco is not your friend.  Despite the improvement, his stated position is that he sees a future where there is no government involvement in the housing Market, according to an interview on National Public Radio.  "While there are many options for the future of Federal involvement, we think that it is private capital and the markets that should be taking the risks in the housing market." 

Take this in the context of the fact that both agencies appear well on their way to end their financial crisis and return to liquidity.  The big headwind, of course, is the fact that the government bailout came with a high price tag.  The agencies must pay a 10% dividend on the money to the government.

More Government Contradictions

This seems like an artifice - Congress and the Obama administration continue to add responsibilities on these corporations, tasking FNMA and FHLMC with rescuing American homeowners, yet the congress and the government want their (hefty) piece of the pie as well.  It's like debt management - much harder to dig out of the hole when there is a high interest rate involved.  It would be one thing if this were a carmaker, but these organizations are central to the recovery of the housing market.

The Treasury as Loan Shark - 10% Dividend Payment makes the future look a lot bleaker.
What we Need

The government needs to stop double-dipping - bashing the agency, then turning around and making a FAT  profit.  FNMA and FHLMC would be much closer to resolution if the government simply charged a dividend rate closer to the government's cost of borrowing.  Why not structure the deal as a 5/1 ARM?  If the dividend rate were 2.75% these companies might be out of the woods in 5 years.  Heck, I'll even throw in a free appraisal...

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