Part One: A man’s home used to be his castle; now it’s somebody else’s bond portfolio
I’ve been critical of Fannie Mae (and by extension, Freddie Mac) before. Here’s the quick and dirty version of what they are, as condensed by Bloomberg:
“Fannie Mae and… Freddie Mac were chartered by the government to spur homeownership by purchasing mortgages from banks with the proceeds from bond sales. They own or guarantee almost half the $7.3 trillion mortgage market. Until 2002, the two companies were exempt from filing financial statements with the SEC…. Fannie Mae is the second-largest debtor in the U.S. after the government, with $942 billion as of July 31.”
So, Joe and Jane Average get a house/mortgage combo pack, their mortgage holder sells the mortgage to a quasi-government entity, which gives their mortgage holder money to lend for somebody else’s mortgage, racking up another set of origination fees in the process. There are several potential pitfalls. First, since the original lender doesn’t plan on holding the mortgage, there is the risk that they won’t screen applicants as well as might be desirable. After all, if the homeowner defaults, it’s Fannie Mae’s problem. Second, we are in the beginnings of a rising interest rate environment. This means that mortgage companies get to sell all their below-market-rate junk, which again becomes Fannie Mae’s problem. Finally, if you have any reason to believe there is a real estate bubble, you must believe it will someday be — you guessed it — Fannie Mae’s problem.
Sounds like somebody else’s problem? When one company — worse yet, backed by government money — has their fingers in almost half of all American mortgages, their problems can quickly be an issue for everyone.
So, as if Fannie Mae doesn’t have enough problems, it has an accounting mess, including “clear instances in which management sought to misapply and ignore accounting principles….” Furthermore, they may not be the only folks in the mortgage industry with such problems. The results of an 8 month investigation by a government agency found little things like $200 Million in expenses nobody bothered to mention until months after the fact. The feds are unhappy. Congress wants hearings. Investors are unhappy. People who need mortgages will be unhappy as rates rise to reflect the fact that mortgage holders may actually have to hold the mortgage to maturity.
If you think the Savings and Loan scandal of the 80s was a big deal, better fasten your seat-belt.
Part Two: Oily to bed and oily to rise makes a man smell like $2 per gallon unleaded.
Crude oil hit record intraday prices today, and may well hit $50 a barrel Real Soon Now. As the Taipei Times reports, that’s a rise of 73% over the last year. Less than 24 hours ago, the Administration was still filling the Strategic Oil Reserves (buy high and sell goodness knows where) and saying this stockpile must not be used to manipulate oil prices. Flip-Flop! Today it turns out maybe some of it can be lent out. Oh, and if you are really interested in more than the soundbite, the folks at Reuters have done this nice item on Why Are Oil Prices So High.
Of course, the price of oil effects the price of gasoline, which is already high priced and supply constrained due to hurricanes. Unless you are a self-sufficient hermit — in which case, why are you reading this? — this effects you.