Archive for the “Fannie Mae, Freddie Mac” Category

When Fannie Mae and Freddie Mac were taken over by the U.S. federal government on Sept. 7, the companies’ stock share prices responded by plummeting more than 80%, with preferred and common stock reaching historic lows. Now, thousands of individual investors who bought stock in the two mortgage giants based on assurances from government officials that the companies would once again ascend to new heights are asking themselves where it all went wrong.

Adam Freid is one of those investors. As reported Sept. 12 in the Wall Street Journal, the general contractor from Thousand Oaks, Calif., bought approximately 25,000 common shares of Freddie Mac when the price was around $5. Among other things, he made the investment, he says, because of the mortgage guarantor’s August earnings report. Though the results were far from glowing - it posted a net loss of $821 million, its fourth consecutive quarterly loss - Freddie Mac also said it was committed to raising $5.5 billion of new capital.

Comments by Treasury Secretary Henry Paulson that a government takeover of Freddie Mac and Fannie Mae would not come to fruition served to offer additional assurance for Freid.

Indeed, in July, the Treasury Department released a statement from Paulson in which he is adamant in stating that Fannie Mae and Freddie Mac “must continue in their current form as shareholder-owned companies.” That same month, Paulson testifies before a congressional hearing and reports that both companies are adequately capitalized.

The about-face came on Sept. 7, when Paulson announced that Fannie Mae and Freddie Mac had been seized by the federal government and placed into a conservatorship. As for individual investors like Freid, they were left bewildered and angry. Freid is out more than $100,000 - money he planned to use for his children’s future college education. Now he’s considering a class-action lawsuit against Freddie Mac.

These investors want answers - and for government officials, just like company executives, to be held accountable for stating what they say were misleading facts and false information about Fannie Mae and Freddie Mac’s imminent future.

Not everyone has come up short from the Fannie Mae/Freddie Mac bailout, however. While thousands of individual U.S. investors have been left financially drained, foreign bondholders apparently are doing just fine. The current structure of the bailout calls for more than $1.3 trillion worth of the Fannie Mae and Freddie Mac debt held by central banks and foreign investors to be fully guaranteed by the U.S. government.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Unable to overcome mounting losses on subprime-rated mortgages, one of the oldest and most revered names on Wall Street apparently is on a desperate track to find a buyer. Among the reported suitors for Lehman Brothers Holdings: Bank of America, Deutsche Bank AG, JC Flowers & Co. and Barclays.

The past three months have been brutal for Lehman. The nation’s fourth-largest investment bank has seen its shares fall more than 80 percent, along with a record $3.9 billion third-quarter loss in September and $5.6 billion of write downs.

Lehman’s future outlook took yet another hit on Sept. 11 when Moody’s Investor Service announced plans to downgrade the long-term debt rating on the 158-year-old investment bank if it did not have a “strategic arrangement” in place for a buyer or links with a stronger financial partner. A downgrade not only would increase Lehman’s borrowing costs, but also could cause other institutions and partners to become leery of doing business with the firm.

That’s exactly what occurred in the case of Bear Stearns, which collapsed in March after clients and vendors abandoned the 85-year-old investment firm on the belief it had become financially insolvent. The Federal Reserve eventually stepped in to orchestrate a deal with JPMorgan Chase to buy the company.

Following the Bears Stearns bail out, the Federal Reserve opened up a lending facility that gave Wall Street investment banks access to a quick source of cash. In exchange for 28-day loans of Treasury securities, companies temporarily use certain assets - including mortgage-backed securities, asset-backed securities and collateralized loan obligations - as collateral.

Critics of the Fed’s lending facility say it undermines the incentive for investment firms to maintain liquidity buffers and instead encourages them to take additional risks because of the belief that the government will come to the rescue if things go wrong.

And apparently that may be the case for Lehman Brothers. As reported Sept. 12 in the Washington Post, both the Federal Reserve and the U.S. Treasury Department are actively involved in finding a buyer for the troubled firm and expect a deal to be in place by the end of this weekend. Several potential scenarios reportedly are under consideration, including selling various divisions of Lehman to multiple buyers.

News of the government’s behind-the-scenes involvement with Lehman Brothers comes less than a week after Treasury Secretary Henry Paulson announced the takeover of Fannie Mae and Freddie Mac and five months after federal regulators arranged the sale of Bear Stearns to J.P. Morgan Chase.

Meanwhile, with news of a forced sale of Lehman Brothers becoming a more likely reality, investors are left to watch the value of their stock evaporate by the hour, and employees of Lehman anxiously wait for word on their future fate.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Washington Mutual’s CEO Kerry Killinger joins a growing list of executives to receive the pink slip because of company losses tied to rising mortgage delinquencies and the ongoing credit crunch. Among those on the roster: Citigroup’s Charles Prince, Bear Stearns’ James Cayne, Wachovia’s Kennedy Thompson, Merrill Lynch’s Stan O’Neal, Daniel Mudd of Fannie Mae and Freddie Mac’s Richard Syron.

Succeeding Killinger is Alan Fishman, a veteran of the financial industry who most recently served as chairman of New York-based Meridian Capital Group.

Seattle-based Washington Mutual is the nation’s largest savings and loans provider and one of the biggest subprime lenders. WaMu’s mortgage business also is heavily concentrated in risky adjustable-rate mortgages, which allow borrowers to set their own monthly mortgage payment.

Killinger joined Washington Mutual in 1982 and quickly rose through the ranks, eventually becoming president, CEO in 1990 and chairman the following year. He’s also largely blamed for allowing the company to take on massive amounts of mortgage-related risk over the years. In July, Washington Mutual disclosed a second-quarter consecutive loss of $3.33 billion - the biggest quarterly loss in its corporate history.

As of June 30, WaMu had lost more than $6 billion, with its shares down nearly 85% this year. The financial wreckage has forced the company to cut dividends twice, and lay off more than 10% of its workforce.

On Sept. 8, Washington Mutual announced that it had signed a letter of understanding with the Office of Thrift Supervision to improve its risk management and compliance practices.

Meanwhile, the person at the center of WaMu’s financial mess - Kerry Killinger - is leaving the company a very wealthy man. Analysts say the former CEO could walk away with an executive payout package worth more than $20 million.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Government intervention comes with a heavy price tag - and the bailout of Fannie Mae and Freddie Mac ultimately could cost taxpayers a whopping $300 billion, according to William Poole, former president of the Federal Reserve Bank of St. Louis.

“I would not be surprised if their total losses aggregate about 5 percent of their obligations” of about $6 trillion, Poole said in an interview on Bloomberg Radio. “Five percent does not seem to me to be an outrageous guess.”

On Sunday morning, Sept. 7, the U.S. government officially took control of the two mortgage giants, firing their CEOs and placing the companies in a conservatorship to be run by the Federal Housing Finance Agency.

In announcing the historic takeover, Treasury Secretary Henry Paulson said Freddie Mac’s CEO Richard Syron and Fannie Mae’s CEO Daniel Mudd will no longer retain their positions. Replacing them is Herb Allison, who will head Fannie Mae, and David Moffett at Freddie Mac.

Part of the plan to resuscitate Fannie Mae and Freddie Mac includes issuing $1 billion of senior preferred stock to the government. In return, the government will commit up to $100 billion to each company to cover any future losses. The government also will receive a quarterly dividend payment and the right to own a 79.9% stake in each company.

In addition, the Treasury Department plans to buy billions of dollars in Fannie Mae and Freddie Mac mortgage securities on the open market.

In the meantime, investors in Fannie Mae and Freddie Mac face the prospect of more bad news. Shares in both companies have tanked in value this year, falling more than 90%. News of the government’s intervention and its plan to cease payment of common and preferred dividends is likely to send shares plunging even further.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The once “implicit” guarantee of a government bail-out has become an explicit reality for Fannie Mae and Freddie Mac. A landmark bill officially establishing a government rescue plan for the mortgage titans was overwhelmingly passed by the Senate on July 26 and is on its way to the President for his signature.

The precedent-setting legislation speaks to growing concerns over the meltdown of the nation’s housing market. An estimated 2.5 million U.S. households are expected to face foreclosure this year, pushing the country into the worst housing slump since the Great Depression.

The housing bill, though expected to be signed promptly by President Bush, has not been without controversy. Sen. Charles Grassley, R-Iowa, referred to it as having “fallen prey to the special interests on Wall Street and K Street at an unjustifiable expense to taxpayers and homeowners on Main Street.”

The basic premise of the bill is to provide up to $300 billion in loans for troubled homeowners and prop up Fannie Mae and Freddie Mac with temporary financial support. Earlier this month, Treasury Secretary Henry Paulson sought approval from Congress to give the financially troubled mortgage companies access to the government’s discount lending window.

Now, it’s apparently necessary. Provisions were added to the housing bill that will allow Fannie Mae and Freddie Mac an unlimited line of credit for the next 18 months. The Treasury also will have the authority to buy stock in both companies.

Critics and supporters alike have both said that the government’s rescue of Fannie Mae and Freddie Mac has several drawbacks, not the least of which is the considerable financial risk it places on taxpayers.

In a July 28 article on Forbes.com, Steve Forbes writes that the Treasury/Fed/Congressional rescue of Fannie Mae and Freddie Mac is nothing more than a “stopgap.” And unless fundamentally restructured, “these two debt-bloated giants will sooner or later blow up.”

Forbes goes on to say that, “The once implicit, now explicit, government guarantee for these two quasi-government entities was the reason that they could be leveraged to the hilt, with a debt-to-equity ratio of almost 25-to-1. Instead of just packaging mortgages and selling them off, the companies kept hundreds of billions in these instruments in their own portfolios to fatten profits - and enrich their politically connected managers and political allies. They also went into the junk-mortgage business, buying more than $170 billion worth of dodgy paper.”

Forbes suggests - and others agree - that the Bush administration would be wise to vigorously push for Fannie Mae and Freddie Mac to be recapitalized and broken up into 10 to 12 new companies, with their ties to the government severed. The move would require the government to provide some $300 billion in equity capital, but such an investment would enable the companies to have a sound debt-to-equity ratio in the vicinity of 4-to-1, according to Forbes. Shares in Fannie Mae and Freddie Mac would then be exchanged for shares of common and preferred stock in the new, solvent firms, says Forbes. Current shareholders could ultimately recover their losses, and taxpayers could eventually get most, if not all, of their money back. According to the article, there might even be a profit in store for Uncle Sam.

Forbes could have a point, because clearly the Fannie Mae and Freddie Mac of today are not working. The business model driving their operations all these years has been fueled by a belief the government would never allow them to fail. As a result, they ran wild, racking up astronomical accounting errors and making poor lending decisions that ended up costing billions. And, all the while, the government and the Office of Federal Housing Enterprise Oversight (whose mission it is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac) remained quietly on the sidelines and did nothing to rein either company back in.

Adding further insult to injury: the exorbitant salaries and bonuses that Fannie Mae and Freddie Mac’s executives are paid, while shareholders watch the value of the companies’ stock plummet more than 60%. In 2007, 10 of the 100 top-paid executives came from Fannie Mae or Freddie Mac, including Freddie Mac’s chairman and CEO, Richard F. Syron. Styon raked in $14.5 million, including a $2.2 million performance bonus that year.

Some of these issues may be addressed in the Senate-passed housing bill, which creates a new regulator for Fannie Mae and Freddie Mac that will have power over the companies’ capital levels, as well as executive compensation and internal financial controls. Now it’s a question of whether the damage can be undone.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.Â

In an attempt to shore up eroding investor confidence, the United States Treasury Department and the Federal Reserve carefully crafted a plan on Sunday evening designed to throw a financial lifeline to mortgage giants Freddie Mac and Fannie Mae.

The plan, which requires approval by Congress, entails giving the Treasury Department authority to take an ownership position in Fannie Mae and Freddie Mac; temporarily increasing the companies’ existing line of credit at the Treasury; and giving the Federal Reserve a consultant-type role in setting capital requirements and other standards.

Should Fannie Mae or Freddie Mac need to borrow directly from the Fed, they will pay 2.25 percent - the same rate given to commercial banks and major Wall Street investment firms. The Treasury also would have the authority to invest government money in the companies by buying their stock.

The government’s announcement caps a tumultuous week of concern that the nation’s two main providers of funding for home mortgages in the United States might not have enough capital to handle their losses because of the rising number of bad home loans. In the past week, shares of Freddie Mac stock plunged nearly 50%, while Fannie Mae’s stock fell 45%.

According to a story in the July 14 edition of the Wall Street Journal, the goal of the government’s plan is not to stage a take-over of Fannie Mae or Freddie Mac, but rather to provide support that allows them to continue operating as private entities. By promising action on an “only-as-needed basis,” officials apparently are hoping to instill sufficient investor confidence in the two companies so that the intervention which occurred during the Fed-facilitated bail-out of Bail Sterns ultimately will prove unnecessary.

The government’s proposal comes just as Freddie Mac prepares to sell $3 billion in three- and six-month securities on Monday morning, July 14. A failure to attract bidders would be evidence of the company’s deteriorating financial health, and potentially spell disastrous consequences for the economy as a whole.

Fannie Mae and Freddie Mac are chartered by Congress to support the mortgage market, but they actually are owned by shareholders. Together, the companies hold or back more than $5 trillion in mortgage debt, roughly half of all U.S. mortgages.

As part of the government’s plan to prop up Fannie Mae and Freddie Mac, both companies would have temporary access to a line of credit that could be in place for up to 18 months. Currently, the lines of credit for Fannie Mae and Freddie Mac are capped at $2.25 billion each. The Treasury did not reveal what the level of increase might be.

Bottom line: The steps by the government to allow Fannie Mae and Freddie Mac to borrow money from the Federal Reserve are unprecedented - and a sure sign that fears over the mortgage giants have indeed moved into panic mode. If one or both of the companies were to fail, it would wreak havoc on an already tenuous financial system and deeply troubled housing market.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The power of rumors - and the resulting damage caused to investors - has come full circle in recent months. Now the Securities and Exchange Commission (SEC) is promising to crack down on the spread of false information as a way to manipulate securities prices.

In a rare weekend announcement on July 13, SEC Chairman Christopher Cox said the SEC and other regulators would “immediately conduct examinations aimed at ensuring investors continue to get reliable, accurate information about public companies in the marketplace.”

The SEC’s investigation comes after a week-long run of rumors over the financial health of mortgage behemoths Fannie Mae and Freddie Mac. Lehman Brothers, the nation’s fourth-largest investment bank, also has been the subject of ongoing speculation, following rumors that some of its biggest trading partners were planning to scale back their business. And, in March, 85-year-old investment banking giant Bear Stearns was pushed to the brink of bankruptcy - and later acquired by JP Morgan Chase - a fate that it says was perpetuated by the spread of false rumors.Â

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. Â

For many people, home ownership is equivalent to the American Dream. But in the past 12 months, the continuing downturn in the U.S. housing market - the worst since the Great Depression - has made that dream more and more elusive.

Now, with the financial health of housing finance giants Fannie Mae and Freddie Mac being called into question, an already bad situation for homeowners could deteriorate even further.

Shares of both Fannie Mae and Freddie Mac plunged to new lows on Friday, July 11, following a devastating crisis of confidence over concerns that rising mortgage defaults would drain the companies’ reserves and leave them unable to finance current operations. Reports of a forced government takeover only added to their troubles. If such a takeover were to occur, it would likely leave shareholders with nothing, and taxpayers footing the bill for the losses on the home loans owned or guaranteed by Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac - which own or guarantee more than $5 trillion of the country’s mortgages - play a central role in the housing market because they provide a major source of funding for banks and home lenders. In the aftermath of the subprime crisis and the credit crunch, their role became even more imperative as they were the only major players to package pools of mortgage loans into securities for sale to investors.

As reported July 12 by CNNMoney.com senior writer Chris Isidore, if Freddie Mac and Fannie Mae were no longer able to perform this function, it could significantly raise the cost of mortgage loans, as well as restrict their availability. In turn, even more turmoil in the housing and credit markets would result.

Former U.S. Treasury Secretary John Snow had harsh words for the way in which Fannie Mae and Freddie Mac have funded their businesses over the years. As reported July 11 in an article by Brendan Murray on Bloomberg.com, Snow said the mortgage companies relied on leverage to fund their businesses in the same fashion as a hedge fund, and that the government should avoid taking them over.

“Congress ought to be embarrassed for years of delays in passing legislation aimed at strengthening regulation of the two companies,” said Snow, now chairman of New York-based buyout fund Cerberus Capital Management LP, in the Bloomberg.com article.

The next big hurdle in the Fannie Mae-Freddie Mac saga will be on July 14 when Freddie Mac is scheduled to sell $3 billion of short-term debt. An unsuccessful sale will strike yet another blow to already-bruised and battered investor confidence.

IndyMac Seized

Meanwhile, IndyMac Bancorp Inc., once one of the nation’s largest home lenders, has been seized by federal regulators.

The shutdown means customers who have traditional bank accounts will be insured up to at least $100,000. Other accounts, however, such as annuities or mutual funds, are not insured.Â

Pasadena-based IndyMac specialized in Alt-A mortgages, a type of mortgage that required minimal documentation from borrowers regarding their incomes or assets. IndyMac was founded in 1985 by David Loeb and Angelo Mozilo, who also were the founders of Countrywide. Countrywide was taken over last week by Bank of America Corp.

The failure of IndyMac marks the largest collapse of an FDIC-insured institution since 1984, and is the fifth U.S. bank to fail this year. The demise of IndyMac and the apparent struggles of Freddie Mac and Fannie Mae, as well as those of nearly every major firm on Wall Street, highlights the new reality that’s been created by the nation’s ongoing credit crunch. Moreover, it serves as a grim but crystal-clear reminder to investors that regardless of how large the entity or how strong it is perceived to be, no one is 100 percent safe.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Shares of Fannie Mae and Freddie Mac fell to their lowest levels in more than 17 years on Friday, July 11, amid growing concerns that a government bailout plan was part of the mortgage giants’ future.

Fannie Mae and Freddie Mac control nearly half of the entire mortgage market in the United States. Speculation of a government takeover has sent the companies’ publicly traded shares in downward spiral this week. Fannie Mae’s stock fell to $10 at the end of the day on July 11; last year, at this time, it was trading at approximately $70.

Shares of Freddie Mac closed at $8.05, after falling to an earlier low of $3.89.

Earlier in the day, Treasury Secretary Henry Paulson tried to play down fears that a government takeover was imminent, but his reassurances had little impact. If such action does happen, however, it would be unprecedented - and costly. Shareholders would likely be wiped out, with the losses on the home loans that Fannie Mae and Freddie Mac own or guarantee - half of all U.S. mortgages - paid by taxpayers.Â

In a news conference, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) also tried to calm fears regarding the financial state of the two mortgage companies, suggesting they could be given access to Federal Reserve’s emergency lending program. The program, which was created in March as part of the Fed’s role in facilitating the purchase of Bear Stearns by JP Morgan Chase, provides direct loans to investment banks at a discount.

Who Are Fannie Mae and Freddie Mac?

Fannie Mae, short for Federal National Mortgage Association, and Freddie Mac, short for Federal Home Loan Mortgage Corporation, are shareholder-owned companies mandated by Congress to provide funding to the U.S. housing market.

Fannie Mae was founded in 1938. Until 1968, it was a government sponsored agency. Freddie Mac was established in 1970. Fannie Mae and Freddie Mac do not lend directly to homebuyers; instead, they buy mortgages from approved lenders and then sell them to investors.

The financial health of Fannie Mae and Freddie Mac is critical because of the momentous role they play in the U.S. housing market. The companies hold or guarantee more than $5 trillion worth of mortgages - roughly half of the $9.5 trillion debt of the United States. If one or both of the companies were to fail, it could unleash untold damage on the country’s financial system and the broader economy.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.