Replies to post #812526 on Fannie Mae-No Politics (FNMA)

[RickNagra]

Great post. Thanks.

The gist I get from reading Parrot and Zandi's impicit guarantee argument is that it's less of a counter-argument and more of a concern and acknowledgement that Trump's already going ahead with the privatization as they please. I find it hard to believe this is the reason for the pullback today.

They also acknowledge that "given their much-improved capital position, their expanded line to Treasury, their more conservative underwriting standards, and stricter regulatory oversight, their standalone ratings this time around would be much higher than their stand-alone ratings of a decade ago, but at best they would likely be consistent with large SIFI banks"

https://www.urban.org/sites/default/files/2025-01/Fannie%2C%20Freddie%20%26%20Implicit%20Guarantee%20-%20Parrott%20%26%20Zandi%20-%20January%2014%2C%202025.pdf

FitchRatings don't sound as negative post-conservatorship.

https://www.fitchratings.com/research/non-bank-financial-institutions/fannie-freddie-conservatorship-exit-would-not-be-immediate-ratings-catalyst-08-01-2025#:~:text=Fitch%20Ratings%2DNew%20York%2FChicago,own%2C%20according%20to%20Fitch%20Ratings.

When it's all said and done I think we're all good and it's just a waiting game now.

[DCBill]

But they are not "large banks," they are mono-line security guarantors and don't hold any loans in the portfolios.
Size and well managed guarantee businesses are NOT authority to lend money all across the world for what their regulators say is doable as SIFI banks have done and can do.
By statute, F&f can't do that. So Parrot and Zandi then make up bizarre situation suggesting the rating agencies will react to the duo in post-Conservatorship and lower their AA ratings--when the GSEs now have a legitimate smallish Treasury credit line (federal indicia??)--for which they pay DOT--and didn't have in 2008.
Read Tim Howard's latest blog, where he discusses, specifically, this matter in detail, and then blows Parrot and Zandi's report out of the water--for cause!

[HappyAlways]

GSEs business are pretty straight forward and safe comparing to banks. Banks may have bank run. Banks operate multiple businesses including some really high risk activities (e.g. forex speculations, over leverage in investments, bad debts due to corruptions, etc). Even so, banks are only required to have 4% capital.

Fannie and Freddie did not require bailout, or they might not be able to turn profitable in 3-4 years (while paying the 10% yearly interest payment to UST on their $181B bailout). IMO. The bailout action was forced upon Fannie and Freddie to rescue the TBTF banks, investment firms and insurance companies. They are all counter-parties to Fannie and Freddie. The insurance companies and investment banks were supposed to reimburse Fannie and Freddie for their book loss in mortgage business. According to an ex-CFO of Fannie, Fannie was well aware of the housing crisis as early as in 2006. They were forced to accept sub-alt mortgages due to government policy (i.e. 25% of their mortgages need to be coming from low-income family). They bought credit-swap insurance from insurance companies and investment banks to cover their known risks. Obviously, the insurance companies and investment banks failed to deliver that coverage. So, I learnt the term Counter-party Risk in 2009. Hope I summarize the picture correctly.

With the many additional measures taken in Fannie and Freddie, they are in a much better position now. They should require no more than 2% core capital.