Yesterday, Reuters reported:

Federal Reserve chairman Ben Bernanke said on Thursday the federal government could relieve some of the credit risk of jumbo mortgage purchases from Fannie Mae and Freddie Mac to preserve their safety and soundness...

Bernanke said that if the two housing finance giants are allowed to temporarily invest in jumbo mortgages above their $417,000 limit, it was imporrtant not to increase their credit risks.

"One possibility would be if the federal government were to be willing to act as guarantor...to take away the credit risk from GSEs, so that they could process these jumbo loans and sell them to the secondary market and that would be of some assistance to the mortgage market.

As stated in yesterday's opening post in this thread, I believe that unless the situation reaches the point where it poses a genuine risk of a significant and prolonged economic shock (as opposed to a modest but temporary slowdown), the federal government should avoid direct intervention aimed at assisting either the affected homeowners or lenders and investors. To do so would only undermine the incentive for lenders and investors who are facing losses from defaults to renegotiate the terms of the loans with affected homeowners so as to limit the expected short-term losses and lead to "moral hazard" in the long-run.

For what it is worth, Fannie Mae has already been suffering a decrease in profits on account of the subprime mortgage market woes. Today, CNN reported:

Fannie Mae, the largest buyer and backer of home loans in the country, said Friday its profits fell by half over the last nine months.

The government-sponsored company said it earned $1.17 a share from January through September, down from $3.5 billion, or $3.16 a share, in the same period last year. Its shares fell over 6 percent.

Aside from its possibly undermining incentives for creditors, investors, and debtors to renegotiate in their mutual interest and the longer-term moral hazard it would produce, the Bernanke proposal would put added pressure on an entity that is already experiencing a decline in profits. Hence, odds of taxpayer dollars being required to address the increased financial costs associated with Fannie Mae's investing in non-conforming jumbo mortgages would be high. In sum, the Bernanke proposal does not make much economic sense. In substance, it is perhaps little more than a backdoor means of bringing about government intervention at a time when the situation is nowhere near sufficiently grave to warrant such intervention.

Originally Posted by oldreliable67 As a student of the markets, the economy, and the business cycle, but most especially, after 25+ years on Wall St, trading everything from bonds to commodities, I can tell you unequivocally that you simply do not know what you are talking about. Over the years, I have seen investment fads come and investment fads go. I have seen people enjoy their 15 minutes of fame, then flame out. I have seen really talented traders take horrendous losses. I have seen really bad traders, total idiots, make stupid trades and make millions. Sad to say, but I admit to having been in both camps at various times. People don't generally spend 25+ years in the street and survive by being "set in their ways." First and foremost, one should always let the market teach you; you should always be a student of the market.

Last week, Federal Reserve chairman Ben Bernanke recommended that the federal government permit Freddie Mac and Fannie Mae to temporarily invest in jumbo mortgages above their $417,000 limit and offer guarantees for such purchases.

As a further illustration of the dangers of such a move, today CNN reported that Lehman Brothers had downgraded both institutions. CNN reported:

A Lehman Brothers analyst downgraded shares of mortgage companies Fannie Mae and Freddie Mac on Monday, expecting lower home prices to cause continued turmoil in the credit markets.

Fannie Mae on Friday said its third-quarter loss more than doubled to $1.4 billion and forecast 4 percent lower home prices in 2008, which is expected to hurt demand for mortgages.

Lehman's Bruce Harting cut his rating on Fannie Mae to "Equal Weight" from "Overweight" and reduced his price target to $46 from $67.

Harting said Fannie Mae's delinquency trends are worsening in the Midwest and in California, Florida, Arizona and Nevada and that credit trends have gotten much worse, consistent with all other mortgage companies.

"The question is what ultimate losses will be at Fannie Mae, which still seems highly uncertain given we are still in the early throws of the housing downturn and it seems like management's forecasts for housing and credit trends are not overly conservative," Harting wrote in a client note...

In my opinion, it is not economically prudent for organizations who are already experiencing weakening financial performances to add to the risk of their portfolios.

On November 8, Federal Reserve chairman Ben Bernanke recommended that the federal government permit Freddie Mac and Fannie Mae to temporarily invest in jumbo mortgages above their $417,000 limit and offer guarantees for such purchases.

Today, CNN reported:

Freddie Mac, a government-sponsored enterprise designed to help provide financing to the mortgage market, announced Tuesday that it is looking to raise cash itself after a larger-than-expected loss cut its capital close to the bone...

Wall Street was spooked by Freddie's announcement that its capital surplus had fallen by $1.2 billion, to only $600 million above a mandatory target set under a consent decree with regulators...

The firm reported a net loss of $2 billion, or $3.29 a share, in the third quarter.

The firm also announced an $8.1 billion, or 25 percent drop, in the fair value of its assets - another way it measures its financial performance - and it said it had set aside $1.2 billion to cover credit losses.

As noted previously, it is very risky for financially-stressed enterprises to be expected to increase their risk exposure. Had the Fed Chairman's advice been implemented, the situation might well have been advancing rapidly toward a partial taxpayer bailout.

Originally Posted by MarcusMagnus Bush is freezing interest rates. What effects will that have on the economy?

Originally Posted by MarcusMagnus Bush is freezing interest rates.

It will offer "more relief to more homeowners, more quickly," the president said. And it will include a five-year freeze on interest rates for borrowers current with their monthly payments. But the freeze is limited. It excludes anyone more than 30 days late at the time the mortgage would be modified or anyone who has been more than 60 days late at any time within the previous 12 months. It also only covers borrowers with adjustable rate mortgages (ARMs) resetting beginning in 2008 and leaves out any who are judged capable of continuing to make mortgage payments at the higher reset rates. Borrowers who can't afford the loan even at low introductory rates also will be ineligible, according to Anne Canfield, executive director of the Consumer Mortgage Coalition, which represents lenders and mortgage servicers. Those borrowers will have to work with servicers on a case-by-case basis to determine if their homes can be saved. Of the 2.2 million subprime ARMS that are expected to reset through the end of 2008, only 240,000 of those would be covered by the freeze, according to an analysis made by investment bank Barclays Capital as reported in The New York Times.

Originally Posted by Goldenboy219 Not that this is entirely important, but..., does anyone know the % of illegal immagrents who were accepted and defaulted on their loans??? I just find statistics that are extremely hard to account too, um... full of ****... Therefore, giving help to people who havent had problems paying their bills, silly. No ****. If you want to be liberal, help people who need help, the ones who are having problems seem to be the ones who cannot pay their bills. Call me stupid, but, socialism shouldnt have an income limit gauge, that is of course it it is always is... Therefore, wtf does this do??? Help the upper-middle class?