Forewarned is Forearmed: It Will All Hit the Fan in 2007, Part 8
Fannie Mae is a U.S. government-sponsored entity (GSE) that was founded to create liquidity in the mortgage market. Currently, Fannie Mae and its sister GSE, Freddie Mac, hold about $3.8 trillion in mortgage loans out of the $8.5 trillion mortgage market.
Over the past decade, Fannie Mae has been accused of overstepping the bounds of its original charter, pumping much more liquidity into the mortgage market than they should, which has been blamed for driving up home prices to their recent nose-bleed heights.
They are currently being investigated for improper accounting, which has caused them to restate their earnings downward by $11 billion and forced their CEO to resign. It has also been discovered that Fannie Mae uses Enron-style off-balance-sheet subsidiaries to hide losses and financial derivative risk.
Freddie Mac has also had its share of accounting and regulatory woes.
In 2004, Alan Greenspan warned that the problems at Fannie Mae and Freddie Mac could be a "systemic risk" to the economy. To minimize the risk, the Federal Reserve and members of Congress are pushing to limit the size of Fannie Mae's portfolio.
The question is, if there is a meltdown at Fannie Mae, how will that affect the liquidity of the mortgage markets, and consequentially housing prices as well?
Just something to be aware of.
Forewarned is forearmed.
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Links to previous "It Will All Hit The Fan in 2007" posts:
Part 1, Part 2, Part 3, Part 4, Part 4 (Addendum), Part 5, Part 6, Part 7
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More on Fannie Mae from TheStreet.com's Peter Eavis here.
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posted by The Phantom Republican @ 10:44 PM
2 comments
2 Comments:
I understand what you're saying, but I'm not sure I connect all of your data with such a bleak expectation of the economic situation in 2007.
There are plenty of things that point the other way. One of the best resources I've found is over at this blog:
http://futurist.typepad.com/my_weblog/economics/index.html
Also the latest reports out of the CBO look to be very good. The Bush tax cuts are having a great effect on the tax revenue. It has been running at a surplus in Q1 of 2006. Very interesting and puts a pin in one of the long standing balloons of fear that the left is using against the administration.
Hi Greg,
I believe the economy is doing fine - right now. But it's important to recognize that since 9/11, almost all economic and job growth has been caused by consumer spending.
It can be argued that:
1) Since 9/11, consumer spending has been supported by the "wealth effect" of rising real estate prices.
2) Rising real estate prices were the result of an unsustainable bubble of easy, cheap credit.
3) The credit bubble was created by abnormally low interest rates, caused by an overly accommodative Fed.
The problem is, the Fed has now "taken away the punch bowl" by raising the federal funds rate 16 times in a row.
We will see what effect the new rates will have, but the days of cheap credit are over, and the hangover may be tremendous.
PR
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