US Fannie Mae+Freddie Mac Goverment Liability?

[Sapphire Capital]

Implied Guarantee of Fannie Mae and Freddie Mac’s Obligations?


The enabling statutes of Fannie Mae and Freddie Mac do not explicitly state their obligations are not obligations of the federal government; they merely require that their obligations indicate on their face that there is no federal guarantee. The Congressional “findings” contained in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, which state that Fannie Mae and Freddie Mac are not “backed by the full faith and credit of the United States.

The disclaimer reads:

This title and the amendments made by this title may not be construed as obligating the Federal Government, either directly or indirectly, to provide any funds to the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, or the Federal Home Loan Banks, or to honor, reimburse, or otherwise guarantee any obligation or liability of the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, or the Federal Home Loan Banks. This title and the amendments made by this title may not be construed as implying that any such enterprise or Bank, or any obligations or securities of such an enterprise or Bank, are backed by the full faith and credit of the United States
12 U.S.C. § 4501(4) (2006)

The general rule however would be to assert promissory estoppel against the government, which is not easy.
See:
28 Am. Jur, 2d Estoppel and Waiver § 139 (“A litigant asserting estoppel against the government bears a heavy burden, particularly when the government acts in a sovereign or governmental role rather than a proprietary role. In fact, it has been held that estoppel may not be applied against the government acting in its sovereign capacity. However, some courts do not apply a rigid distinction between sovereign and proprietary activities in determining the applicability of estoppel against the government, but instead hold that estoppel may be applied against the government even while exercising governmental functions under appropriate circumstances.”) Moreover, the Federal Tort Claims Act does not apply to Fannie and Freddie. See Mendrala v. Crown Mortgage Co., 955 F.2d 1132, 1138 (7th Cir 1992) (holding that Freddie Mac “is not a federal agency for purposes of the FTCA”); see also 28 U.S.C. § 1346(b); § 2680(h)-(i) (2006) (enumerating exceptions to FTCA for claims based on misrepresentation and fraud as well as claims “for damages caused by the fiscal operations of the Treasury or by the regulation of the monetary system.”)

Beside the legal aspect it is most unlikely that such a situation surfaces, as a redress and subsequent delays would be a disaster for the US and the world wide economy.

The guarantee of payment is the most important aspect of the implied guarantee, but the guarantee of timely payment is important because credit rating agencies value timeliness as a key component of creditworthiness and therefore rating (Moody’s has defined creditworthiness as an opinion of the future ability, legal obligation, and willingness of a bond issuer or other obliger to make full and timely payments on principal and interest due to investors).
(,http://www.fanniemae.com/mbs/mbsbasics/remic/issuance.jhtml?p=MortgageBacked+Securities&s=Basics+of+Fannie+Mae+MBS&t=Basics+of+REMICs&q=Fannie+Mae+REMIC+Guaranty )
So far the US federal government has never permitted a federally-chartered corporation to become insolvent.

The obligation is however moral only.

[Sapphire Capital]

July 13, 2008
Protected by Washington, Fannie and Freddie Grew
By JULIE CRESWELL
As the Bush administration scrambles to address the sudden decline of the country’s two largest mortgage finance companies, some of their longtime critics say the crisis has been building for years.

Among them is Jim Leach, a Republican former representative from Iowa, who argued two decades ago in Congress that the government-chartered mortgage companies, Fannie Mae and Freddie Mac, were unfairly insulated from the real world.

They were not subject to the same financial standards and tax burdens as their competitors, he warned, and if they ran into trouble, an implicit government guarantee to back them up meant taxpayers would be left with the losses.

“There are times in public policy making that one can feel like Don Quixote,” Mr. Leach said of his repeated legislative battles to rein in the two companies’ growth.

Congress established Fannie Mae during the New Deal to make homes more affordable for lower- and middle-income Americans, and Freddie Mac was established later with a similar purpose. Neither provides home loans. Instead, the companies buy mortgages from banks and take on the risks of possible defaults — allowing banks to make even more mortgages.

Today they own or guarantee about half of the country’s $12 trillion in mortgage debt, so the free fall of their share prices last week amid concerns that they were undercapitalized has created chaos for Wall Street and Washington.

The dominant role Fannie and Freddie play today is no accident. The companies, Wall Street, mortgage bankers, real estate agents and Washington lawmakers have built up an unusual and mutually beneficial co-dependency, helped along by robust lobbying efforts and campaign contributions.

In Washington, Fannie and Freddie’s sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years.

And as Fannie and Freddie grew, so did the fortunes of Wall Street, which reaped rich fees from issuing debt for the two companies, as well as the mortgage and housing industries, which banked billions of dollars as the housing market boomed.

Even after accounting scandals arose at the two companies a few years ago, attempts to push through stronger oversight were stymied because few politicians, particularly Democrats, wanted to be perceived as hindering the American dream of homeownership for the masses.

Lots of perks came with Fannie and Freddie’s charters and government backing: exemptions from state and federal taxes, relatively meager capital requirements, and an ability to borrow money at rock-bottom rates.

James A. Johnson, a longtime member of the Washington establishment who previously worked as a campaign adviser to former Vice President Walter F. Mondale, ran Fannie for most of the 1990s.

“Jim Johnson was the architect of Fannie’s lobbying strategy. He was the muscle guy, if you will. The guy who would walk the halls of Congress,” said Bert Ely, a banking consultant in Arlington, Va., and longtime critic of the companies. Freddie, Mr. Ely said, soon copied Fannie’s playbook.

Mr. Johnson could not be reached for comment. Fannie declined to comment; Freddie did not respond to an interview request.

An early, and for some analysts, seminal attempt to overhaul regulation of Fannie and Freddie occurred in the early 1990s when the country was still licking its wounds from the savings and loan debacle.

As legislators debated who would regulate Fannie and Freddie and what sort of capital cushions should be established for the entities, the companies enlisted a bipartisan mix of Washington insiders to represent them.

Fannie and Freddie were careful to include powerful Democrats and Republicans as executives, board members and lobbyists to make sure they had access to top government officials and clout on Capitol Hill, no matter which party was in power.

They have hired many former officials from the last two administrations alone. Fannie hired Jamie Gorelick, a former deputy attorney general in the Clinton administration; Thomas Donilon, who was that administration’s chief of staff to the secretary of state; and Franklin Raines, who was President Clinton’s budget chief.

Among Republicans, Fannie hired Robert Zoellick, now the head of the World Bank and a former official in both Bush administrations; Stephen Friedman, the former top economic adviser to the current President Bush; and Michele Davis, now an assistant secretary of the Treasury under Henry M. Paulson Jr.

Fannie’s board once included Frederic V. Malek, a longtime friend of the Bush family and a former business partner of the current President Bush.

The outcome of the regulatory tussle in the early 1990s did little to change things. Fannie and Freddie got a new but fairly weak regulator, the Office of Federal Housing Enterprise Oversight, while still having to meet less onerous capital requirements than some lawmakers wanted. The companies also stymied efforts to get the Securities and Exchange Commission more actively involved in regulating them.

Later on, Mr. Johnson ramped up the influence of its charitable arm, the Fannie Mae Foundation, by doling out money to thousands of nonprofit groups and similar organizations. (Mr. Johnson was compelled to step down as the head of Senator Barack Obama’s vice-presidential search team last month after he was criticized for receiving mortgages on favorable terms from Countrywide Financial.)

Fannie and Freddie also forged alliances with various interest groups, including affordable-housing advocates that previously criticized the companies for not doing enough for low- and middle-income homeowners.

Mr. Leach, the Iowa representative, later accused Fannie and Freddie of effectively buying off activist groups by making charitable contributions to them. By providing much-needed grant money to the nonprofit groups, it made it hard for them to criticize the mortgage titans, said Jonathan GS Koppell, an associate professor at the Yale School of Management.

“Likewise, there were another set of entities, essentially a huge industry, that profits from every additional loan that Fannie or Freddie can buy,” Mr. Koppell said. “The more loans they purchase, the more business there is for them and so they’re willing to work with the enterprises.”

Fannie also opened up what it called Partnership Offices. They were billed as regional oversight offices for various housing projects financed by Fannie. In reality, critics, including the Department of Housing and Urban Development, said they were used primarily to influence Congress by providing local politicians and business leaders with ample ribbon-cutting ceremonies and photo opportunities.

The offices were often run by and populated with former Congressional staff members. Several of those offices were staffed by family members of legislators, said Joshua Rosner, an analyst at Graham-Fisher in New York.

Of course, foes of Fannie and Freddie began their own lobbying efforts, the most muscular of which had the backing of banks eager to get their own piece of the companies’ lucrative mortgage business.

Some Wall Street firms joined these efforts, but Fannie was able to keep them at bay. Investors, meanwhile, applauded Fannie and Freddie’s growth. From 1990 to 2000, each company’s stock grew more than 500 percent and top executives earned tens of millions of dollars.

During that period, much criticism appeared on opinion pages of newspapers, in reports by free-market research groups and in Congressional testimony, all sponsored by a loose coalition of Washington lobbyists and consultants who were paid to portray Fannie and Freddie as too big and risky.

Ultimately, what most hurt the companies was the failure of home buyers to pay off subprime and other risky mortgages that were packaged into bonds and sold to investors largely by Wall Street banks like Bear Stearns, Lehman Brothers and Citigroup, with Fannie and Freddie playing a far lesser role. But they are suffering from the reverberations of the foreclosure wave, as the value of their mortgage assets declines along with home prices everywhere.

A second opportunity to rein in the mortgage titans arose in the wake of accounting scandals at each company a few years ago. But those efforts stalled as members of Congress were loath to do anything that might be viewed as stemming the housing boom.

Supporters of Fannie and Freddie say the companies’ lobbying machines have largely been taken apart in the wake of the accounting scandals, which resulted in billions of dollars of financial restatements and the ouster of major executives. Fannie’s Partnership Offices have been closed and its charitable foundation shut down.

Critics say that current legislation before Congress could, if passed, give even more power to Fannie and Freddie by allowing them to venture into new mortgage-related businesses. That, they say, is evidence enough that the companies have not been fully defanged.

“For sure, the political machine has not been dismantled,” said Thomas H. Stanton, a finance professor at Johns Hopkins University. “For every interest that might lose if Fannie and Freddie expands into what it does, you have someone else who wants to do business with them.”

[Sapphire Capital]

In IndyMac's Wake, Are Fannie Mae and Freddie Mac Safe?
After IndyMac Goes Bust, Concern Centers Around Mortgage Giants
By BETSY STARK, TRACEY MARX and EMILY YACUS
July 12, 2008 —


Fannie Mae and Freddie Mac are private companies with deep ties to the government.

Fannie Mae was created during the Depression as part of the New Deal as a way to revive a collapsed housing market by providing mortgage guarantees to low- and middle-income Americans.

Today they own or guarantee a mind-boggling $5 trillion in loans  far more than any other lender, which is why the fear that they could go under has been so nerve rattling.

"If they were to go out of business, most of middle America would not be able to get a mortgage," said Howard Shapiro, an analyst for global adviser Fox-Pitt, Kelton.

Even if you haven't heard of Fannie Mae and Freddie Mac, there's a good chance, if you're a homeowner, they own your loan. Here's how it works: After a bank gives you a mortgage, it often packages it with other mortgages and sells it, most often to Fannie Mae or Freddie Mac.

If Fannie and Freddie were to fail, analysts say mortgage rates would soar, mortgage lending would grind to a halt and borrowers of all kinds would pay higher rates  sinking the economy into an even deeper downturn.

That's why most analysts believe the government would never let it happen.

"Both Fannie Mae and Freddie Mac play such a vital role in the mortgage market," said Greg McBride, a senior financial analyst for Bankrate.com. "They are essentially too big to fail."

Government officials tried to shore up confidence in Fannie and Freddie. Sen. Chris Dodd, D-Conn., says there is no crisis and no bailout is necessary. "These institutions are in sound shape," he said. "The economics are fine in these institutions, and people need to know that."

But news late Friday saw another big mortgage lender, IndyMac, shut down by regulators. IndyMac's assets as of March 31 totaled $32.01 billion and its deposits totalled $19.06 billion. This news is likely to feed the psychology of fear that has been gripping the market.

Per a July 11 press statement from the Federal Deposit Insurance Corp., IndyMac "had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors." The FDIC has taken over the bank, which it described as the "fifth FDIC-insured failure of the year."

Fox-Pitt, Kelton analyst Shapiro said, "We've been in kind of a psychological mode in the markets for the past year, where the worst news is the news everybody believes."


Copyright © 2008 ABC News Internet Ventures

[Sapphire Capital]

Paulson Sees Fannie, Freddie Share Purchase `Only If Necessary'

By Rebecca Christie

July 15 (Bloomberg) -- Treasury Secretary Henry Paulson said the government would buy shares in Fannie Mae and Freddie Mac ``only if necessary'' and called on Congress to approve his plan to shore up confidence in the two largest sources of U.S. mortgage financing.

Fannie Mae and Freddie Mac ``represent the only functioning secondary mortgage market,'' Paulson said in written testimony today to the Senate Banking Committee. ``Our plan is aimed at supporting the stability of financial markets, not just these two companies.''

The companies' shares have tumbled in five straight trading days, prompting Paulson two days ago to offer the government's financial backing. In the testimony, Paulson said the Treasury doesn't want to quantify the credit-line extension that he proposed, or commit to using an 18-month authority to buy Fannie Mae and Freddie Mac stock.

``Let me stress that there are no immediate plans to access either the proposed liquidity or the proposed capital backstop,'' Paulson said. ``If either authority is used, it would be done so only at Treasury's discretion, under terms and conditions that protect the U.S. taxpayer and are agreed to by both Treasury and the'' companies.

Paulson on July 13 requested from Congress the authority to buy unlimited equity stakes in and lend to Fannie Mae and Freddie Mac -- called government-sponsored enterprises -- to stem a collapse in investor confidence.

Housing Finance

``Continued confidence in the GSEs is important to maintaining financial system and market stability,'' Paulson said today. ``The GSEs are central to the availability of housing finance, which will determine the pace at which we emerge from this housing correction.''

Representative Barney Frank, chairman of the House Financial Services Committee, said Paulson's request to aid Fannie Mae and Freddie Mac will be included in a bill lawmakers will consider this week.

Shares of Fannie Mae were down $2.19, or 22.5 percent, to $7.05 at 11:25 a.m. in New York, while Freddie Mac fell $1.75, or 24.6 percent, to $5.36.

Paulson said that while the Federal Reserve should have a ``consultative role'' in setting Fannie Mae and Freddie Mac's capital requirements, the central bank ``would not be the primary regulator.''

He said that the Treasury has ``long maintained that the GSEs pose a systemic risk and worked with Congress on legislation to create a GSE regulator with authorities appropriate to the task and on par with other financial regulators.''

The Treasury chief urged Congress to ``complete this work.''

[Sapphire Capital]

July 23 (Bloomberg) -- Fannie Mae and Freddie Mac extended their weeklong recovery after U.S. lawmakers reached a deal on legislation that authorizes Treasury Secretary Henry Paulson to bail out the mortgage-finance providers while placing few restrictions on the companies.

Fannie Mae rose 12 percent and Freddie Mac added 11 percent in New York Stock Exchange composite trading. Their market values have more than doubled since July 15 after plummeting on concern the companies may not have enough capital to withstand the highest mortgage delinquency rates in at least three decades.

Shareholders and the companies benefit because the bill doesn't require Fannie Mae or Freddie Mac to cut or eliminate dividends if they take federal aid, giving that discretion to the Treasury. It also doesn't automatically give the Treasury preferential treatment over other shareholders if it buys the companies' preferred shares. The government also can't compel the government-sponsored enterprises to issue securities or buy common stock.

``It sounds like the GSEs got what they wanted again,'' said Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia. ``They got a big backstop and they got language that the Treasury doesn't necessarily have to stop them from paying dividends or cap compensation. That's why the stocks are ripping.''

The House of Representatives today approved the rescue plan for Fannie Mae and Freddie Mac as part of a bill aimed at alleviating the worst housing slump since the Great Depression. The bill passed 272-152. Legislators crafted the agreement nine days after Paulson asked for powers to buy unlimited amounts of stock and extend an unlimited credit line into Fannie Mae and Freddie Mac to enable them to continue buying mortgages.

Good News

The Senate will likely vote on the measure July 25 or 26, Senator Jim Bunning, a Republican from Kentucky, said.

Fannie Mae rose $1.59 to $15. Freddie Mac climbed $1.10 to $10.80. The companies began a plunge July 7 after Lehman Brothers Holdings Inc. said the companies may need to raise a combined $75 billion of capital to meet new accounting guidelines.

Washington-based Fannie Mae is down about 62 percent this year, while McLean, Virginia-based Freddie Mac has fallen about 68 percent. Both traded above $60 a share last year.

``It is good news if you own Fannie and Freddie stocks,'' said Brian Battle, Vice President of Trading at the Chicago-based brokerage Performance Trust Capital Partners. ``Fannie and Freddie will exist as they are now and will get bigger because Congress wants them to do something about the housing market, so that's good for Fannie and Freddie.''

No Dividend Requirement

Lawmakers rejected a proposal to bar Fannie Mae and Freddie Mac from paying dividends while they are tapping the expanded line of credit with Treasury, Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, said late yesterday. They decided instead to give Paulson the power to restrict such payments or to take preferred stock in the companies, he said.

``It's not a mandate,'' Frank said. ``He's got to have some flexibility.''

Lawmakers added the provisions to legislation that would create a stronger regulator for Fannie Mae and Freddie Mac and expand federal efforts to stem mortgage defaults.

The new regulator has reduced authority to approve new lines of business or products, said Joshua Rosner, an analyst with independent research firm Graham Fisher & Co. in New York.

The bill provides for the Federal Reserve to consult on Fannie Mae and Freddie Mac finances. Paulson said this week that the Fed has already begun participating in assessments of the companies.

The housing bill would create a program aimed to help an estimated 400,000 Americans with subprime home loans refinance into 30-year, fixed-rate mortgages backed by the government.

Higher Cap

Fannie Mae and Freddie Mac would have a new, higher cap on the size of mortgages they may purchase. The new limit would be $625,000, or the median home price plus 15 percent, whichever is lower, Frank said.

The Bush administration withdrew its veto threat on a measure to provide $3.9 billion to communities for the purchase of foreclosed properties.

The agreement increases the likelihood Paulson will get the authority this week, after he lobbied lawmakers to overcome concerns about taxpayer liability. The Treasury chief argued that the backstop for the beleaguered mortgage companies was critical to help safeguard U.S. financial market stability.

The government is leaning on Fannie Mae and Freddie Mac, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding, to help revive the housing market and stem a slowdown in the economy.

Credit-Default Swaps

The cost to protect the senior debt of Fannie Mae and Freddie Mac was little changed.

Credit-default swaps on Fannie Mae fell 0.5 basis point to 40 basis points today after dropping more than 40 basis points the past two weeks, according to London-based CMA Datavision. Contracts on Freddie Mac were unchanged at 40 basis points after falling from 80 basis points on July 9, CMA prices show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements.

Paulson yesterday said his rescue plan for Fannie Mae and Freddie Mac will help stabilize financial markets, and that he doesn't anticipate that he will need to bail out the companies.

``This is about not only our housing markets, but it's about our capital markets more broadly,'' Paulson said in an interview with Bloomberg Television in New York. ``This goes well beyond the two institutions, Fannie and Freddie; it has to do with investors in the United States and investors all over the world.''