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Fannie and Freddie's Lost Mission

by: Michael Steinberg August 14, 2008 | about stocks: FNM / FRE    

Michael Steinberg

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The New York Times “Mortgage Giants Find a Bright Spot in Rental Financing” reports that Fannie Mae (FNM) and Freddie Mac (FRE) lent Tishman Speyer and Lehman Brothers (LEH) $8.9B of the October 2007 $22.2B purchase of Archstone-Smith. Since acquisition, rents have risen 5%, but the value of the purchase was written down 25%. Archstone (the shortened name since the acquisition) has sold $2.3B in assets, has another $2B on the market to pay down debt.

Archstone is running a negative cash flow. In "Lehman by the Billions", I wrote that the rent on the 80K+ “luxury” apartments does not even cover Archstone’s interest payments. Unfortunately, the GSEs are not concerned. Mike May (Freddie senior VP) said that Freddie is in a senior position and would be the last to incur losses. Both GSEs cited the high quality of Archstone’s assets as making the deal low risk.

The GSEs claim the freeze in the multifamily CMO market has created a profitable opportunity for them. Fannie increased its multifamily portfolio from $129.5B, (June 2007) to $163B. Freddie has $63.8B. During their conference calls, both cited multifamily as part of their mission.

I don’t call financing of high rent apartments in a levered buyout supporting affordable housing. Both GSEs eluded that they will be venturing deeper into multifamily during their conference calls, and the increased profitability of such loans. I just did not link the talk to highly leveraged transactions. But they spoke about the need to deploy their expensive capital profitably for their shareholders, while giving the illusion of fulfilling their mission.

The implications are bad on two fronts. Raising high cost capital forces the GSEs farther out on the risk curve. Clearly they are better off shrinking their portfolios, rather than raising capital. Second, depending on asset values and appreciation is the root of the current crisis. Liquidating values are not dependable. All mortgages, whether single family or large multifamily, should be based on cash flow and interest coverage. The new Federal Reserve mortgage guidelines view real estate as a “going concern”, and properties should not have to be liquidated to make payments.

Disclosure: Author is long FNM and FRE.

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This article has 3 comments:

  •  
    Aug 14 05:18 AM
    Georgia - The Neo-Cons thought - There little Wimpy Bush-Cheney puppets - could manifest the world.

    Now the wimps are shown for what they are - They should of never sold arms to Gerogia - But the military complex - loves there so-called ruleing the U.S.

    So McCain - What do you mean all Americans are behind another failed neo-con policy?

    So what do you mean we pale-face - American Warriors will never again follow or fight for another neo-con lie of a policy.

    Americans aginst the beast - The New world order - The real violaters of the World morals.

    Look at what happened when - these idiots - sent arms to fight russia in afgan.

    Americans see plainly - Gerogia - should of never decided to fight Russia - So they get there butts kicked so be it - Americans are on the Russian side in this.

    Now the Repubs will be showed for the wimps they are.
    Reply
  •  
    Aug 14 09:52 AM
    PoncaWolf... have you even found your spell-checker or grammar-checker yet?
    Reply
  •  
    Aug 15 06:09 AM
    Ponca, what does Georgia and Russia have to do with Fannie and Freddie? You obviouly have some issues that can't be solved on a financial web site.
    Reply
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