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Fannie/Freddie Not Out of the Woods

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Elliott

Elite Member
Joined
Apr 23, 2002
Professional Status
Certified General Appraiser
State
Oregon
By DAVID REILLY and PETER EAVIS
May 27, 2008
Fannie Mae and Freddie Mac may soon come under the thumb of a new, beefed-up regulator following a compromise reached last week between the White House and Congress on new housing legislation. Like any new sheriff, this one will want to clean up the town.
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That means putting Fannie and Freddie on firmer financial footing so they can be strong enough to act when the housing market needs them. The current regulator, James Lockhart, says they are far from that now. In a recent speech, he said that Fannie and Freddie "have continued to be a point of vulnerability for the financial system because they are so highly leveraged relative to their risks."
It all gets down to Fannie and Freddie's balance sheets, specifically the amount of capital they have relative to the amount of assets they hold. Problem is, these balance sheets look something like the Augean Stables, and it would take a financial and political Hercules to clean them out. A look at three of the knottiest areas shows why.
Mirage Capital: Just like banks, Fannie and Freddie are judged by their regulatory capital. But regulatory capital at Fannie and Freddie is a mirage thanks in part to the inclusion of deferred tax assets.
These are essentially losses that can one day be used to offset future tax bills. These assets won't be much use if Fannie and Freddie need to come up with quick cash.
 
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