Yesterday I took
aim at OFHEO, and I stand by what I wrote: the capital constraints on Fannie
and Freddie are counterproductive and they’re damaging the entire mortgage market.
But it is also true that the capital that OFHEO requires Fannie and Freddie
to hold, although it’s 30% greater than the law requires, is still very small
by banking-industry standards. Writes
Peter Eavis:
Freddie Mac had $25.8 billion in capital at the end of the third quarter,
which is equivalent to just 3.2% of assets. Fannie Mae’s $40 billion of capital
as of Sept. 30 is equivalent to 4.8% of its assets. Compare that with 8.8%
for Bank of America, which has more than $270 billion of residential mortgages
on its books.
And Floyd Norris makes another good point: that when they do have
their druthers, Fannie and Freddie have proven themselves utterly dreadful when
it comes to the sensible use of capital. He
notes:
Since early last year, Freddie spent $3 billion to repurchase almost 49 million
shares, at an average price of around $61.50.
Those shares are now worth about $26 apiece. What a waste of precious capital.
Fannie and Freddie, between them, have about $65 billion in capital, and have
a combined market capitalization of about $44 billion. Both of them are now
trading at a significant discount to their book value. They’re weak, and they
have a much diminished ability to help turn the gargantuan US mortgage market
around. What’s more, any attempt on their part to do so increases the risk that
they’ll be forced to ask for some kind of federal bail-out.
I do still think that Fannie and Freddie are big enough to be part of the solution,
but I also appreciate that the best-case scenario is now that they will only
be a small part. Of course, as Herb
Greenberg says, they might be damaged mainly because they’re taking mark-to-market
writedowns that, so far, big banks have avoided taking. Fannie and Freddie certainly
look bad, but there might well be worse to come elsewhere.