Fannie & Freddie insolvent?

Back on July 15th I posted this blog entry regarding Fannie Mae & Freddie Mac in which I outlined the crucial role they play in our nation’s housing industry.  Here is an update to this saga:

This weekend Barron’s is reporting that the two mortgage giants are essentially insolvent and that government intervention is inevitable.  The main concern surrounding Fannie & Freddie has been their capitalization ratios.  This measure of liquid capital relative to obligations outstanding was as low as 1.58% when reported back on July 15th.

However, the author of the Barron’s story took a deeper look into Fannie & Freddie’s balance sheet and determined that instead of having positive capitalization of $84 billion they are actually more like $50 billion upside down which is why government intervention is inevitable.

According to the author government intervention is certain to mean that the two companies will be nationalized and gradually sold off in pieces to the private sector.  Depending on who is in the oval office at the time of this procedure the outcomes will likely differ.

However, one thing is for certain, a nationalized Fannie & Freddie is not likely to operate as aggressively as the private entities have over the past decade and therefore mortgage funding will likely become more expensive and difficult to obtain.

The nationalization of Fannie & Freddie will also create opportunities for new forms of mortgage funding to hit the marketplace such as the covered-bond solution which I reported on July 30th.