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Tuesday, October 14, 2008

"Rescued by Fannie Mae?"

Is Fannie the answer?:

Rescued by Fannie Mae?, by By Susan E. Woodward, Commentary, Washington Post: The most important task of the Federal Reserve and the Treasury right now is to restore confidence in bank solvency -- hence the Treasury's move to spend the first $250 billion of the Troubled Asset Relief Program (TARP) buying ownership stakes in a range of banks. Nonfunctioning markets and dried-up liquidity are symptoms of universal suspicion of insolvency, and lending among banks will resume in earnest only when banks are known to be solvent.

The original plan under TARP was for the Treasury to buy up suspect mortgage-related assets. Mortgages, by themselves or bundled into mortgage-backed securities, lack a functioning market. Any prices set in the near term are likely to be grossly below the true economic value...

The true values of mortgage assets are generally thought to be a mystery. But little-mentioned among discussions ... of the crisis is that the Treasury has access to the best resources in the business for estimating the hold-to-maturity values of mortgages and mortgage-backed securities. This team is at Fannie Mae, which the government now effectively directs.

Fannie has an underwriting and valuation shop with models for valuing mortgages that are up and running. Key inputs to these models are Fannie's own indexes of property values at the Zip code level -- others make do with prices in entire urban areas. The data needed are not difficult to assemble: current loan balances, the date loans were originated, original property value (or appraisal for refinances), loan type (fixed, adjustable rate, ARM features, loan length), borrower's credit score, Zip code and current loan status. These models project payments and proceeds from foreclosures and calculate the property's present value. Similar but less detailed models in recent academic work show that they do quite a good job of projecting defaults for prime and subprime loans, given changes in property values.

Some argue that Fannie is discredited for this work because it, too, has losses on riskier mortgages. But Fannie's losses arose from a failure to reserve adequately for losses that were anticipated by its models. Fannie's business people overrode the risk managers ... to keep reserves too low. The models were right. ...

In a few weeks, the right team could produce tens of millions of valuations, making a constructive plan of action quickly practical. Right now, many institutions are solvent but ... confusion about the value of their mortgage holdings hobbles them in credit markets... With valuations based on the best available current data, confidence would be restored in banks with truly adequate capital... If more equity or government insurance is needed to secure confidence, this can be provided on terms reflecting informed mortgage values. This step by itself could save taxpayers hundreds of billions of dollars unnecessarily pumped into institutions capable of dealing with mortgage losses on their own. It has not been the usual function of bank regulators to publish values of bank portfolios, but these are unusual times. ...

No other institution has as much data, so well organized and ready to address the specific problem the Treasury confronts, as Fannie Mae. Turning to Fannie for help is Treasury's fastest and least costly option to help our financial markets resume normal operation.

I don't know how much of an increase in confidence there would be from publishing model based valuations from Fannie Mae, I know I wouldn't rely on that alone, but it does seem like this is information the Treasury could use when it purchases distressed assets from financial institutions.

    Posted by on Tuesday, October 14, 2008 at 12:15 AM in Economics, Financial System, Housing, Policy | Permalink  TrackBack (0)  Comments (9)


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