Fannie & Freddie: "To Regulate or Not to Regulate... that is the Question"

As I write this piece, the current stock prices for Fannie Mae (FNM) and Freddie Mac (FRE) are sitting just off their 60’ year lows at $5.20 and $3.28 respectively. There has been a plethora of talk, both on Wall Street and those around Capital Hill as to what exactly should and can be done with these Government Sponsored Entities (GSE's).

Here’s a question; Assuming these entities are “too big to fail” (or perhaps too important) which I believe they are, it begs to question who really benefits if these firms are not privatized.

My thoughts: Both of these companies have some of the largest lobbyist groups in the country. The non-balance sheet payrolls these firms have include very senior officials in both branches and on both major governmental parties. In fact the GSE's have some of the most impressive "paid" supporters of any industry.... and that’s pretty impressive considering the likes of the auto industry, oil, and others.

While the discussions may publicly revolve around the GSE’s ability to remain solvent or if necessary raise more capital to meet federal regulations as it relates to balance sheet ratio’s, a real challenge remains; Will the large number of people who receive a handout from these firms do the right thing, look themselves in the mirror and recognize the overwhelming benefits of taking these firms off of the national balance sheet or will greed and self interest prevail. Unfortunately, I believe we all quickly realized the answer to that question. So look for more shallow justification about the values and virtues of keeping the mission statement alive for Fannie and Freddie.

This week’s economic news:

Release Date & Time
Economic Indicator
Consensus
EstimateMy Analysis

Mon. Aug. 25, 10:00 a.m. ET
July Existing Home Sales
Up 0.8%
Certainly one month of data does not make a trend and no one is suggesting that the bottom has been reached in the housing sector – but if the consensus estimate is accurate, the July number may be a first small step in the right direction. Just kidding!!! This number is insignificant… most pundits are now in strong support of a lengthy recovery which may last till 2010.

Tue. Aug. 26, 10:00 a.m. ET
July New Home Sales
Down 1.3%
Most fixed income traders will take a pretty good look at this number. This data is expected to add one more hopeful sign to a growing number of signs that the worst of housing bubble may soon be behind us. While this is a narrow minded approach, the sales number that matches the forecast won’t likely influence the direction of mortgage interest rates much. A sales pace number showing a drop of 0.6% or less will probably put a little upward pressure on mortgage rates. My personal opinion is that the consensus estimate will likely prove to be too pessimistic this time around.

Tue. Aug. 26, 10:00 a.m. ET
Aug. Consumer Confidence
53.0 vs. last 51.9
Investors are always far more interested in what the consumer is actually doing -- than how they say they are feeling. Look for this data to have little, if any direct impact on the trend trajectory of mortgage interest rates today.

Tue. Aug. 26, 2:00 p.m. ET
Minutes of Aug. 4th & 5th Federal Open Market Committee meeting released
While this document will likely do little more than reinforce mortgage investors’ conviction that the Fed will not hike short-term interest rates anytime in the foreseeable future, it will provide for some guidance for Wednesday and Thursday and a low volume trading week in the equities.

Wed. Aug. 27, 8:30 a.m. ET
July Durable Goods Orders
+0.1% vs. last +0.8%
July orders probably eked out a small gain on an uptick in demand for aircraft and auto manufacturers response to increased calls for more fuel efficient vehicles. This data will likely do little more than take up space on this week’s calendar.

Wed. Aug. 27, 1:00 p.m. ET
Treasury auctions $31 bil. of 2-year notes
It likely will be very difficult for mortgage interest rates to move to notably lower levels in the face of the deluge of supply coming in from Uncle Sam over the next two days.

Thurs. Aug. 28, 8:30 a.m. ET
1st revision to Q2 Gross Domestic Product
+2.7% vs. last +1.9%
New information released since the government made its initial estimate of the value of all the goods and services produced in the United States points to a sizeable upward revision here. Mortgage investors have already priced this expectation into their rate sheets.

Thurs. Aug. 28, 8:30 a.m. ET
Initial jobless claims for the week ended 8/23
Down 2,000
Unless this number is significantly lower, this report will likely have little, if any impact on direction of mortgage interest rates today.

Thurs. Aug. 28, 1:00 p.m. ET
Treasury auctions $21 bil. of 5-year notes
Wednesday’s $31 billion of 2-year notes and today’s big 5-year note offering will likely choke the thinly traded pre-holiday market. If my assessment proves accurate, it will be very difficult for mortgage interest or any fixed income products rates to move notably lower today.

Fri. Aug. 29, 8:30 a.m. ET
July Personal Income Spending PCE
Index 0.0 vs. last +0.1% 0.2% vs. last +0.6%+0.3% vs. last +0.3%
The few traders still at their desk will likely shrug off the income and spending figures but will bore in on the personal consumption expenditure index with laser-like intensity. A gain of more than 0.3% for this measure of inflation pressure at the consumer level will likely prod investors into pushing mortgage interest rate higher.

Fri. Aug. 29, 2:00 p.m. ET
US market will closes early for Labor Day Holiday