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What’s more the gses did not adequately write down

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Unformatted text preview: What’s more, the GSEs did not adequately write down values of guarantees that had deteriorated in quality due to downgrades of the private mortgage insurers that were providing them. But the facts on the ground spelled trouble. Freddie and Fannie saw exponential growth in mortgage delinquencies on their retained portfolios, as well as in their guarantee books. At Fannie Mae, delinquency rates on mortgages rose from an all-time low of 0.45% in 2000 to 0.98% in 2007, before jumping to 2.42% in 2008. Delinquencies at Freddie were only slightly lower: from an all-time low of 0.39% in 1999 to 0.65% in 2007, before tripling to 1.72% in 2008. More than half of the delinquencies were concentrated in four states: California, Arizona, Nevada, and Florida. As a result, the losses at Fannie grew from $2.2 billion in each of the first and second quarters of 2008 to $29.0 billion in the third quarter of 2008. Similarly, the losses at Freddie were only $1 billion in the first half of 2008, but ballooned to $25.3 billion in the third quarter of 2008. It was ultimately these exploding losses and the GSEs’ inability to raise private capital 68 that prompted the Treasury to put the GSEs into the FHFA’s conservatorship on September 7, 2008. Their combined 2008 losses would come in at $109 billion. Each consecutive vintage of loans performed worse. The outright default rates on loans issued in 2004 were 1.4%, 2% on loans issued in 2005, 3.3% on loans issued in 2006, and 2.6% on loans issued in 2007. With many more mortgages of the terrible 2006, 2007, and 2008 vintages yet to fail, the government decided to step in. The only way to address their impending bankruptcy – without risking a disorderly liquidation – was for the Treasury to exercise the exceptional emergency right that it had acquired to take charge. 5.2.3 Conservatorships The conservatorships – not receiverships (which carried the possible connotation of prompt liquidation, as well as an unwanted inclusion of the GSEs in the federal government’s financial accounts) – provided Fannie and Freddie each with a commitment of $100 billion from the Treasury in return for the Treasury’s receiving a 79.9% ownership stake and $1 billion of preferred stock with a 10% coupon rate. This rescue mostly wiped out the existing shareholders: GSEs’ stock prices fell to pennies on the dollar following the announcement (and eventually stopped trading altogether on the NYSE in June 2010). The conservatorships also fully protected the senior and subordinated debt and the mortgage-backed securities of the GSEs. The agreement also required the GSEs to reduce the size of their retained portfolios to $850 billion each by December 31, 2009, and to reduce those portfolios each year by 10% until they reach $250 billion each. The agreement capped the maximum outstanding debt of Fannie and Freddie at 110% of the asset limit. No limits were placed on the guarantee business. The CEOs of Freddie and Fannie were dismissed. and Fannie were dismissed....
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What’s more the GSEs did not adequately write down values...

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