Tuesday, November 16, 2004

Oh, pay no attention to that debt behind the curtain. The housing market is surging, after all!

Shares of Fannie Mae fell sharply in pre-market trading Tuesday as the mortgage giant's outside auditor KPMG refused to sign off on its third-quarter earnings report, causing the the company to miss a regulatory deadline for filing it. . . .

Fannie Mae, whose accounting is under investigation by the Securities and Exchange Commission, also said Monday that if the agency finds that it has improperly accounted for derivatives � the financial instruments it uses to hedge against interest-rate swings � it would show an estimated net loss of $9 billion for the July-September period. And it acknowledged that some of its accounting policies do not comply with generally accepted accounting principles.

Washington-based Fannie Mae, which finances one of every five home loans in the United States, disclosed the SEC investigation on Sept. 22, stunning investors.
While lots of folks, including General Glut, have been focused on the appetite of foreign capital and foreign central banks for US federal government debt, we've often overlooked their appetite for what are called "US agency bonds". Who in the federal government issues debt besides the Treasury? Fannie Mae, Freddie Mac and Ginnie Mae, that's who.

Foreign capital loves our mortgage-backed securities. You can read a little primer, but in short US mortgages get purchased by the millions by Fannie Mae and the others, bundled up into security form, and then sold off to private investors. From January through August of this year, foreign capitalists net purchased nearly $145bn in agency bonds. That's even more than foreign capital spent on US T-bills over the same period (net $128bn). As the US housing markets boom, so booms the mortgage-backed securities market.

In September, however, foreign capital fled Fannie Mae and her sisters. After five straight months of purchasing a monthly average of $20.5bn, foreign capital net sold $1.3bn in agency bonds. This was the first time since September 2003 that foreign capital divested from US agency bonds and only the second time since 1998.

Crisis at Fannie Mae, a la the savings and loan fiasco of the 1990s, will surely drive foreign capital far away from US mortgage-backed securities. And if foreign capital won't buy them, then up go mortgage rates and down goes the housing market.

So many possibilities to make a housing bubble go "pop".

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