January 19, 2004

Gee, Ya Don't Say

Mortgage rates are under 6% again and who knows...it could spawn another wave of home-buying/refinancing....but the incredible story here is how two semi-public companies are stone-walling the public about the risks being taken at the GSEs. Fannie and Freddie's use of derivatives is not something I covered in my recent report. But it's a legitimate issue. The companies have tremendous risk in terms of commitments to bond holders and guarantees made on mortgage-backed securities. They've tried to manage that risk in the derivatives market. Only they're not telling anyone how they've done it, except to disclose now and again that they haven't done it well. Bloomberg.com: U.S.: "Jan. 17 (Bloomberg) -- Fannie Mae, the largest buyer of U.S. home mortgages, isn't providing enough information about its use of derivatives, including how the value of those derivatives fluctuates from quarter to quarter, said Senator Chuck Hagel, a Nebraska Republican. Hagel, a member of the Senate Banking Committee that oversees government-chartered Fannie Mae and Freddie Mac, the second-biggest mortgage buyer, said Fannie Mae's answers about use of the financial instruments are incomplete. In particular, it hasn't satisfactorily explained how hedging with derivatives resulted in a $16.09 billion loss in its equity account during the third quarter. "


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