Florida Virtual Houses

Out of the frying pan, into the Fannie Mae

May 6th, 2008

Douglas Duncan, who was chief economist of the Mortgage Bankers Association, sent a blast email today to all his business contacts saying that it's his first day as chief economist of Fannie Mae.

Talk about jumping from the frying pan into the fire. Or bad timing. Or something. Today, Fannie Mae announced that it lost over $2 billion in the first quarter and is going to cut its dividend and raise $6 billion in fresh capital. The stock fell.

As a taxpayer, I'm happy that Fannie Mae (and Freddie Mac) are raising capital. That will enable them to buy more mortgages and keep the housing market from dying on the vine. At the same time, a thicker capital cushion will reduce the risk that Fan and Fred will require a taxpayer-financed bailout.

In fact, I think Fannie and Freddie should raise even more money from the private markets. The reason they don't, of course, is that selling new shares dilutes the current shareholders, meaning lower earnings per share and thus a lower stock price. Here's Felix Salmon's take at Portfolio.com.

Let's hope that Doug Duncan didn't take most of his pay in the form of Fannie Mae stock options.

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