Fannie Mae today reported a $2.3 Billion Q2 loss much greater than expected. Fannie Mae’s loss of $2.54 a share shocked analysts who expected a loss of 68 cents a share.

Fannie Mae announced they’d be cutting their dividend to 5 cents a share down 30 cents to preserve capital. The company will cease buying Alt-A mortgages as well. The Alt-A mortgage products typically require less income documentation or credit worthiness than conventional mortgage programs. These riskier loans are responsible for much of Fannie Mae’s losses.

The Housing Bill containing the Paulson GSE bailout plan goes the House floor for a vote today. The bill as written by the Senate has a $4 Billion in grant provision for local governments to buy foreclosed homes directly. The President threatened a veto if this provision is in the final bill but has since retracted his opposition.

Government Sponsored Enterprise - GSE - Defined

In the mortgage world government sponsored enterprises usually refers to Fannie Mae and Freddie Mac. These two stock exchange private corporations were created Congress to improve the liquidity of the mortgage market.

These two mortgage GSEs set national underwriting standards and insures the loans so Wall Street can sell pools of loans to large investors ie. insurance companies, foreign banks, etc.

Reuters reports the sovereign wealth fund of Kuwait, the KIA, will not be buying any more GSE debt. Exactly what Bernanke and Paulson were attempting to avoid last week, when they rushed to reassure the world the Fannie Mae and Freddie Mac debacle would not hurt investors, just happened.

Great…just great.

I’ve reported for about 18 months now the two GSEs, Fannie Mae and Freddie Mac are both severely over leveraged. Now I have a former Federal Reserve bank president agreeing with me calling both companies “insolvent”.

William Poole, said in a Bloomberg report,

Mortgage approvals are getting harder and harder to come by…even for the previous “good” borrower.

Lenders and the automated approval systems they use to approve borrowers underwent a major overhaul this month. On first blush one might think this was a knee-jerk reaction to the credit crunch, but there is more on deeper inspection. I also suspect that this is only the first salvo in an increasing tightening of mortgage lender standards across the board.

Finally I am getting some support for my long standing prediction the GSE’s, Fannie Mae and Freddie Mac, are on the verge of collapse. Tuesday the New York Time publish an article which I believe is the first from a major news outlet to even raise the question of the GSE’s long term viability.

The article stated the worries by saying,

When President Bush signed the Economic Stimulus Act into law making jumbo mortgages GSE insurable, he may have unwittingly pushed our GSEs, Fannie Mae and Freddie Mac, already on tilt, over the edge. If you think we have a housing crisis now, wait until you see what the demise of the GSEs and subsequent secondary mortgage market would do!