After reporting a net loss of $4.7 billion in the second quarter of 2010, Freddie Mac asked the U.S. Treasury to pitch in another $1.8 billion, bringing the total bill for Freddie Mac’s government relief to $63.1 billion since September 2008. Fannie Mae also asked for a recent addition of $1.5 billion, bringing the combined total tab for both entities to $148 billion since they were socialized two years ago.
Along with the request for additional government aid, Fannie Mae vows to continually toughen its underwriting standards in order to maintain its focus on encouraging sustainable homeownership over the long term (and its own existence for its stockholders and stakeholder executives).
Freddie Mac’s credit losses are at $5 billion, slightly lower than past quarters due to improved home prices and a slower increase in loan defaults. However, low interest rates caused a $3.8 billion loss on derivatives and the company experienced an error in backlog accounting for delinquent loans that cost it another $900 million.
Recent national statistics show continued stabilization of home prices and lower delinquency rates, which are encouraging, but are irrelevant to California. Bad loans (read: rollover/option adjustable rate mortgages (ARMs)) made during the Millennium Boom continue to eat at the prospect of any viability for the mortgage giants.
Fannie Mae reports the volume of nonperforming loans is still 22% greater than last year. The company has reserved 27 cents for every dollar in nonperforming assets. Likewise, Freddie Mac has seen a36% increase in nonperforming loans since 2009 and has reserved 32 cents for every dollar in nonperforming loans. In the event that foreseeable price declines occur, the companies will run into a serious roadblock due to non-existent cash reserves.
Both government-sponsored enterprises (GSEs) have doubled their inventory of real estate owned (REO) homes to a combined 191,000 properties – up from 97,000 last year.
With their fate no longer open to reasonable debate, the administration will tackle the future of Fannie and Freddie in the early months of 2011.
first tuesday take: The continual monthly bailout of Freddie Mac and Fannie Mae with unimaginable sums of money from the government is disturbing to taxpayers, but encouraged by Russia and China, the holders of huge portions of their bonds, since those countries do not want to suffer losses on their mortgage-related holdings. If they did, they would consider those losses financial warfare and retaliate.
For the homebuyer and the multiple listing service (MLS) market, support of the government as the lender of last resort must continue until the home prices in California stabilize for at least a two-year period and insolvent homeownership due to negative equities no longer exists. This means loan balance cramdowns or massive strategical defaults, and the sooner the medicine is taken by the lenders, the more quickly the MLS market place will recover for agents and homeowners.
Until then, the mortgage-backed bond market will not be attractive for anyone other than the Federal Reserve investment and treasury guarantees, implicit or actual. [For more information on the future of Fannie Mae, see the February 2010 first tuesday article, The fate of our Fannie and Freddie]
These GSEs will eventually be dismantled and the government guarantees will be differently directed to keep the mortgage market viable until Wall Street gets its collective act together and fully returns to the mortgage-backed bond market. Wall Street was most adept at floating these bonds in the past, and they went way beyond the limits of government guarantees in the risky mortgages they were able to fund, package and resell to bond investors around the world.
This Wall Street Bankers are destined to do again — they only need some time to find their comfort zone. They figured out how to sell government-guaranteed mortgage-backed bonds without a hitch in early 2010 after the Feds quit purchasing all of the mortgage-backed bonds for over a year at the height of the financial liquidity crisis.
Thus both Freddie and Fannie will eventually be unnecessary since the private sector has demonstrated they can supply all the mortgage money homebuyers and apartment buyers need to do deals. Watch for a quiet fade into the past as their disappearance is exploited only by pundits and political types.
Re: “Freddie Mac seeks more aid amid loss” from the Wall Street Journal
Re: “Fannie Mae narrows loss, but asks for more aid” from CNNMoney.com