The Federal Home Loan Mortgage Corporation’s (Freddie Mac) earnings report for Q3 2010 reflected $2.5 billion in losses — a significant improvement over last year’s Q3 losses of $5.4 billion. Despite the apparent progress on behalf of the mortgage giant, Freddie promptly squashed any appearance of fiscal stability by warning that the recent delays in the foreclosure process may increase costs considerably. [For more information on delays in the foreclosure process, see the October 2010 first tuesday article, BofA postpones organic economic recovery by halting foreclosures.]
As mortgage delinquencies continue to rise, Freddie’s real estate owned (REO) inventory continues to deepen — the government sponsored enterprise (GSE), now owned by the US Treasury, owned nearly 75,000 homes by the end of September 2010, a 20% gain over the previous three months.
Officials at Freddie Mac have repeatedly expressed concerns over the high price of maintaining their stagnant REO inventory. Maintenance costs for the first three quarters of 2010 on Freddie’s REOs totals $840 million, which is nearly a 50% increase over the same period one year ago. [For more news on Fannie Mae’s and Freddie Mac’s grumbling over the cost of REO maintenance, see the October 2010 first tuesday article, Fannie and Freddie are reluctant to sell, eager to earn.]
Although Freddie is looking to mitigate its losses by demanding buy backs by lenders of bad mortgages when originated, an endeavor that has already garnered the GSE $1.7 billion during Q3 2010, chances are slim that it will ever be able to pay down the massive debt it has accumulated from the government’s bailout — Freddie is paying a 10% annual dividend on its eye-popping total debt of $63 billion, which is just to the US Treasury. [For more information on buy backs, see the October 2010 first tuesday article, The Fed wants BofA to continue buy-backs of misrepresented mortgage-backed bonds.]
The cost of interest alone for Freddie Mac already totals more than its annual earnings — is it any wonder they are playing down the news of their ostensibly encouraging earnings report?
first tuesday take: It seems that nobody has less faith in Freddie than Freddie himself. Perhaps this is fitting. It was clear in 2008 when The Federal Housing Finance Agency (FHFA) extended its massive arms — the United States Treasury — and brought Freddie into its parental embrace of government conservatorship that nobody really had any faith left in its continued existance. It will eventually be replaced with some comparable arrangement providing for the guarantee and production of home mortgages as was accomplished by Freddie and Fannie.
In the meantime and for homebuyers’ sake, the Federal Reserve (the Fed) must continue pumping money into Freddie Mac’s coffers. The Fed must keep the real estate market (read: mortgage-backed bond (MBB) market) bumping along until the seemingly interminable plateau of an abortive checkmark recovery begins to take off and private investors fully support Wall Street Bankers’ MBB market.
Although frustrations abound, $840 million dollars spent on maintaining Freddie’s massive REO inventory is money they must spend to correct a wrong they did not directly create. The inventory must be maintained in order to retain its value and remain attractive to the potential homebuyers of the future — our continued economic recovery depends on it. [For more information on the extent of Fannie and Freddie’s culpability in the mortgage market crisis, see the October 2010 first tuesday article, The truth is in the numbers: government sponsored entities acquire fewer risky loans.]