May 10, 2009

Fannie and Freddie: The Government Sponsored Thingamabobs that Are Eating Your Retirement

Zachary A. Goldfarb reports in the Washington Post:
Fannie Loses $23 Billion, Prompting Even Bigger Bailout

Fannie Mae reported yesterday that it lost $23.2 billion in the first three months of the year as mortgage defaults increasingly spread from risky loans to the far-larger portfolio of loans to borrowers who have been considered safe. ...

The sobering earnings report was a reminder of the far-reaching implications of the government's takeover in September of Fannie Mae and the smaller Freddie Mac. Losses have proved unrelenting; the firms' appetite for tens of billions of dollars in taxpayer aid hasn't subsided; and taxpayer money invested in the companies, analysts said, is probably lost forever because the prospects for repayment are slim.

But the government remains committed to keeping the companies afloat, because it is relying on them to help reverse the continuing slide in the housing market and keep mortgage rates low.

Even as the government bailout of banks appears to be leveling off, the federal rescue of Fannie and Freddie is rapidly growing more expensive. Fannie Mae said that the losses will continue through at least much of the year and that it "therefore will be required to obtain additional funding from the Treasury." Analysts are estimating that the company could need at least $110 billion.

Freddie Mac, which has been in worse financial shape than Fannie Mae and has obtained $45 billion in taxpayer funding, will report earnings in coming days....

Fannie Mae, of the District, and Freddie Mac, of McLean, have been growing ever more dependent on federal largesse. The Federal Reserve has bought $366 billion of their mortgage investments and $70 billion of their debt, and has pledged to buy hundreds of billions of dollars more of both. The Treasury has pledged $200 billion to each company to keep them solvent and already bought $124 billion of their mortgage investments.

In total, the government has committed about $2 trillion to supporting Fannie and Freddie and buying the securities they issue.

Over the next 10 years, the government's rescue of Fannie Mae and Freddie Mac is expected to cost $389 billion, exceeding the cost of investments in banks and other financial firms by the government's Troubled Assets Relief Program, according to a recent study by Subsidyscope, a project of the Pew Charitable Trusts. The group based its calculations on Congressional Budget Office figures.

The federal government seized Fannie Mae and Freddie Mac last September out of concern that they would collapse and threaten the entire financial system. Since then, the companies have been called on to carry out large parts of the government's plan to spur a housing recovery by modifying mortgages and taking anti-foreclosure steps.

Fannie Mae said these programs are likely to have "a material adverse effect on our business, results of operations and financial condition, including our net worth." But, it said, the program could yield long-term benefits. "If, however, the program is successful in reducing foreclosures and keeping borrowers in their homes, it may benefit the overall housing market and help in reducing our long-term credit losses."

But in a filing, Fannie Mae said, "We expect that we will not operate profitably for the foreseeable future." The plight of Fannie Mae and Freddie Mac contrasts with the findings of federal "stress tests" done on the country's largest banks. The government announced Thursday that the tests showed that only one bank, GMAC, required additional public aid, with the tab at $9.1 billion. Fannie Mae's earnings results also contrast with reports in recent weeks by the biggest banks that they are returning to profitability.

Even the ailing insurer American International Group said Thursday that it may not need more taxpayer dollars.

Many banks that have received bailout funds said they will try to pay the government back. But that doesn't hold true for Fannie and Freddie. Their financial situation is so weak that they may have to borrow government money to pay dividends due to the government on money borrowed previously.

Don't you get the feeling that some well-connected Wall Street personage is going to pocket a commission on this purely nominal accounting transaction?

Yet even if the companies were profitable, they might not be able to pay back the money because the dividend payments are so onerous.

"The scenario where these guys can earn money to pay that back is remote," said Bose George, an analyst a New York investment bank Keefe, Bruyette & Woods.

Jim Vogel, an analyst at FTN Financial, said the amount of taxpayer money that must flow to Fannie and Freddie will be clear in the coming months. He said it will depend on whether government efforts to keep people in their homes can make significant headway even as rising unemployment makes it more difficult for many to afford their loans.

"We need more to pass to see how people react to all the different plans to help people with mortgages and how people react to a prolonged period of unemployment," Vogel said.

According to analysts, Fannie Mae's financial assumptions aren't as bleak as those embodied in the government's stress tests of major banks. For the tests, the government assumed that the percentage of loans going bad in a portfolio would range from 1.5 percent to 4 percent. Fannie Mae assumes that only 1.45 percent of loans will be bad, suggesting that the company would have to come up with much more money to cover losses if a worse scenario comes to pass.

Well, that sounds swell.

A major reason for concern about Fannie Mae and Freddie Mac is the size of their exposure to the mortgage market, analysts said. Fannie Mae and Freddie Mac own $5.4 trillion in assets, and all of those are mortgages, the worst-performing kind of loan. By comparison, the total assets -- from mortgages to credit card loans -- held by the 19 big banks that underwent stress tests was $7.8 trillion.


Truth(er) said...

Here is an interesting point from "The Market Ticker."

After I posted my Ticker on this subject the Fannie report came out and immediately proved up what I had said - the tests are a sham:

According to The Fed's "More Adverse" scenario prime delinquencies will reach 3-4%.

Well, how about this?

(Click for a larger image)

Note that the PRESENT serious delinquency rate on Fannie's credit book for single family homes is at 3.15%, up from 2.42% last quarter.

What's worse is that a lot of the paper Fannie holds was written before the bubble. If you look at only the "bubble-era" paper (e.g. ALT-A) or even prime paper written in 05, 06 and 07 the numbers are going to be far worse.

We have the largest lender in the United States reporting current "prime" serious delinquencies, almost all of which will end up as foreclosures, equal to the most serious stress tested level right now and twice the so-called "baseline" scenario.

Furthermore, Fannie's credit-related expenses nearly doubled quarter/over/quarter and was 2/3rds of the full year 2008 expense in one quarter alone!

Folks, there is absolutely nothing to support any claim that these "stress tests" were or are realistic when market performance in the nation's largest lender and one that allegedly has written all "prime" mortgages states (not "suggests") that their credit book delinquency rate has reached the "more adverse" stress level already.

Nowhere in the "mainstream media" (e.g. CNBC, etc) has this been mentioned but it is literally right in your face while reading the Fannie quarterly report.

Everyone is entitled to be optimistic.

But nobody, especially not anyone in the government, has the right to intentionally mislead the markets and investors as to the validity of what they're allegedly doing.

eh said...

Their financial situation is so weak that they may have to borrow government money to pay dividends due to the government on money borrowed previously.The sad thing is they're probably not kidding about that. And neither I guess are you.

Some recent info on FNM:

More On The SHAM "Stress Test"

eh said...

The link in my previous comment is the same as the one from Truth(er) -- sorry.

dearieme said...

"Fannie and Freddie" is quite a mouthful. How about just "Fraudie"?

Jeff Williams said...

It is important to remember the China and Goldman, Sachs connections with Fannie and Freddie.

Here is a quote from Accuracy in Media:

"The China connection to Goldman Sachs figures prominently in the current crisis. Because China owned $376 billion of Freddie Mac and Fannie Mae paper, it played a big role in the financial crisis, and Treasury Secretary Henry Paulson, with his own personal and financial ties to China, admittedly tried to reassure the Chinese through this process that their investments would be protected. They are being 'protected' in the sense that the American taxpayers are now on the hook for these government mortgage companies, which have been nationalized."

Read more here:

Accuracy in Media Nov. 10, 2008If the taxpayers don't pick up the tab for the crap Fannie and Freddie paper that Goldman Sachs sold to the Chinese, then the Chinese will not finance Mr. Obama's $2 trillion deficit; and, perhaps more importantly, Goldman might lose the commissions they can make by peddling another $2 trillion of funny paper.

So, as you can see, there is no choice in the matter.

Anonymous said...

Pay OFF your house ISteve readers.

Do NOT trust the Government/Wall Street (the same thing now?) with your hard earned money.

If I could go back (oh, only if!), I'd have bought several mid-level rental properties and led renters PAY ME my retirement in my golden years instead of nervously watching and seeing what the theives on Wall Street and the theives in corporate headquarters all over the planet are doing with my money.

Screw Rick Edelman and his ol' book that I never should-have-read, m

stari_momak said...

I'm trying to work this out in my own mind.

I remember reading P. Lynch's 'One up on Wall Street', and he made a very big deal about cash on the balance sheets. A stock that didn't look so good, if it had, say, $100 cash per outstanding share, well, it's price should go up accordingly. Somehow I have the feeling that these banks have taken the cash from the government, thus boosting their nominal value, and now will get investors money via issuing stock -- which they can sell at a greater price due to having 'borrowed' money from the government, and now they will supposedly pay the government back with the proceeds from the stock sale. Something sounds fishy.

What happened to the 'toxic assets'? I suppose investors maybe counting that the banks can now make a profit with the new cash, i.e. invest it wisely. Still, something doesn't seem right. I'd like to see comments from anyone who knows about this stuff.

testing99 said...

No one is investing in the Market at all. It's a mug's game, because Obama and pals are intervening to pick winners and losers, based on cronyism and Union PAC connections. I.E. SEIU, wrt California, and the UAW wrt Chrysler bondholders and so on. All in explicit violation of the law, but laws don't count for "the one."

Meanwhile those who want to hold to their contractural rights get threatened with ACORN and the White House Press Corps.

NO ONE is going to be investing in the market, in real estate, in anything. Which means those with savings are going to hold cash in various bank accounts, and we're turning into China. Which has a massive cash savings rate because so many investments are crooked, most savers stay out of investing.

Freddie and Fannie are bad, yes. But strcuturally, Obama has done so much to damage investor confidence that it will be AT LEAST a generation after he's gone before investment happens in a large scale.

Which means folks no more Venture Capitalists (Obama wants to regulate them into oblivion) funding tech firms, the one area of growth in the Post 1970's economy.

AmericanGoy said...

"If I could go back (oh, only if!), I'd have bought several mid-level rental properties and led renters PAY ME my retirement in my golden years"

Uhhh, I basically break even on my rental apartment.

I make money off the tax break (depreciation).

Anonymous said...

Thank goodness we're a First World country. Third World countries seem to have many riots, even revolutions. (Just listen to NPR.) It can't happen here. We don't have to worry about who would lead such activities or what their aim would be. Is "Idol" on tonight?

none of the above said...

If you're interested in this topic, I recommend the Atlantic Monthly article (on their website):

The author is an IMF guy who points out a lot of parallels between the US financial collapse and the kind of financial collapse that takes down various third world crony capitalist countries.