The Fannie Mae sinkhole

August 6, 2009

Fannie Mae has reported the a $14.8 billion loss in the second quarter and is going hat in hand to the Treasury for another $10.7 billion to pull its net worth out of deficit. The release is here.

In a very quick read through, here are some of the things that jumped out:

We are experiencing increases in delinquency and default rates for our entire guaranty book of business, including on loans with fewer risk layers. Risk layering is the combination of risk characteristics that could increase the likelihood of default, such as higher loan-to-value ratios, lower FICO credit scores, higher debt-to-income ratios and adjustable-rate mortgages. This general deterioration in our guaranty book of business is a result of the stress on a broader segment of borrowers due to the rise in unemployment and the decline in home prices. Certain states, higher risk loan categories and our 2006 and 2007 loan vintages continue to account for a disproportionate share of our foreclosures and chargeoffs.

In other words, the good borrowers are having problems keeping up with their mortgages. They are Fannie, as well as Freddie’s, bread and butter.

And here’s a big shout-out to FASB :

Net other-than-temporary impairment of our Alt-A and subprime private-label securities was $753 million in the second quarter of 2009, compared with $5.7 billion in the first quarter of 2009. The quarterly decrease was primarily the result of our adoption on April 1, 2009 of a new accounting standard for assessing other-than-temporary impairment for investments in debt securities.

And lastly, the a big thanks to Treasury for being there with its $200 billion lifeline:

Due to current trends in the housing and financial markets, we expect to have a net worth deficit in future periods, and therefore will be required to obtain additional funding from the Treasury pursuant to the senior preferred stock purchase agreement.

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