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.

5 comments

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Great post Agnes, keep up the great work! The general public is still unaware of the massive exposure we have to both Fannie and Freddie as taxpayers.

For them to recast their subprime and Alt-A impairment by nearly $5B in a single quarter (using the new FASB rules) is obfuscation at its finest!

The increasing delinquency and default rates are not totally suprising in a recession, but I wonder how much is due to misrepresentation or fraud from mortgage originators like Taylor Bean?

Posted by Mark G | Report as abusive

Calling this a “conservatorship” is becoming quite a stretch, but if Fannie & Freddie get definitively taken over, then all the Agency Debt automatically has to be acknowledged by the OMB as part of America’s sovereign debt package. That is, the National Debt doubles.

Or else the Administration imposes a haircut on the GSEs’ bond holders before the above can happen.

This is a choice they don’t want to confront, and so the conservatorship continues, no matter how fast F&F’s numbers deteriorate.

There is no end/bottom. This is a tax payer black hole… and since WE don’t have the money I guess we’ll make our children and grandchildren debt slaves….

Are we debt slaves?? Are you ready? A New Era Begins…

http://www.youtube.com/watch?v=-vzVsxE98 ZE

This is indeed troubling to me. I saw the numbers that half the US mortgages would be upside down/underwater come next year and then this. My plan for myself is to get out of debt asap and put my cash into something that will hold wealth. The jobs numbers may be good that they released today but once it get’s digested and we realize that there is something like 14.5 million people out of work still, what will that do to the housing market and healthcare system?
Time will tell but I think the best course really would be for the government to just get out of the business world and let the market right itself.

What accounting standard shaves 5 billion off of a 5.7 billion loss? That’s pretty drastic.

Posted by Dave | Report as abusive

what is an Upside Down Mortgages…