Commentaries

Now raising intellectual capital

Freddie in the black, Treasury off the hook

Photo

Freddie Mac reports that it managed an actual net income gain in second quarter of $768 billion – a big turnaround from the $9.9 billion loss in the prior quarter. That means Treasury is off the hook, at least in this quarter, in terms of giving Freddie more money through its $200 bln equity line.

This contrasts with Fannie, which needed to take another gulp from the Treasury spigot. See more on the sinkhole here.

Freddie’s net worth got a big boost from an accounting change, one that also benefited Fannie.

Net worth at June 30, 2009 was $8.2 billion. As a result of the positive net worth, no additional funding from the U.S. Department of the Treasury was required under the terms of the Senior Preferred Stock Purchase Agreement for the second quarter. The positive net worth includes a $5.1 billion increase to total equity reflecting the April 1, 2009 adoption of FSP FAS 115-2 and FAS 124-2 relating to accounting for security impairments.

The Fannie Mae sinkhole

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.

It’s August. Do you know where Fannie and Freddie are?

Fannie and Freddie’s regulator-in-chief James Lockhart is stepping down to spend more time with his family, Reuters reports. Can’t say I blame him. He’s been at the helm of the Federal Housing Finance Agency, formerly known as OFHEO, for three years, saw through an unprecedented de facto nationalization of the companies, and still the future of the housing finance giants remains nearly as uncertain as it did a year ago.

Will the government wind them down, will they return them to the private sector, will they stop propping up the debt markets where they operate? There’s plenty of question marks – some might say too many considering the pivotal role these companies play in the U.S. housing market. Much of the game plan set forth when the government took over Frannie nearly a year ago expires at the end of the year, making all this uncertainty doubly worrying.

The government owns the MBS market

OK, it’s not a majority owner, but the government has an impressive stake in the $4.5 trillion agency mortgage-backed securities market.  Barclays Capital’s last count, as of July 3, puts Federal Reserve purchases at $621.6 billion since it launched the program in January.  Separately, the Treasury Department has picked up more than $145 billion since the government put Fannie Mae and Freddie Mac in receivership in September. The Treasury data is through the end of May.

The Federal Reserve has pledged to buy up to $1.25 trillion of mortgage bonds guaranteed by Fannie and Freddie and $200 billion of agency debt by year end.

  •