December 28, 2009 09:39 AM EST by Elizabeth MacDonald
Fannie and Freddie's End Run
Expect dismal fourth-quarter numbers from Fannie Mae (FNM) and Freddie Mac (FRE), as the Treasury moves to pacify the markets by lifting their total credit facilities beyond $400 billion.
In fact, the White House signed off on unlimited government support for the next three years.
By lifting their credit lifelines, the White House and Congress avoid nasty, negative headlines about yet another bailout for the two biggest basket cases in the markets, publicly traded companies who got the biggest total bailouts of all because they are hostage to the Congress’s every housing desire.
Amid rising defaults, both made unusual disclosures recently (see bottom), noting that the government's pressure on them to assist the housing market could cost taxpayers. Fannie and Freddie are portraits in miniature of a government distorted housing market getting a government bailout.
At the same time, the Administration and Congress avoid the criticism that Fannie and Fred are getting more taxpayer bailout money even though their executive compensation is not subject to the pay czar’s limits, because they were bailed out before the pay czar’s strictures were put in place.
Unlike Citigroup (C), Bank of America (BAC), AIG (AIG), Chrysler, and GM, Congress deemed that Fannie Mae and Freddie Mac had not received "exceptional assistance" and therefore did not have to have their pay decisions scrutinized by the pay czar.
Top executives of Fannie and Freddie could get paid as much as $6 million for 2009, despite the companies' horrendous performances this year.
The government has already doubled the lifeline provided to Fannie and Freddie in May 2009 (from $100 billion each to $200 billion each) and reports indicate that the two had wanted the administration to double that lifeline again (to a total of $800 billion). Fannie so far has received $60 billion, Freddie $51 billion from taxpayers.
Fannie Mae and Freddie Mac finance mortgages by buying them from lenders and selling them to investors. Together, they own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages, reports indicate. The two also have hundreds of billions of dollars more in securitizations stuffed off their balance sheets.
Under the Treasury’s new flexible financing formula, Fannie and Freddie get more taxpayer support based on a formula that takes into account how much each company loses in a quarter.
Even after the companies were forced into conservatorship, the White House has continued to use Fannie and Freddie as tools to promote the Obama administration's efforts to pump air into the rapidly deflating housing bubble.
These efforts have come at a time when the performance of their portfolios has continued to decline and the Administration's plans to address foreclosures have not worked.
What To Expect from Freddie and Fannie in the Fourth Quarter?
- Freddie: Freddie posted a net loss of $5 billion in the third quarter of 2009 and has posted a net loss of $14 billion over the first three quarters of the year. The delinquency rate on Freddie's single-family mortgage portfolio jumped 18 basis points to 3.72% in November 2009 and has more than doubled over the last year (in November 2008 it was only 1.52%). Freddie's multifamily loan delinquency rate rose to 0.14% in November 2009 from 0.12% in October 2009, and has increased by a factor of 14 over the past year (it was just 0.01% in November 2008)
- Fannie: Fannie posted a net loss of $18.9 billion for the third quarter of 2009 and has posted a net loss of $56.8 billion for the first nine months of 2009. The "serious delinquency rate" on Fannie's single-family mortgage portfolio jumped 27 basis points to 4.72% in September 2009 and has increased by 3% over the past year (in September 2008 it was only 1.72%). Fannie's multifamily loan delinquency rate 6 basis points to 0.62% in September 2009 and is almost four times the September 2008 delinquency rate (0.16%).
Meanwhile, according to Fox News analyst James Farrell, a recent report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision stated that:
* Nearly 40% of homeowners who had their monthly payments cut by 20% or more last year pursuant to mortgage modification programs were delinquent again within a year.
* Although banks participating in the White House's loan modification program have offered trial loan modifications to 760,000 eligible borrowers since it was launched in March 2009, as of November only 31,000 of them had been made permanent. Why? Poor borrowers. About the same number of homeowners had dropped out of the program or had been found to be ineligible (a permanent modification requires the borrower to make at least three on-time payments as well as prove income)
* 6.2% of all mortgage loans nationwide were seriously delinquent (which is 60 days or more past due) and an additional 3.2% of all loans are in the process of foreclosure.
* Delinquency among prime mortgages, which is the largest and highest-quality mortgage category, rose sharply.
* Only 92% of loans owned or insured by Fannie Mae or Freddie Mac are performing – down from 93% in the second quarter of 2009.
* Only 83% of loans guaranteed by the Federal Housing Administration or Veterans Benefits Administration are now listed as "performing" – down from 85% in the second quarter of 2009 and below the national average of 87% for the third quarter.
Finally, a Confession
The Administration's efforts to use Fannie and Freddie to promote its efforts to prevent foreclosures come at a significant cost to U.S. taxpayers. Both Fannie and Freddie admit as much in the following disclosures in their recent financial statements, says Fox News analyst Farrell:
Freddie: "We changed certain business practices and other non-financial objectives to provide support for the mortgage market in a manner that serves public policy, but that may not contribute to profitability. Some of these changes increase our expenses, while others require us to forego revenue opportunities in the near term."
Fannie: "In connection with our public mission to support liquidity and stability in the secondary mortgage market, and in addition to the investments we undertake to increase the supply of affordable housing, FHFA, as our conservator, and the Obama Administration have given us an important role in addressing housing and mortgage market conditions. ... Our financial results are likely to suffer, at least in the short term, as we expand our efforts to assist the mortgage market, thereby increasing the amount of funds that Treasury is required to provide to us and further limiting our ability to return to long-term profitability."
Even more worrisome are Fannie and Freddie's blunt acknowledgement that they cannot predict or quantify how much the Obama administration's dictate to blindly follow its programs will cost U.S. taxpayers:
Freddie: "At present, it is difficult for us to predict the full impact of the MHA Program [loan modification] on us. However, to the extent our borrowers participate in HAMP in large numbers, the costs we incur, including the servicer and borrower incentive fees, could be substantial."
"Under HAMP, Freddie Mac will bear the full cost of the monthly payment reductions related to modifications of loans we own or guarantee, and all servicer and borrower incentive fees, and we will not receive a reimbursement of these costs from Treasury."
"In addition, we continue to devote significant internal resources to the implementation of the various initiatives under the MHA Program. It is not possible at present to estimate whether, and the extent to which, costs, incurred in the near term, will be offset by the prevention or reduction of potential future costs of loan defaults and foreclosures due to these initiatives."
Fannie: "Prior to the conservatorship, our business was managed with a strategy to maximize shareholder returns, while fulfilling our mission. However, in this time of economic uncertainty, our conservator [the US government] has directed us to focus primarily on fulfilling our mission of providing liquidity, stability and affordability to the mortgage market and to provide assistance to struggling homeowners to help them remain in their homes."
"As a result, we may continue to take a variety of actions designed to address this focus that could adversely affect our economic returns, possibly significantly, such as: increasing our purchase of loans that pose a higher credit risk; reducing our guaranty fees; refraining from foreclosing on seriously delinquent loans; increasing our purchases of loans out of MBS trusts in order to modify them; and modifying loans to extend the maturity, lower the interest rate or defer the amount of principal owed by the borrower."
"Activities of that type may adversely affect our economic returns, in both the short term and long term. These activities also create risks to our business and are likely to have short- and long-term adverse effects on our business, results of operations, financial condition, liquidity and net worth."
Fannie continues: "Other agencies of the U.S. government or Congress may also ask us to undertake significant efforts in pursuit of our mission. For example, under the Administration’s Making Home Affordable Program, we are offering the Home Affordable Modification Program. If our borrowers participate in this program in large numbers, we expect to incur substantial costs as a result of modifications of loans we own or have securitized."
"These costs include the incentive fees we will provide our servicers and borrowers and fair value loss charge-offs against the 'Reserve for guaranty losses' at the time we acquire loans, which we must do prior to any modification."
"This program will therefore likely have a material adverse effect, at least in the short term, on our business, results of operations, financial condition and net worth."
"In addition, at FHFA’s direction, we have entered into a memorandum of understanding with Treasury and Freddie Mac to provide financial assistance to state and local housing finance agencies through three separate assistance programs to allow these agencies to continue to meet their mission of providing affordable financing for both single-family and multifamily housing."
