If You Liked Bear Stearns, You'll Love Fannie Mae/Freddie Mac

The New York Times reported today that the two mega government-sponsored mortgage lenders, who have single-handedly kept the US mortgage market from sinking through the quicksand altogether since private mortgage finance dried up in the wake of the subprime crisis (they account for no less than 80% of mortgages bought by investors in the first quarter of 2008), may themselves require enormous taxpayer-financed bailouts if properties they hold continue to decline in value. Fannie and Freddie, who use their unspoken government guarantee to clinch cheap financing (which they do, to a degree, pass on to consumers), buy mortgages from banks and keep some of them on their books, while securitizing and selling the rest off (retaining the liability for repayment if consumers default). For example, Fannie Mae sits on an enormous pile of debt and outstanding loans (nearly $3 trillion), while investments, retained earnings and equity (or “core capital”) chalks up at only about $800 billion, while Freddie has about $2 trillion in liabilities and $750 billion in assets. If these some of these loans follow the prevailing trend and continue dropping in value, it is clear that Fannie and Freddie could find themselves facing a serious shortage of capital, especially since they’ve been doing all in their power to avoid ramping up capital, in order to concentrate on paying off shareholders. Shareholders, remember, were put off by a series of scandals at the agencies, and Fannie and Freddie have been using Congress’ desperation to keep the mortgage markets open to extract better terms from Congress (for one thing, Congress increased the cap on mortgages they can buy to $730,000 from $417,000); and now, Fannie and Freddie want Congress to repeal the very
laws Congress made in the wake of the scandals.

On top of this, it appears as if the agencies aren’t accounting for their losses in conventional ways (i.e. “unrealized” losses don’t affect earnings), and that, even worse, according to The Times, that they are betting that the housing market will rebound by 2010. If the crunch lasts longer, say analysts who spoke with the paper, “unexpected” losses could overwhelm reserves.

Well, Fannie reported its third straight quarterly loss today, and Freddie reports next week. Meanwhile, the headlines are full of sentiments like “Is the Housing Tsunami Receding?”

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