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Some Thoughts on Fannie's Horrible Year
Fannie Mae released it’s annual and 4th Q numbers after the close on
Friday and during one hell of a messy snowstorm. FNM posted a loss of
$16.3b for the quarter and $74.4b for the year. An unmitigated
disaster. The timing of the release suggests that they were hoping that
no one would notice how bad the last twelve months were. There was
nothing particularly new in the most recent quarter, just more bad
news. What is happening at Fannie is also happening at Freddie Mac and
to a different extent at FHA. There are some trends that I think are
worth noting.
It would be a gross overstatement to suggest that Fannie has found
religion and is now committed to making ‘good’ loans versus ‘bad’ ones.
In my opinion they still must tighten their lending standards if they
expect to stabilize their credit losses. But they have moved to
restrict lending to better borrowers. The process is ongoing, but the
direction is becoming clear.
At this point all three of the D.C. mortgage lenders are pulling on the
credit reins. It is obvious from the report the direction that has been
taken. Significant additional measures have been announced by the
Agencies that will kick in between now and June.
For those economists out there that are scratching their heads as to
why they missed by a mile on their expectations of New and Existing
home sales last month they need only look at this report for an
explanation. It is harder to get a mortgage today than it was a year
ago, It will be harder to get a mortgage in one month from today and
even harder to get one six moths from today. For me the implications of
this are very obvious. Broad RE values will have to go lower, high-end
homes will suffer the most in percentage drops.
Consider the following slide.
A major issue for Fannie and the entire country is the REO problem. As
of YE 2009 they had an inventory of 89,000 homes. Looking at the
information provided one can add up the foreclosed properties from
2007-2009 (290,000) subtract the current inventory (86,000) and come up
with a number of 200k homes sold in the past two years. And that number
does not include short sales.. If you add in the REO sales by Freddie
and FHA it is easy to conclude that the biggest seller of RE over the
past 24 months in America has been the federal government. Great timing.
At one point there was some academic debate as to the causes of all of
these defaults. In March 2010 the debate is over. The vast majority of
defaults come because borrowers are underwater. Falling RE prices are
the number one contributor to the default cycle. That being the case
one has to wonder as to the wisdom of Washington trying to sell all of
these homes during the down market. Their actions have no doubt made
the losses at the federal level higher than they might have been. (They
collect only 56% of the principal balance when a home goes to
foreclosure) The policy of liquidating REO has also hurt millions of
homeowners and financial institutions.
This is that ‘price discovery’ debate that is ongoing. If, ‘extend and
pretend’ is wrong than surely accelerated sales of REO is right. I am
one that believes that neither of these extremes is good policy. Both
options take us down a dark road. If RE were to fall by an additional
20% nationwide it would, in my opinion, be a lights out situation.
There would be nothing the Fed could do to stop us from falling over a
cliff. At the same time there must be some viable alternative for the
federal REO. The cost of owning and maintaining all of this property is
staggering. Policies that would restrict REO sales may be beneficial to
the ‘owners’ of our society, but they would not be fair to the
‘renters’. Don’t wait for our pals in D.C. to put this important social
issue on the table.
The following chart looks at the fall in RE prices across the country.
Not a pretty picture. Note that the biggest drops are in the West and
that this area of the country has the highest single concentration of
Fannie's book. For me this begs a question. Was Fannie (and the other
D.C. lenders) a force that contributed to the crazy run up in prices in
the region? Fannie went where the demand for mortgages was. Basically
it was the Sunbelt. The other Washington lenders have the same
portfolio. This is a chicken and egg question. Did the Agencies cause
this? Or were they just sucked into a vortex?
The Agency’s concentrated lending added to the magnitude of the blowup.
There is a lesson in this. At the moment no one in Washington is asking
this question. That might well be because they already know the answer.
In the red states, Washington poured on the gas. They were a force that
helped create the bubble in the states that are now causing the
problem, and they are taking a pasting as a result.
Fannie reported that it converted a portion of the 2008-1 Mandatory
Preferred stock into common at a ratio of 1:2. This is not of relevance
to the remaining Preferred shares that are not subject to a mandatory
conversion to equity at this time. But it does, for me, set somewhat of
a road map for the Pref. I have never felt comfortable with the idea
that the Pref gets left out entirely in the cold when all is said and
done with Fannie and Freddie. The junior subordinated creditors got
paid out at a premium. The Pref gets dicks hatband. Odd outcome. Less
than 6 months before Fannie went into conservatorship Fannie sold $2b
of Pref through Merrill. That deal was done because Paulson was pushing
to get it done.
Fannie owns or leases 2.7mm square feet of office space. That happens
to be the same number of square feet in the Empire State Building.
Fannie is a big company. Its 6,000 employees put it in the top 500
private employers in the country. But to think of FNM as a private
company at this stage of the game is just a joke. Given the mess they
are in I would guess that they will be creating new jobs for some time
to come.
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Fannie and Freddie could save millions by putting all their 6000 overpriced employees on the Federal GS pay scale. No more million dollar salaries, no more six figure bonuses. Their need for top financial sector talent went out the window when the feds took them over. Now they are like HUD, full of federal sector parasites. They were overpriced anyway, losing billions through shameless incompetence, or maybe it was arrogance knowing they'd be bailed out so just went for the bonus. Either way, enough good money has been thrown after bad. Shut them down or cut to the bone. Put a dilbertcam inside those buildings, must be just like watching Office, all day every day.
Amen to that. At least the FHA workers are on the scale. They may lose money, but they are less expensive at losing money.
Government bonuses will be up this year.
Taxpayer go to hell.
"...Wow. I forgot that utterly stupid comment by Bernanke "It's important for Fannie Mae and Freddie Mac bonds and stocks to rise so they can keep raising capital and aid the mortgage market."
Fannie Mae never did raise any more capital. That short squeeze was the beginning of a violent end. Taxpayers have now bailed out Fannie Mae and Freddie Mac to the tune of $127 billion dollars. Recently Congress upped the taxpayer liability to infinity. Taxpayers are now on the hook for every penny of future losses."
http://globaleconomicanalysis.blogspot.com/2010/02/short-selling-restric...
Another 20% downleg wouldn't even put us back at 3x average annual income. I'd be anticipating an overshoot to 2x on the downside.
These guys don't seem to get it yet - that what we have isn't a liquidity problem, it's a secular demographic shift.
Bruce - did you see CNBC Friday a.m., where Fred Mishkin said "I need the Shadow Banking System back, as I have 2 houses and need to sell one, but there are no Jumbo Loans."
Can't Fannie Mae help this poor man out?!
*snort*
Pffft. There are plenty of suckers with all cash who are buying. That fool is just being greedy. All he needs to do is to lower the price.
Real Estate is always about location and price. That's it.
Fannie is old news. Just wait until FHA insurance fund goes into the red. They have been increasing market share and lending at 97% ltv since the crisis began. 2008 loans already over 10% delinquent and first half 2009 loans not far behind. Congress will have a decision on its hand. Do we continue to spread the losses from homeowners and banks to all taxpayers thru underpriced FHA loans or do we stop the madness and stop underwriting loans with ltv over 80. The rubber meets the road really soon
To the extent that unemployment is ignored. That is the extent that housing will become more affordable. FUCK Fannie,Freddie, and the GSE's the FED too. They deserve to have this shit on their books. Tax receipts are off a cliff. The greedy fuckers that created this mess are going to have to default on it.
Japan bitches. Prepare for a couple decades of extend and pretend, except with steak and friends instead of sushi.
"If RE were to fall by an additional 20% nationwide..."
It will. Plan accordingly.
Absolutely it will, I expect house prices to drop another 15%, except it is going to take years, like 5-10. We would be so much better off if they fell 15% overnight, then started slowly rising again. 5 more years of slowly drifting down housing prices is going to be pretty corrosive to the economy, and society.
IIRC, Shiller (of the Case-Shiller reports) was predicting another 25% decline this year.
This does not bode well.
banksters do preemptive strikes. So, it's all downhill from here on.
Future, there is still a lot more RE 'resets' peaking in September and then you have to factor in the CRE.
US Gov's Fan/Fre says to the Federal Reserve (who owns a lof ot this junk paper) "Pucker up buttercup, the fun has only just begin."
Got physical gold?
no problem lol buffet thinks it about over . the wave goes out and we will see him bare ass naked
One thing I don't get about Buffett and the rest of his ilk - meaning rich, old men. Why does he still try so hard to make money? I mean what does he have left? Maybe 5-10 years at most. Is the difference between 40 and 42 billion dollars meaningful or is it all just a game. I guess I just don't understand the pathologically greedy.
So he can get adoring Becky Quick to pay attention to him. If it's not the money, or the power, it's about the babes.
It's like any addiction.
Do it over and over again, as big as possible, regardless of the detriment to anyone else.
Bullshit.
Buffet will be one thing - Rich off the giant government mammary gland in the sky.
"Choo choo."
Anything else we can hand over to you Mr. Buffet? A large helping of national sovereignty, my lord?