At lunch with a journo friend, the question arose as to whether or not yesterday’s front page NYT article on Fannie Mae (FNM) was inflammatory or not.
I am not sure if inflammatory was the correct word, but the Times certainly got the gestalt right of how bad things are at the mortgage GSE these days.
Consider these Fannie Mae facts:
• Their loss of $2.2B was 4X greater than expected ($-2.57B v.s. $-.640m expected)
• FNM accounted for 81% of the home-loan market in Q1 2008
• Shareholder equity dropped to less than zero for the first time in 15 years (from $20.5 billion in Q4)
• Subprime exposure: $51.2B
• Alt-A exposure: $344.6B
• Fair market value of assets dropped to $12.2 billion last quarter from $35.8 billion in December. This includes $56.1 billion in Level 3 assets;
• Moody’s downgrades FNM’s financial strength one level to ‘B’
• Credit and derivative losses rose fivefold to $8.9 billion; expects bigger credit losses in 2009;
• Estimates for credit losses in 2008 were boosted to 13 basis points to 17 basis points (up from 11 to 15 basis points). Each basis point, 0.01%, = 15 cents of earnings/sh (Morgan Stanley)
• Company issued $6B in securities to shore up balance sheet
• FNM cut their dividend to preserve capital
• Fannie Mae warns the housing slump will persist into next year.
• CEO sees 7-9% decrease in home prices in 2008 (previous estimate: 5 – 7%)
• FNM’s regulator, Office of Federal Housing Enterprise Oversight (OFHEO), said it will lower surplus capital requirements to 15 percent from 20 percent. Hence, this should allow more (not less) lending into the troubled mortgage market.
• Ofheo also lifted its consent order — imposed in 2006 after $6.3 billion in accounting errors;
• Barney Frank’s (approved by BB) proposed mortgage bailout boosted FNM — it rallied 15% from opening lows.
Hence, the cure for too much leverage and a lack of mortgage lending standards is more leverage and increased lending.
Note: We no longer have any short positions in FNM . . .
As the old cliche goes: "It’s not the news; it’s how the markets react to the news that matters." We agree.
click for larger graphic
courtesy of NYT
Doubts Raised on Big Backers of Mortgages
NYT, May 6, 2008
Fannie to Boost Capital After Posting Big Loss
JAMES R. HAGERTY
WSJ, May 7, 2008; Page C2