Fannie Mae is Fantastic !

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
WSJ, May 7, 2008; Page C2

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What's been said:

Discussions found on the web:
  1. Banker commented on May 7

    I agree with your statement

    As the old cliche goes: “It’s not the news; it’s how the markets react to the news that matters.”

    Perception is reality……and sometimes it makes no sense.


  2. DownSouth commented on May 7

    Purchasing a house in America is unaffordable. House prices need to decline another 20 to 30% in order to get price/family-income ratios back to any kind of reasonable level.

    All the policy proposals of Fannie Mae, Freddie Mac, the Fed, the Treasurey and Congress seem to point in one direction: to shore up housing prices.

    But why?

    If policy makers were to propose the same for, let’s say, the price of gasoline, the public would be up in arms.

    So why is it OK for the government to favor, and to commit huge amounts of public monies, to perpetuate unaffordable housing, but not unaffordable gasoline?

    The United States is one screwed up country.

  3. BG commented on May 7

    I don’t consider myself as a religious man; but, I remember the phrase in the Bible somewhere referring to Jesus’s return as a “thief in the night” and essentially no one will know the hour and minute of his return.

    Our turning away from financial discipline and good old common sense will eventually trigger an economic event that we (as usual) are not prepared for and an inflection point will have been witnessed where all things going forward will be compared against.

    As mentioned earlier, no one knows the what or when; but, there seems to be an inordinate amount of long-standing principles that are being thrown to the wind. There is no free lunch and every action has an equal and (often unforeseen) opposite reaction.

    It looks to me like it all boils down to (2) variables: our ability to continue to service our annual interest expense on the national debt and at what rate of return lenders demand while holding our debt.

    I am confident there are few if any on this blog that don’t already know that simply returning to the more normal interest rate levels common in the 60’s & 70’s (where a passbook account earned 6.25% and mortgage & CD rates were in the high single digits) would consume most if not all of the annual tax receipts of the entire Country for servicing our debt for one year.

    Who would have thought a barrel of oil would go from $28 to $122? Who would have thought interest rates would increase from 2% to __%? You can’t take the opposite side here; because we all know that foreign investors will not hold our debt without a COMPETITVIVE rate of return. The rest of the world is also competing for their money just like the US.

    I made no mention of inflation in this post; because the US Government will continue to understate it and will largely ignore it in every decision they make because they can and will continue to do so.

  4. wolfers commented on May 7

    A loss of $2.2B, issuance of $6B in new equity, and shareholder equity drops $20B? How does that math add up?

  5. shrek commented on May 7

    If interest rates went to 10 percent there would be feral children chewing on bones in a street. Lets call this what it is. A default. The US is going into default.

  6. Toro commented on May 7

    “Hence, the cure for too much leverage and a lack of mortgage lending standards is more leverage and increased lending.”

    Bingo! That’s exactly what I thought when OFHEO announced the capital required to be held in surplus would be lowered from 30% to 20%.

    Debt, debt, debt! The financial system needs to deleverage, not releverage. What a way to run an economy.

  7. Groty commented on May 7

    Lockhart, the top dog at OFHEO, appears very uneasy when he talks about the loosening of regulations, easing capital requirements, etc. at FNM and FRE. Maybe I’m reading him wrong, but when I see him on TV, he just does not exude confidence that some of the changes being pushed through are the right moves.

    My sense is he’s a regulator buckling under intense political pressure.

  8. phil commented on May 7

    BG(Not a religius man…)

    I rarely compose a post at the BP even though the comments and articles are fantastic but I do need to comment on this.

    The real gist is the Fed’s are trying to destroy the USD and our credit system so they can usher in the new multi-country curreny similar to the Euro. That can’t be initiated without destroying the USD and creating much pain, suffering, and gnashing of teeth. In between, they will go after everyone’s 401k’s. What the government gives, the government can take, or stated another way “what’s your’s is mine”.

    There is historical precedence for this as it was a somewhat regular event in old Europe.

    Of course it’s not going to happen overnight, maybe a few years. I hope I’m really really wrong but think I’m really really right because it’s the only world view that answers the Fed’s insane decision makings.

    It’s always good to watch what they do and not listen to what they say and then derive their world view by their actions.

    Phil-Las Vegas

  9. BG commented on May 7

    Ross stated earlier:

    “I hereby term the American economic situation as stagflatulation. No growth combined with smelly combustible hot air.”


    Ross, you are a genius!! Thanks for the laugh. I needed that.

  10. Patri Friedman commented on May 9

    So why aren’t you short them, if things are this awful?

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