I read a great piece in the Financial Times today about the increasing risks that Fannie and Freddie are taking with their lending portfolios. Make sure you click on the graph below because it blows up nicely.
There are too many areas to highlight in this article so I advise everyone to read the whole thing. I will quote a few paragraphs that were eye opening to me:
"Their market share has swollen since last year with the contraction of the market for “private label” mortgage-backed securities (MBS) sold by investment banks. Fannie and Freddie accounted for 84 per cent of total MBS issuance in the first quarter – up from 33 per cent at the peak of the US housing boom in 2006.
The sums involved are potentially enormous. At the end of March, Fannie and Freddie had total credit outstanding of $5,300bn (€3,400bn, £2,690bn) – $1,600bn in debt and $3,700bn in credit obligations – a total that is equivalent to the entire publicly held debt of the US government.
So what are the risks?
For a start, the two enterprises support their giant operations with only a thin cushion of equity capital – a combined total of $81bn. Fannie and Freddie are a “source of strength for mortgage lending and the housing market” but a “point of vulnerability for the financial system, because they are so highly leveraged”, James Lockhart, who as director of the Office for Federal Housing Enterprise Oversight (Ofheo), is their regulator, warned in a speech last month.
As the housing crisis has deepened, the expected loss in default has increased, along with the likelihood of default. The companies have credit protection on the higher loan-to-value mortgages – but this insurance is only as strong as the companies standing behind it (see below).
What level of house price declines would put Fannie and Freddie at risk in the absence of additional equity? Many analysts put that number at a further 10-20 per cent. “If a broad measure of house prices were to fall another 15 per cent from here, would these companies need to raise further capital in order to ensure they would remain solvent over time? Yes, absolutely,” says Thomas Lawler, head of the Virginia-based Lawler Economic & Housing Consulting.."
My Take:
There is much more meat in this article so please read it in its entirety. The graph and the numbers discussed in this article are alarming aren't they?
We are pretty much down to a one stop shop in the mortgage market. The banks have no desire to make loans that aren't backed by the government so as a result, Fannie and Freddie's market share has risen from 30% of the mortgage market a year ago up to around 85% now.
So lets do some quick math. These two companies now have $5.3 trillion in credit obligations and only $81 billion of capital. This is insane! The analyst above said that a 15% drop in housing would make them insolvent.
I think it would take a hell of a lot less than that to wipe them out. A 10% loss on credit obligations would be a loss of $530 billion dollars! This might be on the high side, but wiping out $81 billion in capital could happen with a 2% shift to the red on these credit obligations.
Gee do you think we might be getting setup for a bailout? How much is this tax bill going to cost us?
This is the type of stuff that should anger you as a taxpayer. There is no doubt we will be forced to clean up this mess, while Wall St. continues to get a free pass and is offered bailout after bailout.
I'm sorry I need to go on a rant right now because I am getting angry just thinking about how irresponsible this is. Sometimes I can't believe what I read.
These companies have taken insane risk in a housing market that's in the middle of imploding!!!
These numbers are mind boggling and its being done for one reason!
A socialized housing bailout. Whatever happened to free capitalism?? Remember this when you think about who you are going to vote for in November. I get infuriated when I see companies acting with zero responsibility and greed.
The government continues to let them get a free pass by first allowing them to do jumbo loans, and then reducing their capital requirements so they can continue to lend in an irresponsible manner.
I hope it sickens you as much as it sickens me. Our economy is going in the tank because of our addiction to cheap money and greed. Fraud is running rampant all over Wall St. with zero regulation.
These numbers are ludicrous! When your housing GSE's debt is equivalent to all of the publicly owned debt by the US government, I think its time to maybe re-evaluate things! This crap needs to stop!
One more quick blurb on Mortgage Applications and I am done
We hit a 6 year low for mortgage applications last week as interest rates jumped. Here are the mortgage application stats from Bloomberg:
"June 4 (Bloomberg) -- Mortgage applications in the U.S. last week dropped to the lowest level in six years, reflecting less refinancing as interest rates jumped.
The Mortgage Bankers Association's index of applications to purchase a home or refinance a loan fell 15 percent to 502.3, the lowest level since April 2002, from 593.3 the prior week. The group's purchase index decreased 5.4 percent and its refinancing gauge dropped 26 percent.
The housing market faces decreasing demand as prospective buyers wait for prices to stop falling and additional foreclosures force lenders to tighten rules for mortgage applicants. The real-estate slump will probably weaken the economy for the rest of 2008.
``We continue to view the residential real-estate crash as the most important factor underlying current recessionary conditions in the U.S.,'' said Maury Harris, chief economist at UBS Securities LLC in Stamford, Connecticut, in an e-mail note to clients. ``Home prices are falling at a faster rate, a signal of worsening supply/demand imbalance.''
Quick Take:
I bet these mortgage application stats keep Frannie and Freddie up at night as they watch housing crash.
The sad thing is they are probably sleeping like babies because they know in the end, it will be you and I that end up paying for it.
2 comments:
Feel free to focus on the markets and rant as much as you want. Just don't forget to proof read first. :)
lol shrp
I felt better after that one. I will get the decade right on the next one:)
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