Another Fannie Mae Bailout

Will bailouts of mortgage giants Fannie Mae and Freddie Mac ever stop? Today, Fannie Mae made public to the Securities and Exchange Commission their profit and loss statement to the Securities and Exchange Commission. Total losses at Fannie Mae for 2008 are greater than 58 billion dollars.

Given President Obama’s recent plans for normalizing the housing market it looks like a bailout of Fannie Mae will, in my opinion, have to occur. Until the full picture of the Foreclosure Plan is made available mid March, the exact details remain unknown as to what role Fannie Mae will play in the cleanup of the American Housing crisis. My assumption is that Fannie and Freddie will take on a greater servicing role and guarantee more mortgages in the future.

From CNN Money:

Hammered by the ailing housing market, mortgage finance giant Fannie Mae said Thursday it would tap its lifeline from the Treasury Department after reporting $58.7 billion in losses for 2008.
The company, a crucial source of funding for mortgage lenders, said it would draw down $15.2 billion of its $200 billion federal line of credit. In return, the government will receive preferred shares.

And it gave a dour view of the housing market — saying it expects peak-to-trough price declines to be in the 33% to 46% range, up from the 27% to 32% range it gave in the previous quarter. For 2009, it predicts home values will drop 12 to 18%.

For the fourth quarter, Fannie Mae reported $25.2 billion in losses, or $4.47 per share. The results mark the sixth straight quarter of losses, though slightly narrower than it reported in the third quarter. A year ago, Fannie Mae reported $3.6 billion in losses.

The company, which was taken over by the government in September along with Freddie Mac, attributed the losses to soaring defaults. Its provision for credit losses plus foreclosed property expense came to $12 billion for the quarter, up 30% from the previous quarter. Its charge-offs, or loans written off as uncollectable, rose 219% to $7 billion in 2008.

The value of non-performing loans were $119.2 billion at year-end, compared with $63.6 billion on Sept. 30 and $27.2 billion at the end of 2007.

From the Associated Press:

Fannie Mae (FNM, Fortune 500) had said it would need up to $16 billion to cover its fourth quarter losses. Freddie Mac (FRE, Fortune 500), which has accessed nearly $14 billion and has said it may need up to $35 billion more, should report its results in coming weeks. The companies need the funding because their liabilities exceed their assets, giving them a negative net worth.

The companies’ net worth is declining in part because its mortgage guaranty becomes a costlier obligation as the housing market worsens. Also, its funding costs have run higher as investors demanded higher rates because of the agencies’ perceived riskiness.

The results come a week after President Obama unveiled his foreclosure prevention plan, which relies heavily on Fannie and Freddie. The companies will allow borrowers whose mortgages they own or back to refinance even if they have little or no equity. And they will contribute more than $20 billion toward subsidizing interest rates to lower the monthly payments for borrowers on the verge of or already in default.

Fannie Mae, which unveiled with Freddie Mac their own streamlined loan modification program in November, said it conducted 33,249 loan modifications, 7,875 repayment plans and 11,682 preforeclosure sales in 2008.

Acknowledging the need to strengthen Fannie Mae and Freddie Mac at a time when the companies are under pressure from rising defaults, Obama doubled their federal lifeline, which was originally $100 billion each. He also is allowing each to hold up to $900 billion in loans in their portfolios, an increase of $50 billion.

The companies provide critical financing for mortgage lenders by purchasing their loans. They dominate the home loan market now that private investors have been spooked by the mortgage meltdown.

Their long-term future, however, remains in doubt. Set up by the government, they were private companies whose debt carried an implicit federal guarantee. But as the mortgage crisis deepened, the Treasury Department in September put them into conservatorship, a form of reorganization similar to bankruptcy.

From AFP:

Troubled US mortgage finance giant Fannie Mae said Thursday it lost almost 60 billion dollars last year and expected to suffer more losses in 2009, and asked for a further 15.2 billion dollars in government aid.

The US government-controlled Fannie Mae reported a loss of 25.2 billion dollars in the fourth quarter driven mainly by the effects of a prolonged housing slump and a global financial crisis. It had a third-quarter loss of 29.0 billion dollars.

For the full year of 2008, the company posted a loss of 58.7 billion dollars, almost 27 times higher than the 2007 loss of 2.1 billion dollars.

Fannie Mae said it submitted a request Wednesday for 15.2 billion dollars from the Treasury “in order to eliminate our net worth deficit as of December 31, 2008.”

“We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth,” the company said in a statement.

The fourth-quarter loss was driven mainly by 12.3 billion dollars in credit losses due to declining housing market conditions, 12.3 billion dollars in losses on derivatives and 4.6 billion dollars in writedowns of the value of its mortgage-backed securities, the statement said.

The company and its troubled twin, government-controlled Freddie Mac, finance more than 40 percent of US home mortgage and were taken over by the government in September last year in a bid to avert their collapse and a further meltdown of the mortgage market.

The US Treasury Department said last week it was doubling its financial support to the two mortgage giants, to 200 billion dollars each, in an effort to stabilize the real estate sector.

Moe’s Comments:

While bailouts are never desirable in general, the new bailout of Fannie Mae, in my opinion, is a necessary task for the new Administration to take on. The quasi governmental agencies Fannie Mae and Freddie Mac have played a significant role in providing the American Consumer with a vast array of home loans. They provide this assistance, however, in an indirect way. These quasi governmental agencies guarantee mortgages under $417,000.00 throughout the United States. Without such guarantees, the mortgage marketplace would not become unrecognizable. Let’s hope that if and when the newest Fannie Mae bailout occurs, and it will, that it’s the last.

Sources:

http://www.google.com/hostednews/ap/article/ALeqM5iVAF4FNNGCiKCJfNJMp-FCePBQxAD96JHPT00

http://www.google.com/hostednews/afp/article/ALeqM5jpajAHlDBOCKiyS45PeaEQICHF3g

http://money.cnn.com/2009/02/26/news/companies/Fannie_results/?postversion=2009022617


Comments Off