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I guess it shouldn’t be surprising, but the numbers for Freddie Mac's third quarter losses are really phenomenal. One analyst we called this morning said, “Freddie is a disaster,” and he said we could quote him on that. I won’t, but here’s what’s so striking to me. It’s not like we haven’t heard bad numbers from tons of lenders out there, but the difference here is that Freddie Mac

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[FRE  Loading...      ()   ] , a GSE, doesn’t play that much in the field where all the bad sportsmanship took place.

Freddie is not a big subprime lender. As of September at least, of Freddie’s $713.1 billion portfolio, $105 billion of securities were backed by subprime mortgages. That’s a lot, but it’s nowhere close to the bulk of the portfolio. So the losses can’t all be subprime.

The trouble is, as a Fannie exec said on the call, you have to factor in home price depreciation and the corresponding historical default rate. Comparing to the housing downturn in the early nineties, if home prices fall 10%, then the default rate rises 4-5%.

It’s hard to say how far prices will fall; there are about as many estimates as there are estimators. But the point is they continue to fall, and therefore defaults will continue to rise, and unlike previous downturns, the unique mortgage products of the recent housing boom could make that default ratio worse.

An interesting moment on the Freddie conference call: An analyst asked if Freddie had talked to its regulator, OFHEO, about changing its mandatory minimum capital surplus of 30%, given that it's bleeding cash. Answer: "We respect and abide by our regulators wishes, we have had discussions with them on the 30% and I would expect we would have those discussions as time goes forward," said CEO Dick Syron. So the analyst says, "Is that yes or no?" Syron answers, “You can interpret that response…”

Cutting to the chase, the answer is NO.

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