I came away from the Freddie Mac conference call feeling a little, shall we say nicely, confused.
The CEO, Richard Syron, warned of the troubled times in housing, even revised his forecast for home price drops, peak to trough, from 15 percent to 18-20 percent. He said we’re only halfway through the correction.
But then one of his underlings went on to assure everyone that Freddiewould be able to withstand $40 billion worth of credit pain through 2009 (if it finishes raising that $5.5 billion it promised). He also talked about how they may reverse some of the previously estimated losses as the portfolio does better than expected.
Here’s the issue: write-downs. Unless you’ve been trapped under something heavy for the past year, you probably know that this is the crux of the credit crash. Wall St. has been writing down the value of all these mortgage-backed securities, as foreclosures and defaults rise on home loans and prices continue to fall. That has taken billions and billions of dollars off the nation’s corporate balance sheets and caused the collapse of the likes of Bear Stearns and many many others.
Freddie, in the second quarter, wrote down the value of its subprime and Alt-A portfolio by $1 billion. Freddie is claiming that they can hold these securities to maturity and not have to take a loss, because over time, the dire predictions of defaults on these loans just won’t come to pass. Freddie’s subprime and Alt-A portfolio is about $130 billion. Think of that. Just $1 billion in writedowns.
I think Armando Falcon, a former head of OFHEO, said it best when I interviewed him yesterday:
"They've only written them down by let's say five or 6% total over the past few quarters. If those were sold on the market they would get maybe 50 cents on the dollar for these securities. At some point they can't delay the inevitable about having to mark these assets down to their true market value. They are now holding them close to book value, based on the theory that these are temporary impairments. As the market continues to decline into next year, it will be clear that these aren't just temporary impairments. Then the government will not be able to allow this forbearance on recognizing losses much longer."
He’s not the only one who thinks this by the way. A top analyst told me this morning that the auditors are very nervous because the top guys at Freddie “don’t understand the credit risks on their books.”