Fannie (And Freddie's) More Costly Future?

I guess I didn’t need the CEO of Fannie Mae to tell me that his company’s dismal second quarter results, “reflect challenging conditions in the housing and mortgage markets that began in 2006 and have deepened through 2007 and 2008.” No kidding.

What I do need to know is how, given the deepening of the credit situation, i.e. the fact that the mortgage delinquency rate is rising, not falling, and credit is getting more expensive for most, how can Fannie say in the same breath, “We expect that 2008 will be our peak year for credit-related expenses as we build our combined loss reserves in anticipation of charge-offs we expect to incur in 2009 and 2010.” I get that the expenses, or “provisions” as we call them are forward-looking, but so many folks I’ve spoken to believe that both Fannie and Freddie have underestimated the losses to come, and while nearly $4 billion in one quarter sounds like a lot, the totals in the end may not be enough.

Take a look at slide number 32 from the Fannie 10Q out this morning:

It shows that the 2006 and 2007 vintages of loans are very nearly vertical in their delinquencies. Given that those are the most recent vintages, I wonder if we don’t have to extrapolate some of those future provisions a bit farther out and a bit deeper into both Fannie and Freddie’s pockets.

Video: Report on what Fannie's saying since their disastrous earnings announcement this morning.

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