Fannie Mae's Future Looks Pretty Grim—Downright Scary
Nothing like starting off a new week with a $29 billion net loss for the nation’s largest mortgage investor. Fannie Mae is currently under government guard, with the conservatorship instituted in September, but it still apparently can’t keep its balance sheet from joining the ranks of other massive mortgage meltdowns that seem to be par for today’s course.
Former Fannie employees in formerly high-ranking positions had suggested to me a few months ago that the 10Q would look particularly grim this third quarter, for reasons part fiscal and part political. But I’m not interested in looking back; I’m looking forward, and unfortunately Fannie’s future looks pretty grim.
According to today’s filing, Fannie has “experienced reduced demand for our debt obligations from some of our historical sources of that demand, particularly in international markets. There are several factors contributing to the reduced demand for our debt securities, including continued severe market disruptions, market concerns about our capital position and the future of our business (including its future profitability, future structure, regulatory actions and agency status) and the extent of U.S. government support for our business.” And there you have it.
I was also looking through what they call the “Credit Supplement” in the filing, specifically to see just how all those Fannie loans are doing, now that we’re all about modifications and saving the housing planet and all. It appears the 2006 and 2007 vintages of loans held or guaranteed by Fannie are on life support. Together they now make up 66 percent of the company’s Q3 credit losses. Were Fannie underwriters out for coffee for two years or what?? Remember, Fannie supposedly doesn’t do subprime loans. They did, however, do Alt-A loans, that is the low doc, no doc, don’t tell anyone anything about your ability to actually repay anything borrower. As one analyst put it to me this morning: “They just waved it in, yeah, they stopped underwriting - That is what Alt-A was.”
This particular guy thinks the 07/08 vintages will be even worse, setting new records for defaults. In the 10Q Fannie detailed at length its modification programs including loan workouts, additional loans to help borrowers in financial difficulty bring loans current and increased outreach to delinquent borrowers. Nowhere did it say anything about actually writing down the principal on the loans, which is a requirement of the government bailout plans though not a requirement of the conservatorship. The CEOs of Fannie and Freddie recently said writing down principal would be necessary, but so far, I’m not seeing it.
The feeling I get from this particular 10Q is brash uncertainty. And that’s a little scary, given today’s economic climate and the size of this particular mortgage entity. No wait, that’s a lot scary.
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