Fannie Mae & Freddie Mac Losses Make Them "Insolvent," former Saint Louis Federal Reserve Governor William Poole warns today in a Bloomberg article.
Over the past few days there has been an ever increased talk of systemic problems with the main two guarantors of home loans in the United States.
UPDATE: U.S. Foreclosures Rose 53% in June, Bank Seizures Almost Triple this past month according to Reality track.
http://www.bloomberg.com/...
More below the fold.
Since the collapse of the "sub-prime" lending markets and the associated mega losses, 400+ billion dollars US to date in many sectors of the financial services, pension & insurance sectors worldwide the stability of Fannie May & Freddie Mac have provided the primary source of mortgage funding in the United States. These two government service entities or GSE's have the implicit backing of the US Treasury. Because of this their bonds which they sell in order to raise the capital necessary to buy mortgages from originators have usually sold for just a small premium on what US Treasury bonds or T-Bills return.
As more and more mortgages have gone into default there has been an ever increased pressure on Fannie & Freddie's balance sheets causing them to raise additional capital during the first months of the year.
Fannie Mae and Freddie Mac have raised a combined $20 billion since December to cover losses of more than $11 billion generated since the credit crisis began last year. Freddie Mac has yet to raise a planned $5.5 billion, scheduled for mid-year.
On Monday there was a note issued by a major investment bank that suggested Fannie & Freddie may need to raise as much as 70 billion in additional capital to maintain solvency. Yesterday, their regular bond sale did so poorly that they were forced to provide record rates of interest to attract buyers.
Fannie Mae sold $3 billion of two-year notes yesterday to yield 74 basis points more than Treasuries. A basis point is 0.01 percentage point. That's the widest spread since Fannie Mae first sold two-year notes in 2000 and triple what it paid in June 2006.
Well, former fed governor Poole has weighed in saying:
Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.
The below referenced article continues with the following:
The government is counting on Fannie Mae and Freddie Mac, which own or guarantee about half the $12 trillion in home loans outstanding, to help revive the housing market.
Without a fully functional and healthy Fannie & Freddie the opportunity for the housing sector & the economy generally to recover and quickly would be greatly impaired.
The financial market of Credit default Swaps, or CDS has recently reflected the following changes with respect to Fannie & Freddie:
The price of credit-default swaps, contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac, doubled in the past two months to more than 80 basis points for the senior debt, according to London-based CMA Datavision.
The median credit-default swap on debt rated Aaa by Moody's was 26 basis points as of July 8, data from the credit rating firm's strategy group show. It was 76 basis points for debt rated A2.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
There are many voices the the financial sector that espouse the view that Fannie & Freddie are too big to fail and that the government would need to step in to protect these firms. Further, there are other voices that insist that these firms are strong and well capitalized.
All I know as an admitted non financial services professional is that I have heard all sorts of talk for these same folks recently telling me that they "support a strong dollar" as its value as fallen more than 25% since 2001 against the other major currencies and that "the sub-prime market problems are contained". This talk reminds me of the same folks telling me that there were no secret prisons for detainees, secret surveillance programs and the war in Iraq was necessary to protect us from an immediate threat from weapons of mass destruction.
Regardless, this is a developing story that has the potential to dwarf every other financial services story from the current round of financial services sector troubles.
The link to the article:
http://www.bloomberg.com/...
UPDATE: More bad news as property values continue to devalue as bank seizures accelerate.
More than 252,000 properties, or one in every 501 U.S. households, were in some stage of foreclosure, RealtyTrac Inc., an Irvine, California-based seller of default data, said today in a statement. Nevada, California and Arizona had the highest foreclosure rates.
The news just gets worse as the report unfolds.
About $3.5 trillion in homeowner equity has been wiped out since the spring of 2006, when housing prices were at their peak, Zandi said. Home prices fell the most on record in April, according to the S&P/Case-Shiller index of 20 U.S. metropolitan areas. June was the second straight month in which more than a quarter million properties received foreclosure filings, RealtyTrac said. Filings fell 3 percent from May.
`Faster Pace'
``The year-over-year increase of more than 50 percent indicates we have not yet reached the top of this foreclosure cycle,'' James Saccacio, chief executive officer of RealtyTrac, said in the statement. Bank repossessions, which increased 171 percent in June, are rising at a ``much faster pace'' than default notices and auction notices, he said
For those folks that had been hoping for a rapid stabilization & turn around in the housing market the news is especially bleak as a major analyst predicts this meltdowm will continue past 2010.
``The foreclosure problem is getting worse and will stay with us well into the next decade,'' Mark Zandi, chief economist for Moody's Economy.com in West Chester, Pennsylvania, said in an interview. ``The job market is eroding and homeowners have less equity. Lenders are much less willing to work with you if you've got negative equity, and you're more likely to give up your house if you're deeply underwater
One thing is for certain, if property values continue to deteroriate at this rate Fannie & Freddie may have bigger liquidity problems than most folks are ready or willing to acknowledge.
Hold on folks, it looks like a rougher road ahead.