Some Thoughts on Fannie’s Horrible Year
Courtesy of Bruce Krasting
Fannie Mae released it’s annual and 4th Q numbers after the close on Friday and during one hell of a messy snowstorm. FNM posted a loss of $16.3b for the quarter and $74.4b for the year. An unmitigated disaster. The timing of the release suggests that they were hoping that no one would notice how bad the last twelve months were. There was nothing particularly new in the most recent quarter, just more bad news. What is happening at Fannie is also happening at Freddie Mac and to a different extent at FHA. There are some trends that I think are worth noting.
It would be a gross overstatement to suggest that Fannie has found religion and is now committed to making ‘good’ loans versus ‘bad’ ones. In my opinion they still must tighten their lending standards if they expect to stabilize their credit losses. But they have moved to restrict lending to better borrowers. The process is ongoing, but the direction is becoming clear.
At this point all three of the D.C. mortgage lenders are pulling on the credit reins. It is obvious from the report the direction that has been taken. Significant additional measures have been announced by the Agencies that will kick in between now and June.
For those economists out there that are scratching their heads as to why they missed by a mile on their expectations of New and Existing home sales last month they need only look at this report for an explanation. It is harder to get a mortgage today than it was a year ago, It will be harder to get a mortgage in one month from today and even harder to get one six moths from today. For me the implications of this are very obvious. Broad RE values will have to go lower, high-end homes will suffer the most in percentage drops.
Consider the following slide.
A major issue for Fannie and the entire country is the REO problem. As of YE 2009 they had an inventory of 89,000 homes. Looking at the information provided one can add up the foreclosed properties from 2007-2009 (290,000) subtract the current inventory (86,000) and come up with a number of 200k homes sold in the past two years. And that number does not include short sales.. If you add in the REO sales by Freddie and FHA it is easy to conclude that the biggest seller of RE over the past 24 months in America has been the federal government. Great timing.
At one point there was some academic debate as to the causes of all of these defaults. In March 2010 the debate is over. The vast majority of defaults come because borrowers are underwater. Falling RE prices are the number one contributor to the default cycle. That being the case one has to wonder as to the wisdom of Washington trying to sell all of these homes during the down market. Their actions have no doubt made the losses at the federal level higher than they might have been. (They collect only 56% of the principal balance when a home goes to foreclosure) The policy of liquidating REO has also hurt millions of homeowners and financial institutions.
This is that ‘price discovery’ debate that is ongoing. If, ‘extend and pretend’ is wrong than surely accelerated sales of REO is right. I am one that believes that neither of these extremes is good policy. Both options take us down a dark road. If RE were to fall by an additional 20% nationwide it would, in my opinion, be a lights out situation. There would be nothing the Fed could do to stop us from falling over a cliff. At the same time there must be some viable alternative for the federal REO. The cost of owning and maintaining all of this property is staggering. Policies that would restrict REO sales may be beneficial to the ‘owners’ of our society, but they would not be fair to the ‘renters’. Don’t wait for our pals in D.C. to put this important social issue on the table.
The following chart looks at the fall in RE prices across the country. Not a pretty picture. Note that the biggest drops are in the West and that this area of the country has the highest single concentration of Fannie’s book. For me this begs a question. Was Fannie (and the other D.C. lenders) a force that contributed to the crazy run up in prices in the region? Fannie went where the demand for mortgages was. Basically it was the Sunbelt. The other Washington lenders have the same portfolio. This is a chicken and egg question. Did the Agencies cause this? Or were they just sucked into a vortex?
The Agency’s concentrated lending added to the magnitude of the blowup. There is a lesson in this. At the moment no one in Washington is asking this question. That might well be because they already know the answer. In the red states, Washington poured on the gas. They were a force that helped create the bubble in the states that are now causing the problem, and they are taking a pasting as a result.
Fannie reported that it converted a portion of the 2008-1 Mandatory Preferred stock into common at a ratio of 1:2. This is not of relevance to the remaining Preferred shares that are not subject to a mandatory conversion to equity at this time. But it does, for me, set somewhat of a road map for the Pref. I have never felt comfortable with the idea that the Pref gets left out entirely in the cold when all is said and done with Fannie and Freddie. The junior subordinated creditors got paid out at a premium. The Pref gets dicks hatband. Odd outcome. Less than 6 months before Fannie went into conservatorship Fannie sold $2b of Pref through Merrill. That deal was done because Paulson was pushing to get it done.
Fannie owns or leases 2.7mm square feet of office space. That happens to be the same number of square feet in the Empire State Building. Fannie is a big company. Its 6,000 employees put it in the top 500 private employers in the country. But to think of FNM as a private company at this stage of the game is just a joke. Given the mess they are in I would guess that they will be creating new jobs for some time to come.
Email This Post
Facebook
Twitter
LinkedIn
del.icio.us
Digg