Fannie and Freddie Losses To Offer Gauge on Mortgage Defaults
February 23, 2008 - When Fannie Mae and Freddie Mac report fourth-quarter results in the coming week, shareholders will be nervously surveying the damage from rising defaults on home mortgages owned or guaranteed by the two companies. Both are expected to post big losses, as they did in the prior quarter. Merrill Lynch downgraded their shares to “sell” Friday.
With housing in a deep slump, the financial health of these government-sponsored behemoths matters to Americans in general, not just their long-suffering shareholders.
Fannie and Freddie acquire home loans and hold them as investments or bundle them into securities held by other investors. They collect fees for guaranteeing payments on those so-called securitized loans — and take a hit when lots of homeowners default. Though Fannie and Freddie are owned by private shareholders, the companies were created by Congress to help ensure a steady flow of money into housing. Investors assume the government would bail them out in a crisis.
The huge role Fannie and Freddie play in the mortgage market has grown even bigger since mid-2007, when other investors took fright and virtually stopped buying home loans other than those guaranteed by Fannie and Freddie or insured by the Federal Housing Administration. Meanwhile, another set of government-sponsored institutions — the 12 regional Federal Home Loan Banks — have stepped up their lending to mortgage companies cut off from other sources of funds.
The mortgage market is now so reliant on funds from government-related entities that it has been “effectively nationalized,” says Richard Iley, an economist at BNP Paribas. These institutions have kept the credit spigots open for home mortgages, but “potentially there are very large liabilities for the taxpayer,” Mr. Iley says.
Freddie, which is scheduled to report results Thursday, is forecast to post a loss of about $1.6 billion, or $2.54 a share, according to the mean analyst estimate compiled by Thomson Financial. The mean forecast for Fannie — whose results are due in the coming week, though the day hasn’t been announced — calls for a loss of about $1.1 billion, or $1.13 a share, Thomson says. Those forecasts are only a rough guide because analysts find it hard to predict how the results will be affected by such things as swings in the value of loan-guarantee obligations.
Heavy losses in the third quarter forced Fannie and Freddie to raise a combined $13 billion through the sale of preferred shares late last year to shore up their capital. Joshua Rosner, an analyst at Graham Fisher & Co., a research firm, says continuing losses are likely to force one or both of them to raise money again soon, perhaps through the sale of common stock.
But David Hochstim, an analyst at Bear Stearns, says another trip to the capital trough isn’t likely in the near term. He says that Fannie and Freddie have been able to raise the fees they charge lenders, and he expects their regulator eventually to remove a “surcharge” that for now requires the companies to hold 30% more capital than their normal statutory minimum.
Fannie and Freddie Losses To Offer Gauge on Defaults
By JAMES R. HAGERTY | Wall Street Journal