The short answer is, "You'd better believe it!"
The long answer is that along with FHA, Fannie Mae and Freddie Mac ARE the mortgage market today. If you shut down these conduits, the housing market comes to a screeching halt, and I shudder to think of the repercussions of that on our economy. It would be devastating – a lot worse than it is now.
Due to accumulated losses, both institutions have significant negative net worth, effectively wiping out the shareholders. The government's financial position is in preferred stock, which has a higher priority than the common stock that is worthless from a book value standpoint (but still trading at about $1 per share).
Fannie Mae recently announced a $23 billion loss for the first quarter of 2009 and Freddie Mac just announced a $10 billion loss. Both asked the Treasury Department for more money to shore up their balance sheets.
Now, even though I have an MBA, working through the accounting is beyond my capabilities. I do understand that most of the losses are due to write-downs in the estimated value of loans that are on their books or which they have guaranteed. If a $1 billion pool of mortgages is now valued at $600 million, the result is a $400 million write-down and a $400 million loss. We don’t know what the real losses might be until the loan is paid off or foreclosed upon and the property sold.
You will recall that both institutions came under considerable fire a few years ago for "fooling around" with earnings. Allegedly, management paid top executives bonuses totaling over $100 million – money that they arguably did not deserve.
In part, the difficulty in making sense of the financial situation is due to the fact that the accounting is complex. Over the years the managers fooled their Boards, auditors, regulators, bondholders, and shareholders. So it's understandable that the current numbers are incomprehensible to ordinary human beings today.
Included in the 206-page first-quarter report, filed with the Securities and Exchange Commission, appears the following:
"Our expectation [is] that, for the foreseeable future, our earnings, if any, will not be sufficient to pay the dividends on the senior preferred stock…"
That means that they cannot pay the dividends on the stock we taxpayers have in the business. They will have to borrow more to make these payments.
"Our expectation [is] that we will not operate profitably in the foreseeable future, and [it is] our belief that there is significant uncertainty as to our long-term financial sustainability."
With a $20 billion negative net worth, they are right.
"[We believe] that the actual and perceived risk that we will be unable to refinance our debt as it becomes due is likely to increase substantially as we progress toward December 31, 2009, which is the date on which the Treasury credit facility terminates."
With further write-downs on the horizon, this means that the government – read: taxpayers – have a permanent stake in Fannie and Freddie.
The good news is that no one in Washington, D.C., is going to let them fail. Around $400 billion has already been pledged to keep them afloat. Both institutions are doing lots of business – about $300 billion in the first quarter. Let's assume that they are making money on that business.
A summary of the first quarter activity at Fannie Mae makes very interesting reading – I highly recommend it.
Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrowerarticles, Randy is a mortgage broker who has financed over $1 billion
in properties. He writes about home buying and real estate finance
topics for CreditBloggers.com.
Randy Johnson Randy is a Credit.com contributor and seasoned mortgage expert. He writes about home buying, mortgage laws and real estate finance issues. He has financed over $1 billion in properties, is the author of How to Save Thousands of Dollars on your Home Mortgage and he is a feature columnist for Savvy Borrower.
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