Tuesday, August 5, 2008

Are we there yet?

In the housing bill that was signed into law last week, there was the GSE bailout bill. The bill includes the government to use unlimited funds to save Fannie Mae and Freddie Mac. But once the market bottoms and the housing industry stabilizes the need for a bailout will no longer exist. That brings us to a Bloomberg piece on Fannie Mae, Freddie Mac to Report Losses Through 2008. The article discusses the second quarter losses here -

Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, may report net losses through the first quarter of 2009 as home-loan delinquencies rise to the highest on record, analysts' estimates show.

Freddie, based in McLean, Virginia, probably will say tomorrow when it releases second-quarter results that it had $1.9 billion in credit-related costs, while Washington-based Fannie will report $2.4 billion, according to Credit Suisse analyst Moshe Orenbuch in New York. The companies' regulator said July 22 that they may need to write down the value of $217 billion in securities.

Then a bit further down the article we get these two nuggets of important info -

Fannie will lose an additional $45 billion and Freddie $30 billion on mortgage defaults over the next two to three years, and each may need to raise $15 billion in capital, Miller said.

There are few signs that the housing market has bottomed. The S&P/Case-Shiller home-price index dropped 15.8 percent in May from a year earlier, the biggest decline since records began seven years ago. Some 6.35 percent of home loans had at least one payment overdue as of the end of March, up from 4.84 percent a year earlier and the highest since at least 1979, the Washington- based Mortgage Bankers Association said June 5.

Freddie has yet to write down the value of $150 billion in privately issued subprime, Alt-A, option adjustable-rate mortgages and home-equity loan securities because the company considers those losses ``temporary'' and expects to recover the full investment when the debt matures, according to Orenbuch. That could lead to potential losses of $24 billion more, he said. Non-agency, or private-label, mortgage securities, lack guarantees from Fannie and Freddie or U.S. agency Ginnie Mae.

The first interesting claim is that the housing markets has bottomed - due to the already steep declines and the high numbers of late payments. Are we certain that neither of these numbers can get any higher? This seems like a short sighted and premature reason to claim a bottom.

This is followed by the statement additional writedowns that may be "temporary." Does Orenbuch really believe that option arms will fully recover? Perhaps Orenbuch has a different data set from the rest of us, because we just see further losses still to come.

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