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Tuesday, March 25, 2008

Sarcastic Rant on Fannie and Freddie

Just a quick update on Fannie Mae and Freddie Mac…
They were both DOWN yesterday in an UP market, which has piqued my interest.

Fannie Mae delinquencies jump; portfolio up 1 pct: “Fannie Mae (FNM.N: Quote, Profile, Research), the largest provider of funding for U.S. home mortgages, on Monday said its portfolio edged higher in February while delinquencies jumped in the prior month to more than a decade high.

The government-sponsored enterprise said its mortgage investments increased $594 million to $721.6 billion in February, representing a 1 percent annualized growth rate.

Delinquencies on Fannie Mae's single-family home financing business rose in January to 1.06 percent, the highest since at least 1997. The rate increased from 0.98 percent in December.”

Sure enough, FNM’s portfolio continues to deteriorate RAPIDLY, while they continue to EXPAND it. The delinquency rate of 1.06% doesn’t sound like much. That’s exactly why it was reported that way. More importantly is the RATE OF CHANGE of delinquencies. That is a truly freakish number. Delinquencies increased 8.16% MONTH OVER MONTH.

A delinquency rate of 0.98 resulted in $3.6 billion in losses in the fourth quarter. What do you suppose a delinquency rate of 1.06% will result in? Especially if those continue to increase at anywhere near 8%?

FNM would have to IMPLODE.

“Fannie Mae's business of guaranteeing payments on mortgage-backed securities it issues grew at a torrid pace in February. The company said it issued $69.4 billion in the securities in the month, marking a 21.4 percent annualized growth rate.”

In the meantime, taking on more risk is probably not the cleverest thing to do.

Federal Home Loan Banks May Buy $150 Billion of Bonds (Update3): “Federal Home Loan Banks were freed to increase their purchase of mortgage-backed bonds by about $150 billion as part of a government effort to pump money back into a market that slumped as the housing crisis deepened.

Directors of the Federal Housing Finance Board, the banks' regulator, approved the temporary increase today, according to an e-mailed statement. The purchases will be restricted to bonds guaranteed by Fannie Mae and Freddie Mac, the board said.

The approval for Federal Home Loan Banks to increase their purchases comes a week after Fannie Mae and Freddie Mac, the two government-chartered mortgage-finance companies, were cleared to buy at least $200 billion of mortgage securities.”

In all their wisdom, the powers that be have mandated that THIS is the time to MASSIVELY increase their exposure to mortgages. How massively exactly?

“The government increased the limit on the FHLBs' investments to six times capital for two years, up from three times, the statement said. The board said that would increase the banks' spending by “well in excess” of $100 billion. Based on the banks' capital of $54 billion, the change may increase the FHLB's purchasing power by about $150 billion.”

Well, how about SIX TIMES CAPITAL? (What could possibly go wrong?) What happens two years from now when the FHLB’s are forced to start dumping? I’m willing to bet that that two years gets extended indefinitely instead…

Go taxpayers! Bagholders of last resort.

Junk Bond Losses Top $35 Billion as JPMorgan Says More to Come: “High-yield, high-risk bonds are off to their worst start ever, and the biggest investors say there's no recovery in sight.

Junk bonds have fallen an average 3.9 percent this year, losing about $35 billion, according to data from Merrill Lynch & Co. indexes. Some funds managed by John Hancock Advisers LLC, OppenheimerFunds Inc. and Fidelity Investments are down more than 7 percent, showing that even the largest investors were caught off guard by the collapse.

While the Federal Reserve has slashed benchmark interest rates by 3 percentage points since September, it has been unable to get investors to increase their purchases of the riskiest assets. The declines are choking off financing for speculative- grade companies, boosting defaults. The debt is likely to “struggle” for months as the economy enters a recession, according to JPMorgan Securities Inc., the top high-yield research firm in Institutional Investor magazine's annual poll.”

Sarcasm ON. >check<
Ok, so you’re saying that HIGH YIELD bonds, or ‘JUNK’ bonds are risky and that the debt is likely to ‘STRUGGLE’ as the economy enters a RECESSION? Unbelievable. I thought I could get HIGH YIELDS for free. You know, without the risk. I thought I was the SMARTEST HEDGIE ALIVE and that I could buy these things on massive leverage and laugh at all the dummies in lower yielding, safer investments.

“The slump is hurting more companies than ever before. Some 51 percent of U.S. corporate borrowers are rated below investment grade, up from 28 percent in 1992, according to S&P.”

Oh sweet momma! Not only is the economy going into a recession, while simultaneously in a credit crunch, but corporate borrowers have never been WEAKER as a whole? 51% of borrowers are BELOW investment grade as the single largest credit bubble in history bursts. Just awesome!

Don’t worry though; last week was the BOTTOM in equities. Equities and other risky assets are clearly set for a MOONSHOT to new record highs.

Sarcasm OFF >check<

NOTE: As I post this Freddie Mac just reported the same DISGUSTING results on their portoflio this morning. [EDIT: UPDATE 1-Freddie Mac portfolio shrank 12.4 pct in February]

Related Posts
Short Covering on Bear, Goldie, Lehman, Fannie and Freddie
Fannie Mae, Freddie Mac: The Dumbest Idea Ever
Fannie Mae: Another Shoe Drops
Monoline Bailouts: The Great Circle Jerk


Partyboy said...

really... there is a relationship between 'risk' and 'reward' ... schucks, I thought that was just a cute, little lullaby my parents used to hum me to sleep with.

Anonymous said...

Fannie, Freddie and other (tbd) government entities are all being setup to be the bagholders.

As a pseudo government entity, who cares if FNM & FRE lose trillions over the coming decade? Just so long as Paulson's buddies on Wall Street don't have to foot the bill.

I'm stunned there isn't more outrage from the public on the BSC bailout (and future scapegoating of FRE & FNM).

Those agencies were setup to help average people get homes, what do you think they are going to be able to do once the housing bubble finally deflates over the coming years? NOTHING, because they'll be so riddled with bad debt future programs will be slashed.

Mark said...

I have been reading the blog for a while now. Thanks for all your hard work.

Anonymous said...

Looks like the bulls are winning... Can anyone see this run breaking this week?

Anonymous said...

And by "this run" I mean the TSX. Ben?

Ben Bittrolff said...


I expect equities to curl over and head south later this week as the short covering drys up. Already up volume is anemic. The economic data coming out continues to deteriorate.

Also, money market rates as measured by LIBOR and EURIBOR are spiking... hinting of building financial system stress. So 'another shoe' could drop at any moment.

Anonymous said...


Thanks for your viewpoint. That is my feeling as well. I will continue to hold HXD on the TSX. Built up my position on Friday and has totally been blown out of the water these past two days.

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