Despite Government Takeover, Fannie Mae Still Bleeding

November 12, 2008

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

In hind sight, it’s easy to point fingers as to why Fannie Mae and Freddie Mac were so hopelessly reckless with their money. Where this crisis started and ended was in the government, spurred ever onward to grow by Uncle Sam, these firms became increasingly reckless despite their major role in the mortgage markets. Repeated attempts to bring them under control on the government failed. The average tax payer was forced to pay for these mistakes as the government took control of these two firms that had fallen so far from grace that bankruptcy was imminent and allowing them to fail could have had catastrophic consequences.

Yet officials seemed cautiously optimistic about the takeover. They hoped that it would begin a lengthy process of stabilizing the housing market. Lender balance sheets could be cleaned up, and mortgage rates and fees could get cheaper as a result of this. Mortgage securities owned by Freddie and Fannie could also be turned into Federal paper, which would boost confidence for foreign investors. Most importantly, the line of thinking was that the government could work with existing home owners and modify the terms on delinquent loans that could allow them to keep their homes with more flexibility than lender owned mortgages.

Yet today’s news of Fannie Mae’s loss of $29 billion serves as a sobering reminder that the government takeover is not the be-all end-all of mortgage fixes. The mistakes made by both Freddie and Fannie are not something that will be repaired overnight, much less in the near future. With this most recent loss, firm officials said that it hasn’t had to tap into the $100 billion of allocated tax dollars just yet. However, the firm filed on Friday that “if current trends in the housing and financial markets continue or worsen…we may have a negative net worth as of December 31, 2008.” If your a taxpayer, this probably doesn’t sit well with you.

So where did the losses come from? $21 billion was from non-cash charges related to how it accounts for tax credits it had been carrying on the books. As the firm continues to hemorrhage money, the firm is “no longer confident that it can make enough money to use those tax credits. Loans also continued to fall into default unabated despite government intervention and more push being given behind government programs designed to keep consumers in their homes. Credit-related losses accounted for $9.2 billion. This is after they lost $5.3 billion in the second quarter and $1.2 billion in losses a year earlier. Doesn’t exactly inspire confidence for the future, does it?

Despite these losses, however, it doesn’t appear that the housing market will be able to operate without Freddie or Fannie. Together, the firms guarantee about $5 trillion in mortgage loans, and they’re pretty much the only firm left that can bundle loans into securities to sell to investors. That ability, it appears, is an important source of funding for banks and other lenders, who need to sell loans to make room for funds for…more loans. This means that no matter how much financial pain Freddie and Fannie cause to the government’s already ballooning amount of funds given out with taxpayer money, we’re just going to have to bite the bullet.

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