Friday, 31 August 2007

Freddie Mac's loan losses go exponential

About 6 months ago I drew attention to the lax standards for buying mortgages at Freddie-Mac (FRE). Remember Freddie Mac is not a lender but a buyer and securitizer of mortgages. At that time Freddie Mac was instituting some tougher standards on the types of mortgages they buy.

Actually it be more accurate to say they were instituting 'some' standards because they didn't seem to have any prior to that.

6 months later Freddie's lax standards have become more obvious. Yesterday the company reported a 45% drop in 2Q07 profit on the back of a significantly higher provision for loan losses. Below you can see, as a I recently pointed out with Countrywide (CFC) , FRE's loan loss provisions are turning exponential.

Remember this is the same company, with the support of senator Dodd, that has been lobbying congress to raise their portfolio cap so they can buy more mortgages.

The same company that only last quarter returned to regular quarterly financial reporting. The same company that hasn't been current on its results since 2002, following an accounting crisis in which it said earnings were misstated to the tune of about $5 billion for 2000 through 2002. Ahhh what's 5 billion between friends?

Thankfully congress have decided against lifting Freddie Mac's cap however it seems that Bush has decided to do something to stem the tide of foreclosures. Or to put it another way, to keep people in overpriced houses they can't afford. From the WSJ:

Bush Moves to Aid Homeowners

WASHINGTON -- President Bush, looking for ways to respond to the subprime-mortgage crisis, will outline a series of policy changes and recommendations today to help borrowers avoid default, senior administration officials said.

Among the moves will be an administrative change to allow the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers. The change is intended to help borrowers who are at least 90 days behind in payments but still living in their homes avoid foreclosure; the guarantees help homeowners by allowing them to refinance at more favorable rates.

Mr. Bush also will ask Congress to suspend, for a limited period, an Internal Revenue Service provision that penalizes borrowers who refinance the terms of their mortgage to reduce the size of the loan or who lose their homes to foreclosure. And he will announce an initiative, to be led jointly by the Treasury and Housing and Urban Development departments, to identify people who are in danger of defaulting over the next two years and work with lenders, insurers and others to develop more favorable loan products for those borrowers.

Click on the heading for the full story. The best part is about 2/3 down the page:
Mr. Bush is instructing Treasury Secretary Henry Paulson to look into the subprime problem, figure out what happened and determine whether any regulatory or policy changes are needed to prevent a recurrence.

That should be interesting since Paulson doesn't even think there is a problem. Remember, housing has bottomed and sub-prime is contained


w.a.l. said...

I'm so pissed about this dhukka. What is the point of being financially responsible when the gummint bails out all the irresponible tossers?

I cannot believe this.!! GRRR


grant said...


Well the bailout, if it happens will be courtesy of the taxpayer, same taxpayer that bailed out the S&L's the last real estate debacle.

It's looking rather deja-vu

jog on

The Fundamental analyst said...

Yeah I understand your sentiments Wayne. On the face of it Bush's proposal sounds more like a political move than any kind of broad based solution.

The proposed measures would help out about 80,000 households whose mortgages will reset out of an estimated 2 million.

However that obscures the real aim which is to bail out lenders. American taxpayers should be furious - if only they were that politically aware?

Look at what we've seen so far: a reduction at the discount window which hasn't helped any and now this little gem is offered up, interestingly on the last day before the labor day weekend, coincidence?

Regardless they are placebos. Corporate profits are diving, the corporate debt market is vanishing at a rapid pace and more toxic debt riddled bodies continue to float to the surface.

I was surprised at the relative weakness of the rally in the US given the decent economic numbers. Maybe everyone took off for the Hamptons already?