Fannie & Freddie Clobbered Over Need to Raise Capital

The proposal by Bernanke and Congress to up the lending limit on Fannie Mae and Freddie Mac will not solve a thing if both are capital impaired and cannot make new loans. That seems to be the situation as Freddie Mac Loses $2 Billion and Seeks New Capital.

Freddie Mac, the nation's No. 2 buyer and guarantor of home loans, lost $2 billion in the third quarter and said Tuesday it must raise fresh capital to meet regulatory requirements. Its shares fell more than 26 percent.

The mortgage financier said it is "seriously considering" cutting in half its dividend in the fourth quarter and has hired Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. as financial advisers to help it examine possible new ways of raising capital in the near future.

My Comment: After listening to its latest conference call I questioned Fannie Mae's cure rates and capitalization in Fannie Mae's Credit Loss: What's The Real Story?

In the call Fannie repeatedly dodged questions over capital concerns. In response, I wrote "Fannie Mae is way undercapitalized and a systemic threat. Oddly enough this was the opinion of the Fed before they abruptly changed their minds in reaction to the credit crunch."

It did not take long to prove that assertion, and so much for the alleged transparency from this Fed.

Expect a disaster in Fannie Mae's next quarterly statement as well.

Freddie Mac said it set aside $1.2 billion in the turbulent July-September period to account for bad home loans, reflecting "the significant deterioration of mortgage credit."

My Comment: It is now clear that Fannie Mae is way too optimistic about what cure rates will be. This will restrict the ability of both Fannie and Freddie to take back more loans as well as issue new loans.

The $2 billion third-quarter loss for McLean, Va.-based Freddie Mac worked out to $3.29 a share, compared with $1.17 a share in the third quarter of 2006.

Freddie Mac's regulatory core capital was estimated to be just $600 million in excess of the 30 percent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight.

My Comment: In the next bubble blowing gimmick, expect the amount of regulatory capital required to be lowered. The Fed , Congress, and oversight committees will do damn near anything to keep the bubble alive. However, nothing will work. The system is broke. It's time for a new one.

"We have begun raising prices, tightened our credit standards and enhanced our risk management practices," Piszel said. "We also continue to improve our internal controls."

My Comment: Raising prices huh? We finally have explicit confirmation of what I have been saying for a long time: Mortgage rates are going to disconnect from 10-year treasuries over default concerns. We can now add capital impairment as a reason for further disconnect.

"We were getting thin" in terms of excess capital, and Freddie Mac decided it needed to bolster its capital "to manage through this credit cycle," Piszel said in a telephone interview. That cycle isn't expected to improve until 2009, he said, with home prices projected to register a 5 percent to 6 percent decline nationwide.

My Comment: Notice how 2007 became 2008 became 2009. I expect it will be more like 2012 at the earliest. My reasons were outlined in When Will Housing Bottom? Now we have more reasons to add to the list.

Sympathy Plays

It seems that Countrywide Financial is falling in sympathy. Also remember that CEO Mozilo recently promised Countrywide would make money next year. Fat Chance.

Countrywide (CFC) Daily Chart



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Fannie Mae (FNM) Daily Chart



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Freddie Mac (FRE) Daily Chart



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Mr. Practical nailed it this morning with his comment: "The clear implication of the Freddie Mac (FRE) report is that there is no way, even if politicians insist, to expand the balance sheets of the GSEs to help the broad economy 'recover' from the credit slump."

I will add to that by saying both the ability to buy back loans and to raise loan amounts are now officially DOA. Oh, they can raise loan amounts alright, they just won't be able to act on it.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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