Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) are not immune from the mortgage mess [subscription required] and they, too, are seeing a dramatic increase in their losses from mortgage defaults. Freddie's results for the third quarter are due out tomorrow, but if they are similar to Fannie's results from last week, it won't be a pretty picture. The stocks for both companies have taken a nosedive since last May before the credit mess really took hold of the mortgage market. In May 2007, Fannie Mae stock sold for $62.87. It closed at just $40.69 on Friday. Freddie Mac stock sold for $65.72 in May 2007. Friday, it closed at $40.72.
Both Fannie and Freddie are government sponsored enterprises (GSEs) that buy mortgages from lenders, which frees up capital so lenders can then lend more money. They have avoided the riskiest mortgages -- interest only, ARMs and other creative financing types that face the greatest number of defaults -- but they are still facing an upswing in defaults in the mortgages they do buy. The two companies together own or guarantee $4.8 trillion of U.S. mortgages, which is about half of the mortgage market. If borrowers default on a mortgage they guarantee, Fannie or Freddie must reimburse the holders of the loans.
Fannie reported last week that it suffered credit losses of 0.04% of its $2.8 trillion of mortgages and related securities. That's up from last year's 0.018%. The situation is actually worse than it looks because as part of its accounting method change, Fannie now separates realized from unrealized losses. When the unrealized losses are factored in, the loss rate is 0.075%, up from 0.023% last year. In 2008, Fannie projected credit losses of $2.2 billion to $2.8 billion with default rate continuing to rise to 0.08% to 0.1% of loans. Fannie told investors it sold $500 million in preferred stock with an annual dividend of 7.625% to raise cash. That preferred stock with an annual dividend of 7.25% looks more attractive than its common stock right now.
Lita Epstein has written more than 20 books including "Reading Financial Reports for Dummies and "Trading for Dummies."
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Reader Comments (Page 1 of 1)
11-21-2007 @ 2:28PM
william lindblad said...
Good article, but I find the report itself deceptive.
Here's why:
These should be mostly HUD loans and this area always has a fair amount of default. The key point that is missing is exactly where, broken down State by State. Example of this is State law. In Ga. if one falls two months behind on a note it is considered default and all it takes is a newpaper ad and a couple of weeks and eviction proceeds. In Fl. the process could take as long a two years. Some States, like Mich, have had great job loss. There are a lot of factors here and without detail, it is not a clear picture. Also these loans should all be under the 417,000 HUD cap and initiated under the HUD guidelines that acknowledge risk. I.E., they usually check ability to pay. This is also the known low end of the market. Just what are we looking at? Low end job losses not making the reports? A major increase in the divorce rate? Cost of living increases? Hey, the Gov. says that inflation is contained. Of course they don't drive and they don't eat.