FHLMC Sinking in Cess Pool of Delinquent Loans
FHLMC Freezes Cess Pool ... Last month Freddie Mac sold $6 billion of preferred stock and halved its dividend to 25 cents to shore up reserve capital.
Talk about the TED spread... The preferred shares will pay an 8.375% fixed dividend for five years and then shift to the higher of 7.875% or 4.16 percentage points above the three-month LIBOR London interbank offered rate.
Today, Freddie Mac CEO Richard Syron weaved a delusional tale of denial that would make a heroin addict seem sane....
Syron said on CNBC that the stock issuance was a "once and for all" transaction, to be in position to have enough capital to get through 2008 and have incremental extra capital.
Syron sobered up and came to his senses and stated that Q4 results are not going to be better than the Q3 loss of $2.02 billion.
Freddie and Fannie profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities.
Under their capital rules, FHLMC and FNMA must hold 2.5% in reserve against un securitized loans in their portfolios, compared with 0.45% against the securities they guarantee, which are off their balance sheets.
You get the picture? They are going to buy less mortgage assets which have higher reserve and must be on balance sheet, while buying more guarantee assets which are lower reserve and off balance sheet.
Yesterday, Freddie also quietly made a small change in accounting to help preserve capital and further misrepresent it financials.
The change will limit purchases of delinquent loans from pools underlying the MBS mortgage backed securities it guarantees.
Freddie formerly purchased all of the delinquent mortgages from its pools, shortly after they reached 120 days late.
Going forward, Freddie will buy loans that are 120 days or more delinquent only when...
they've been modified, a foreclosure sale occurs, or borrowers don't catch up within 24 months.
This means Freddie can freeze the bad loans swimming in the cess pool for up to 24 months. Citigroup analysts:
"This change will reduce the pace at which loans are purchased from pools and therefore reduce the amount of losses that Freddie Mac will be required to realize in the near term."
Freddie: "The change will better reflect expected future credit losses. Taking this action will also have the effect of reducing the company's capital costs."
Keeping the turds swimming in the cess pool will generate greater expenses associated with delinquent mortgages, primarily from the need to advance interest and principal on more loans to bondholders.
Freddie thought of this angle also and has a way out: "Under the new plan, the mortgages may also be bought if the cost of such payments exceeds the expense of holding the loans."
Buyouts of deliquent loans create prepayments which help bondholders that bought at a discount, while hurting those that bought at a premium.
Now who might of bought those FHLMC bonds at a discount recently???
Talk about the TED spread... The preferred shares will pay an 8.375% fixed dividend for five years and then shift to the higher of 7.875% or 4.16 percentage points above the three-month LIBOR London interbank offered rate.
Today, Freddie Mac CEO Richard Syron weaved a delusional tale of denial that would make a heroin addict seem sane....
Syron said on CNBC that the stock issuance was a "once and for all" transaction, to be in position to have enough capital to get through 2008 and have incremental extra capital.
We have reported really ugly numbers. But we reported really ugly numbers at a time when the business coming in has got terrific returns to it.
We are not growing our retained portfolio, but we are not shrinking it either. The guarantee business will be a relatively quite attractive business going forward.
You can anticipate us emphasizing the guarantee business significantly more than the business of buying mortgage assets for the company's investment portfolio.
Our business going forward looks like it's getting better and better.
Syron sobered up and came to his senses and stated that Q4 results are not going to be better than the Q3 loss of $2.02 billion.
We would expect that our total future credit losses on our current book of business would total approximately between $10 billion and $12 billion.Its just getting better and better all the time, isn't it?
If I were you, I would want in this time period someone running one of these companies to err on the side of pessimism rather than optimism.
We have seen a ton of foreclosures but we have not seen a lot of pictures of people standing in front of their house with their furniture on the front lawn.
As that starts to happen, and it will happen, I am afraid of the impact that this has. Household wealth in housing is about $21 trillion.
It does not take a big shift in consumer confidence, in consumers worrying about things, for it to have an effect on the economy.
I think it will get worse before it gets better.
Freddie and Fannie profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities.
Under their capital rules, FHLMC and FNMA must hold 2.5% in reserve against un securitized loans in their portfolios, compared with 0.45% against the securities they guarantee, which are off their balance sheets.
You get the picture? They are going to buy less mortgage assets which have higher reserve and must be on balance sheet, while buying more guarantee assets which are lower reserve and off balance sheet.
Yesterday, Freddie also quietly made a small change in accounting to help preserve capital and further misrepresent it financials.
The change will limit purchases of delinquent loans from pools underlying the MBS mortgage backed securities it guarantees.
Freddie formerly purchased all of the delinquent mortgages from its pools, shortly after they reached 120 days late.
Going forward, Freddie will buy loans that are 120 days or more delinquent only when...
they've been modified, a foreclosure sale occurs, or borrowers don't catch up within 24 months.
This means Freddie can freeze the bad loans swimming in the cess pool for up to 24 months. Citigroup analysts:
"This change will reduce the pace at which loans are purchased from pools and therefore reduce the amount of losses that Freddie Mac will be required to realize in the near term."
Freddie: "The change will better reflect expected future credit losses. Taking this action will also have the effect of reducing the company's capital costs."
Keeping the turds swimming in the cess pool will generate greater expenses associated with delinquent mortgages, primarily from the need to advance interest and principal on more loans to bondholders.
Freddie thought of this angle also and has a way out: "Under the new plan, the mortgages may also be bought if the cost of such payments exceeds the expense of holding the loans."
Buyouts of deliquent loans create prepayments which help bondholders that bought at a discount, while hurting those that bought at a premium.
Now who might of bought those FHLMC bonds at a discount recently???
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