A Fannie FNMA In Need? Yes Indeed.
We first took a good look at our Fannie in September of 2004...
Hattip to Yves at Naked Capitalism for the full text of this Barron's article on Fannie's woes.
Critical excerpts follow...
with its extreme leverage -- assets stand at 20 times net worth -- Fannie has little room for error.
Fannie's $314 billion of Alt-A -- often called liar loans because borrowers provide little documentation --
accounted for 31.4% of the company's credit losses while making up just 11.9% of its $2.5 trillion single-family-home credit book.
spiraling mortgage defaults and falling home prices could bring a tsunami of credit losses over the next two years that will severely test Fannie's solvency.
Although Fannie has just been cleared to deal in mortgages of up to $700,000, from $420,000 now,
8% growth could be hard to come by if the company's capital remains stretched.
In our view, the rapid decline in home prices and soaring level of foreclosures might cause
the wave of credit losses to hit far sooner and with greater ferocity than many imagine,
potentially submerging the income Fannie is expecting to harvest from volume growth and higher lending fees.
At a conference several weeks back, William Poole, president of the St. Louis Federal Reserve Bank, said that
the GSEs (clearly a reference to Fannie and Freddie) appeared to be insufficiently capitalized
to handle the kind of losses suffered by U.S. major banks in the past six months.
"I do not have any information on the GSEs that the market does not have.
Nevertheless, in assessing the risk of further credit disruptions this year,
I would put the GSEs at the top of my list of sources of potentially serious trouble."
And, in commenting on the government's "too big to fail doctrine" for financial institutions, he said:
"First, firms in trouble ought not to be bailed out, unless the bailout takes a form that imposes heavy costs on managers and shareholders."
Hattip to Yves at Naked Capitalism for the full text of this Barron's article on Fannie's woes.
Critical excerpts follow...
with its extreme leverage -- assets stand at 20 times net worth -- Fannie has little room for error.
Fannie's $314 billion of Alt-A -- often called liar loans because borrowers provide little documentation --
accounted for 31.4% of the company's credit losses while making up just 11.9% of its $2.5 trillion single-family-home credit book.
spiraling mortgage defaults and falling home prices could bring a tsunami of credit losses over the next two years that will severely test Fannie's solvency.
Although Fannie has just been cleared to deal in mortgages of up to $700,000, from $420,000 now,
8% growth could be hard to come by if the company's capital remains stretched.
In our view, the rapid decline in home prices and soaring level of foreclosures might cause
the wave of credit losses to hit far sooner and with greater ferocity than many imagine,
potentially submerging the income Fannie is expecting to harvest from volume growth and higher lending fees.
At a conference several weeks back, William Poole, president of the St. Louis Federal Reserve Bank, said that
the GSEs (clearly a reference to Fannie and Freddie) appeared to be insufficiently capitalized
to handle the kind of losses suffered by U.S. major banks in the past six months.
"I do not have any information on the GSEs that the market does not have.
Nevertheless, in assessing the risk of further credit disruptions this year,
I would put the GSEs at the top of my list of sources of potentially serious trouble."
And, in commenting on the government's "too big to fail doctrine" for financial institutions, he said:
"First, firms in trouble ought not to be bailed out, unless the bailout takes a form that imposes heavy costs on managers and shareholders."
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