Freddie Blows Through Another $35 Billion
Prime loans turn out to be anything but.
Over the weekend, Freddie Mac (FRE) requested a second draw on its Treasury Department credit facility, saying $30-35 billion would suffice to keep its net worth above zero, thank you very much. After taking $14 billion in the third quarter of last year, Freddie has now chewed through almost half its $100 billion taxpayer-provided safety net in just 5 months.
According to Bloomberg, Freddie's fourth -quarter operating losses triggered the need for additional funds, as its massive mortgage portfolio continues to sour. Analysts expect Freddie's sister company, Fannie Mae (FNM), to request a similar draw when it announces fourth-quarter results in February.
As one analyst told Bloomberg, "[Fannie and Freddie's] losses are going to be much higher than anyone anticipated. The more and more that people are digging into these portfolios, they're finding out the more and more these guys were doing subprime and Alt-A loans and classifying them as prime."
Defaults on prime mortgages, which are supposed to be given out to borrowers with good credit and stable jobs, are now increasing at a faster rate than the subprime loans that get so much headline play. According to the latest Mortgage Bankers Association Delinquency Survey, 2.87% of all prime loans were delinquent in the third quarter of last year, up 85% from the same period a year ago.
Keep in mind those figures are through September 2008 and don't include the abysmal economic conditions of the past 4 months. And as layoffs mount and the economy continues to contract, the previously well-to-do are facing the same economic hardships those "subprime" people have been dealing with for almost 2 years.
Fannie and Freddie, despite not technically being involved in subprime lending, drove industry trends, and, in many ways, set precedents followed by the rest of the mortgage industry. Their drive to automate the loan underwriting process created massive opportunities for fraud. Both savvy and ignorant originators easily duped the system, jamming subprime borrowers into prime loans, which neatly showed up on bank balance sheets as AAA-rated assets.
The sieve-like automated systems were adopted by other big lenders, such as Countrywide, Washington Mutual, Bear Stearns, Lehman Brothers, IndyMac and Wachovia.
Now that none of those firms exist, loans originated under the guise of "prime" are turning out to be anything but. Bank of America (BAC), JPMorgan (JPM) and Wells Fargo (WFC), heretofore the strongest banks in the country, who absorbed many of those defunct lenders, are now faced with mounting losses on loans they thought were of the highest quality.
As I noted about this time last year, while everyone was so focused on subprime, prime mortgages -- a market about 4 times as large -- quietly presented a far bigger threat to the financial system. Now, as the government has bailed out 2 of the 4 remaining big American banks, those loans threaten the federal balance sheet.
Where's TARP 2 when you need it?
The information on this website solely reflects the analysis of or opin=
=3D =3D3D ion about the performance of securities and financial markets by =
the wr=3D iter=3D3D s whose articles appear on the site. The views expresse=
d by the wri=3D ters are=3D3D not necessarily the views of Minyanville Medi=
a, Inc. or members=3D of its man=3D3D agement. Nothing contained on the web=
site is intended to con=3D stitute a recom=3D3D mendation or advice address=
ed to an individual investor =3D or category of inve=3D3D stors to purchase=
, sell or hold any security, or to =3D take any action with re=3D3D spect t=
o the prospective movement of the securit=3D ies markets or to solicit t=3D=
3D he purchase or sale of any security. Any inv=3D estment decisions must b=
e made =3D3D by the reader either individually or in =3D consultation with =
his or her invest=3D3D ment professional. Minyanville write=3D rs and staff=
may trade or hold position=3D3D s in securities that are discuss=3D ed in =
articles appearing on the website. Wr=3D3D iters of articles are requir=3D =
ed to disclose whether they have a position in =3D3D any stock or fund disc=
us=3D sed in an article, but are not permitted to disclos=3D3D e the size o=
r direct=3D ion of the position. Nothing on this website is intende=3D3D d =
to solicit bus=3D iness of any kind for a writer's business or fund. Mi=
ny=3D3D anville mana=3D gement and staff as well as contributing writers wi=
ll not respo=3D3D nd to em=3D ails or other communications requesting inves=
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter