Comments on: Fannie and Freddie: Burnt Offerings http://www.thedisciplinedinvestor.com/blog/2008/02/28/fannie-and-freddie-burnt-offerings/ Investment Disciplines and Timely Advice. Fri, 10 Feb 2012 21:15:03 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Federal Reserve Actions: Goose Eggs http://www.thedisciplinedinvestor.com/blog/2008/02/28/fannie-and-freddie-burnt-offerings/comment-page-1/#comment-2090 Federal Reserve Actions: Goose Eggs Thu, 13 Mar 2008 05:51:31 +0000 http://www.thedisciplinedinvestor.com/blog/2008/02/28/fannie-and-freddie-burnt-offerings/#comment-2090 [...] (See: FNM/FRE Burnt Offerings) [...] [...] (See: FNM/FRE Burnt Offerings) [...]

]]> By: John M http://www.thedisciplinedinvestor.com/blog/2008/02/28/fannie-and-freddie-burnt-offerings/comment-page-1/#comment-1951 John M Mon, 03 Mar 2008 00:39:24 +0000 http://www.thedisciplinedinvestor.com/blog/2008/02/28/fannie-and-freddie-burnt-offerings/#comment-1951 First for the trivia: "One of the problems that helped to enhance the mess that we find ourselves in was the lack of a belief that old-fashioned loan and risk management procedures were of no consequence." -- my head hurts, but I think this makes more sense without "lack of" My friend Debi referred me to this article as reposted at Forbes. I've been warning about some similar things for a while, and would like to share a couple of relevant finds. This quote from a long and important pre-9/11 article points out the all-important role played by risk modeling in this story. http://www.bizjournals.com/washington/stories/2001/04/16/story1.html?page=5 -- begin quote -- Fannie Mae's Howard, in his recent [early 2001] testimony, said if housing prices suddenly were to decline by 5 percent, Fannie Mae would suffer a gross credit loss of $1.065 billion. However, he added that credit enhancements, or hedges, would absorb $770 million of this loss, resulting in a net loss to the company of only $295 million. While that sounds good, it is certainly possible that such a huge, unexpected drop in equity values would result in additional damage to the U.S. financial system. Under such conditions, Fannie's risk-sharing partners [***NOTE: counterparty risk***] might not be in a position to make good on their insurance contracts. "Most models aren't structured for those types of extremes," says Charles Peabody, a bank analyst with Mitchell Securities in New York. "You can't hedge discontinuous markets." -- end quote -- I brought up this story in a 31 July 2006 post that points to a valuable seminar where a bond rater gets down and dirty on that famous AAA rating on Fannie's agencies. Enjoy. http://housingdoom.com/2006/07/31/gse-risks/ One thing that has me really worried is the possibility that Fannie's economists are tweaking their forecasts so as not to show the enterprise getting into too much trouble. David Bernson, in late '06, displayed forecasts asserting a screaming turnaround in mid-07. I captured the amazing performance in this post. http://housingdoom.com/2006/11/09/fannie-re-turnaround-07/ Bernson just left Fannie, that might be a *real* forecast. First for the trivia: “One of the problems that helped to enhance the mess that we find ourselves in was the lack of a belief that old-fashioned loan and risk management procedures were of no consequence.” — my head hurts, but I think this makes more sense without “lack of”

My friend Debi referred me to this article as reposted at Forbes. I’ve been warning about some similar things for a while, and would like to share a couple of relevant finds.

This quote from a long and important pre-9/11 article points out the all-important role played by risk modeling in this story.
http://www.bizjournals.com/washington/stories/2001/04/16/story1.html?page=5

– begin quote –
Fannie Mae’s Howard, in his recent [early 2001] testimony, said if housing prices suddenly were to decline by 5 percent, Fannie Mae would suffer a gross credit loss of $1.065 billion. However, he added that credit enhancements, or hedges, would absorb $770 million of this loss, resulting in a net loss to the company of only $295 million.

While that sounds good, it is certainly possible that such a huge, unexpected drop in equity values would result in additional damage to the U.S. financial system. Under such conditions, Fannie’s risk-sharing partners [***NOTE: counterparty risk***] might not be in a position to make good on their insurance contracts.

“Most models aren’t structured for those types of extremes,” says Charles Peabody, a bank analyst with Mitchell Securities in New York. “You can’t hedge discontinuous markets.”
– end quote –

I brought up this story in a 31 July 2006 post that points to a valuable seminar where a bond rater gets down and dirty on that famous AAA rating on Fannie’s agencies. Enjoy.
http://housingdoom.com/2006/07/31/gse-risks/

One thing that has me really worried is the possibility that Fannie’s economists are tweaking their forecasts so as not to show the enterprise getting into too much trouble. David Bernson, in late ’06, displayed forecasts asserting a screaming turnaround in mid-07. I captured the amazing performance in this post.
http://housingdoom.com/2006/11/09/fannie-re-turnaround-07/

Bernson just left Fannie, that might be a *real* forecast.

]]> By: fredw http://www.thedisciplinedinvestor.com/blog/2008/02/28/fannie-and-freddie-burnt-offerings/comment-page-1/#comment-1932 fredw Sat, 01 Mar 2008 13:59:19 +0000 http://www.thedisciplinedinvestor.com/blog/2008/02/28/fannie-and-freddie-burnt-offerings/#comment-1932 FNM and FRE are the latest desperate bailout tool. FHLBs have been used to prop up the likes of CFC since Q3-07. The TAF was created to allow depository banks , who saw their reserves evaporate in December of 2007 , borrow while remaining in the shadows ; March's TAF will once again be 60 billion , indicating the level of liquidity the Fed must make available to enable our fractured banks to function... the most recent H-3 show non borrowed reserves are approximately negative 17,000 million , modestly improved from the prior period of approximately negative 18,000 for non borrowed reserves. But back To FNM and FRE , their Q4 numbers certainly don't provide confidence they are are managing their present risks appropriately and Q1 for 08 should be another doozy. But what truly makes your skin crawl is FNM's announcement of their new Home Saver Initiative program , which apparently commenced during Jan of 08... details for this program can be found on pg. 79 of their 10 k released last week. In essence , qualified borrowers can get an unsecured loan to pay their delinquent mortgage balances from FNM. So , combining removing caps as to the loan amount for FNM / commencing the removal of the requirement that FNM maintain capital in excess of 30 percent of the minimum statutory requirement / and the Home Saver Initiative program , assures that FNM will be rendered formally insolvent and bailed out by the taxpayers within 2- 3 years . FRE is in similar dire straits and using their prior accounting protocols would have lost 3.7 billion , not the 2. 5 billion reported. They also will be rendered formally insolvent and bailed out by the taxpayers. One can only conclude that the plan by the powers that be is to have FNM and FRE suck up as much of the toxic loans as possible before imploding .... then the taxpayers pay for the rescue operation because these two entities are "too big to fail." FNM and FRE are the latest desperate bailout tool. FHLBs have been used to prop up the likes of CFC since Q3-07. The TAF was created to allow depository banks , who saw their reserves evaporate in December of 2007 , borrow while remaining in the shadows ; March’s TAF will once again be 60 billion , indicating the level of liquidity the Fed must make available to enable our fractured banks to function… the most recent H-3 show non borrowed reserves are approximately negative 17,000 million , modestly improved from the prior period of approximately negative 18,000 for non borrowed reserves. But back To FNM and FRE , their Q4 numbers certainly don’t provide confidence they are are managing their present risks appropriately and Q1 for 08 should be another doozy. But what truly makes your skin crawl is FNM’s announcement of their new Home Saver Initiative program , which apparently commenced during Jan of 08… details for this program can be found on pg. 79 of their 10 k released last week. In essence , qualified borrowers can get an unsecured loan to pay their delinquent mortgage balances from FNM. So , combining removing caps as to the loan amount for FNM / commencing the removal of the requirement that FNM maintain capital in excess of 30 percent of the minimum statutory requirement / and the Home Saver Initiative program , assures that FNM will be rendered formally insolvent and bailed out by the taxpayers within 2- 3 years . FRE is in similar dire straits and using their prior accounting protocols would have lost 3.7 billion , not the 2. 5 billion reported. They also will be rendered formally insolvent and bailed out by the taxpayers. One can only conclude that the plan by the powers that be is to have FNM and FRE suck up as much of the toxic loans as possible before imploding …. then the taxpayers pay for the rescue operation because these two entities are “too big to fail.”

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