Wednesday, February 27, 2008

Government is trying to re-inflate house prices

Voltron says: just as Fannie posts massive losses, the government is allowing them to lend more money to re-inflate housing. I'm no bleeding heart, but how does this help make housing affordable?

The Wall Street Journal

February 27, 2008 11:27 a.m. EST

Ofheo Lifts Freddie, Fannie Limits

Fannie Mae Records a Steep Loss,
Shaken by Credit-Market Malaise
February 27, 2008 11:27 a.m.

WASHINGTON -- The regulator for mortgage-finance giants Fannie Mae and Freddie Mac said Wednesday it would lift a cap on the two companies' investment portfolios on March 1.

The announcement from the Office of Federal Housing Enterprise Oversight came just hours after Fannie Mae was able to successfully file its 2007 financial statements on time Wednesday morning. Freddie Mac is expected to report its full-year 2007 results Thursday.

Shares of both Fannie and Freddie surged on the news. In late morning trading, Fannie shares were up $3.14, or 12%, to $30.11, while Freddie was up $2.14, or 8.5%, to $27.35, both on the New York Stock Exchange.

The inability of both firms to file their audited financial statements in a timely fashion was one of the major reasons Ofheo had placed a cap on the companies' retained mortgage portfolios. Now that Fannie Mae and Freddie Mac are able to successfully file on time, the caps are no longer necessary, Ofheo Director James Lockhart said in a statement. (See the statement.1)

Though the portfolio caps are being lifted, Ofheo said a 30% capital surcharge required of both firms will stay in place for the time being. Mr. Lockhart's statement said Ofheo is discussing with the management of each company how to gradually decrease the capital requirement, which is in addition to statutory capital requirements both firms must also meet.

Any easing, Mr. Lockhart said, will depend on Fannie Mae and Freddie Mac's financial condition and current market conditions.

The announcement marks a change in the relationship between Ofheo and the two firms, which has been strained since both experienced accounting problems that forced them to restate years of earnings. Those accounting issues, which resulted in the ouster of the firms' management teams, led to in increased scrutiny from Ofheo.

Mr. Lockhart said Wednesday that both companies have made "substantial progress" in fixing their internal controls and accounting systems. Ofheo plans to work with the companies to review and test the new systems, and could lift the consent orders currently in place for Fannie and Freddie.

Ofheo's assessment of the firms' progress was echoed by Fannie in its earnings release Wednesday. "We have completed the 81 requirements of the consent order, and we are in ongoing discussions with [Ofheo] regarding the 30% capital-surplus requirement," Chief Financial Officer Stephen Swad said in the release.

Fannie Posts Deep Quarterly Loss

In its earnings report, Fannie Mae reported it swung to a deep fourth-quarter loss and reported a sharp rise in late payments on loans, a sign damage from the U.S. housing slump is spreading beyond subprime mortgages.

Fannie Mae, which buys mortgages and repackages them into bonds it guarantees, said in its earnings report that it doesn't see any relief coming. Serious delinquencies will continue to mount this year, the company said, as housing markets continue to deteriorate, particularly in states like Florida and California.

"We expect the housing market to continue to deteriorate and home prices to continue to decline in these states and on a national basis," Fannie said in its annual report. "Accordingly, we expect our single-family serious delinquency rate to continue to increase in 2008."

The poor results gave a boost to U.S. Treasurys, which see buying when investors worry about the quality of other debt, and hurt the value of debt issued by Fannie and Freddie.

The mortgage lending giant reported a net loss of $3.56 billion, or $3.80 a share, compared with year-earlier net income of $604 million, a turnaround driven by $3.22 billion in losses on derivatives. The company recorded negative revenue, including derivative and investment losses, of $2.25 billion. Year-earlier revenue was $1.75 billion.

The results came in well below the forecast of analysts polled by Thomson Financial, who were expecting a loss of $1.24 a share on revenue of $1.33 billion.

Credit costs continued to rise as the company posted a $2.79 billion provision for loan losses, compared with $221 million a year earlier. The company also recorded $1.13 billion in investment losses compared with a year-earlier gain of $75 million. Derivative losses ballooned from $668 million.

UBS analyst Eric Wasserstrom said Fannie Mae saw strong growth in fees for guaranteeing debt, but felt that bright spot would be overwhelmed by credit-related expenses.

Fannie said its "serious delinquency rate" as of Dec. 31 climbed to 0.98% from 0.65% a year earlier, with the serious delinquency rate in Florida nearly quadrupling to 1.59%. Nonperforming loans rose 43% to $10.1 billion.

Fannie said delinquency rates were highest for borrowers with low credit scores or high loan balances relative to the value of their homes, with fast rises in delinquencies among loans with less than full documentation, adjustable rates, and interest-only or variable payment features, many of them made in 2006 and early 2007. Loans used to buy condominiums and second mortgages also saw delinquencies rise rapidly, and Florida was a particular trouble spot, with serious delinquencies there nearly quadrupling.

Fannie Mae finally issued long-awaited results for the first three quarters of 2007 in November, and the picture it painted was of a company hammered by credit-market woes. At the time, Fannie said it was in the middle of "one of the most challenging mortgage and housing markets in recent history."

The company, chartered by Congress in 1938 to insure a steady supply of funding for home mortgages, is also under investigation by the New York Attorney General over its behavior in the run-up of the housing bubble.

Fannie said it expects the credit crunch "to continue to affect our ability to meet our housing goals and subgoals in 2008."

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