Sunday, April 26, 2009

Fannie Mae Creates Housing Mirage

April 24 (Bloomberg) -- Give money away. That was a solution to the housing crisis mortgage giant Fannie Mae hit on last year.

Faced with growing numbers of homeowners unable to make mortgage payments, Fannie decided to fund loans to borrowers that were instant losers.

The point was to buy time. Even though those loans resulted in a $453 million loss, they helped keep troubled homeowners from defaulting. That meant Fannie for now didn’t have to make good on loan guarantees that may have cost it as much as $2.4 billion.

The big game of kick the can strikes at a deep-seated fear among many investors -- that banks and others faced with mounting housing losses are finding all manner of dubious ways to push a day of reckoning into the future.

If that’s the case, any improvement in the housing outlook might be a mirage obscuring even greater pressures building in the financial system. That would eventually counter better-than- expected first-quarter results from many banks.

Investor angst was made worse by the knowledge that the government is leaning hard on banks to modify troubled loans any way they can. Prevent foreclosures and worry about the consequences later is the mantra of the day.

In a perverse way, there is some logic to such maneuvers. Today’s troubled borrower may be in better shape if given time to wait for fractured markets to heal. Or, if today’s losses can’t be cured, the company facing them may be better able to deal with them at a less-stressed future date.

...Based on market prices, Fannie said the loans had a value of just $8 million. That’s right, the loans, which are in many cases just months old, were worth 1.7 cents on the dollar.

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