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Fannie and Freddie; Oh Yea. July 11, 2008

Posted by shaferfinancial in Uncategorized.
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The internet has gone bonkers over the latest reporting that the administration has developed a plan in case Fannie Mae and Fredie Mac have liquidity problems.  Meanwhile regulators say there is no such danger at the two major mortgage buyers.  So what is it, the begginning of a depression, like the internet philosophers think, or contingency planning?

My best guess is Freddie and Fanny will survive intact and their stock prices will go up dramatically but not immediately.  After all comforming loans, the one’s that F & F buy, still has a foreclosure rate of less than 1%.  So why all the teeth knashing?  Because of a change in accounting rules and the drop in real estate values.  F & F needs to have a small amount of reserves to cover the foreclosure losses.  Since there is uncertainty how much those losses might go to, the market has reacted with a vengence dropping the stock prices down to almost nothing. 

Remember any loans made and bought by these two that had a loan to value of over 80% had to have mortgage insurance.  So F & F has a 20% cushion.  Oh, you say real estate values have dropped over 20%.  Well yes, from peak pricing to now, but only a small percentage of folks bought at the peak.  Bottom line for conforming loans 98% still have positive asset value compared to the loan value. 

So let’s put it all together; 1% of conforming loans are in foreclosure, 98% of loans have a positive loan to asset value combined with the insurance,  real estate values are starting to descend less abrubtly (not enough months data to call this a trend), regulators insist that F & F have proper capitalization.

Seems to me to be a safe bet, that this is a stock market issue, not an issue of these companies going out of business.  But the future will tell us!

EDIT:  Apparently I missed the fact F & F bought some sub-prime and alt a bonds.  15% of their portfolio is in these two areas.  However, they report that these are the cream of the crop for sub-prime and alt-a and only .62% of their portfolio is in serious delinquency (90 days past due).  Bottom line, original thoughts still hold, even though losses might mount for the sub-prime area.  Mea Culpa for the wrong info.

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