Today's earnings report from government sponsored Fannie Mae (FNM) should cause investors to question whether the very entity charged with saving the real estate market will actually need to be rescued itself. The company's first quarter net loss was $2.2 billion-or $2.57 per share-the company's third consecutive quarterly loss. Such a track record should have caused the Office of Federal Housing Enterprise Oversight (OFHEO) to balk at expanding the duties of Fannie. However, in today's environment of rewarding bad behavior, the regulating body of FNM has decided to lower capital requirements from 20%- 15% once an additional $6 billion is raised.
It doesn't seem to matter to them that Fannie already has an ownership stake in fully 20% of the U.S. mortgage market and 40% of all mortgage dollars outstanding. Neither does it perturb them that it was disclosed this week that they have $56.1 billion in level 3 assets- those which trade so infrequently that there is virtually no reliable market price for them, and valuations for which are based on management assumptions. And get this; if you combine the financial obligations of both Fannie and Freddie (FRE), you reach a staggering $5 trillion.
In fact, the Fannie is on such a shaky financial foundation that it has just again lowered its dividend from 35 cents to 25 cents a share after cutting it from 50 cents last year. And according to Bloomberg, the value of the company's assets has dropped to $12.2 billion from $35.8 billion-since December! By traditional financial accounting, then, the company currently has negative shareholder equity once all debt has been accounted for.
Additionally, in the company's own words it warns of continued "severe weakness" in the housing market, predicting a decline of between 7-8% in home prices and warning still of "credit losses larger than 2008" for next year!
Against this appalling backdrop, officials in Washington, D.C. are somehow relying on both Fannie and Freddie to bail out the real estate market. They have even given the companies expanded authority and purchasing power in hopes the company can buy mortgages from banks and free up capital to make yet more loans.
Fannie sells some of the mortgages it holds and guarantees them should the borrower default. Although the director of OFHEO James B. Lockhart expressed confidence the company's longevity, others, like Senators Richard Shelby from Alabama and Christopher Dodd from Connecticut, rightfully have their concerns. Showing at least some grasp of the underlying fundamentals-a rare feat in the economically illiterate world of the Beltway-both have tried to rein in the expansion of these government sponsored enterprises.
Should that come as a great surprise given the company's checkered accounting history? Amazingly, however, they face stiff opposition from those who imagine Fannie and Freddie can somehow clean up the subprime mess.
In the ongoing credit crunch shell game, it appears that all they're doing is shifting the burden from banks to these GSEs in order to buy some time for the housing market to heal. However, if the housing market does not make a quick price recovery-and by all indications that appears highly unlikely-the problems currently on the books of FNM and FRE may be transferred next to the balance sheets of the American taxpayer.
Given Fannie Mae's troubles, by hoping it can somehow rescue the housing market, aren't we really just asking they guy who can't swim to save the one who's drowning?
www.deltaga.com
