Posted on 03/08/2008 8:06:37 AM PST by shrinkermd
Fannie, of course, occupies a curious middle ground between the public and private sector as a result of its privatization in 1968 as a Government Sponsored Enterprise, or GSE. While owned by its shareholders, Fannie is regulated by a government agency and is able to borrow money cheaply, thanks to an implicit guarantee by Uncle Sam. It uses those funds to buy and securitize home loans -- lots of them. At year end, the company owned in its portfolio or had packaged and guaranteed some $2.8 trillion of mortgages or 23% of all U.S. residential mortgage debt outstanding.
...But, if the truth be known, a considerable portion of Fannie's losses also came from speculative forays into higher-yielding but riskier mortgage products like subprime, Alt-A (a category between subprime and prime in credit quality) and dicey mortgages requiring monthly payments of interest only or less. For example, Fannie's $314 billion of Alt-A -- often called liar loans because borrowers provide little documentation -- accounted for 31.4% of the company's credit losses while making up just 11.9% of its $2.5 trillion single-family-home credit book. Fannie was clearly looking for love -- and market share -- in some of the wrong places.
Likewise, Barron's has found other areas that may bode ill for Fannie's prospects. Its balance sheet is larded with soft assets and understated liabilities that would leave the company ill-equipped to weather a serious financial crisis. And spiraling mortgage defaults and falling home prices could bring a tsunami
...Fannie, for its part, insists it's more than adequately capitalized to withstand any future stress. The company also contends that as a result of tightening its standards and making fewer risky loans, the quality of its book of business will improve mightily.
(Excerpt) Read more at online.barrons.com ...
The author also points out, conservative estimated default rates of 40% on its $133 billion subprime book, 12.5% on its $314 billion of Alt-A mortgages and 4% on its remaining $2 trillion of prime home mortgages means the total losses could be 50 billion or more.
... all of which makes it a really smart move to raise the conforming loan limit to $730K.
As we fall deeper and deeper into the socialist abyss -— and the Dims are just in a state of perpetual orgasm....
http://www.forbes.com/lists/2006/18/06f2000_The-Forbes-2000_Assets.html
Fannie has $989 billion in assets. A $50 billion loss represents just over 5% of that.
5% of assets, but close to 100% of equity. They would be bankrupt. Not only would shareholders be wiped out, Fannie would be unable to purchase any more loans until the equity were replaced. That would really gum up the real estate market.
Botto line...Too Big To Fail.
I don’t know how you arrived to these numbers. No One can explain Fannie Mae financial business. It’s a convoluted maze more confusing than the Rubik Cube. You could right a thesis on it and still not figure it out.
Leverage. Fannie, like most financial companies, has many times the amount of stock holder money invested in loans. Movement in the value of the asset base is magnified when it flows to the bottom line.
As of December 2007 it had 882.5 billion in assets and 838.5 billion in liabilities making a net worth of about 44 billion which would be more than wiped out with a 50 billion dollar loss.
Fannie feeling the pinch, you might say...
The Fed is providing some relief (to the big banks) by offering to take their FNM debt at full face value as collateral for loans through its Term Auction Facility. But what about the hundreds of billions of dollars of such "agency" debt that has been purchased in the past couple of years by the Chinese, the recyclers of Petrodollars and yield-hungry leverage players like Carlyle and a myriad of otherhedge funds? The Fed is obligated to keep the banks healthy. But my hunch is FNM will have to be recapitalized at less than 100 cts on the dollar for its debt and there could be triage for non-bank holders of such MBS.
The loss is not necessarily cash that has to be paid out.
The loss could well be a liquidation of one of it’s assets for less than it’s book value.
Imagine they hold the notes on 10 homes, each worth $100,000, for a total of a million dollars in net worth.
If those homes are now only worth $80,000, and the owners all abandon them so FM has to foreclose, that would be a 20% loss, or $200,000. But it didn’t have anything to do with how much cash they had on hand.
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