Fannie Mae’s Portfolio The ‘Elephant In The Corner’
Some housing bubble news from Washington and Wall Street. “‘Congress and the American people were misled by the former leadership’ of Fannie Mae and Freddie Mac, Rep. Michael Oxley, chairman of the House Financial Services Committee, said at a hearing. Oxley said the report underscored the need for a tough new regulator of Fannie Mae and Freddie Mac, according to accounts.”
“Fannie Mae disclosed Monday that it had found more errors in its accounting review. The House in October passed legislation written by Oxley that would bring stricter federal oversight of the two government-sponsored companies, reports said. But the White House opposes that bill because it would not force the two mortgage giants to reduce their mortgage investment holdings, reports said.”
“‘We are focused on doing what is right for the taxpayer,’ Emil Henry, assistant Treasury secretary. ‘While many of the issues in the report are in the process of repair, I think it’s clear that the elephant in the corner, the legacy of that era, is the extensive retained portfolio which..in our judgment is something that presents systemic risks.’”
“The American Bankers Association’s Economic Advisory Committee said it expects the Fed to raise overnight interest rates by a quarter percentage point to 4.75 percent at its meeting on March 27-28. It said another increase at the next policy meeting in May was likely.”
“One economic risk the group cited was the slowdown in the U.S. housing market. While the group said it expects housing to moderate, not take a nose dive, many uncertainties remain, including the impact of a push by federal bank regulators to make lenders tighten up underwriting standards on risky, alternative mortgage products. (Economist) Robert McGee, echoing other economists, said house prices are unlikely to decline nationwide, but some areas that experienced more significant gains could see prices drop.”
“Countrywide Financial Corporation is filing this Current Report on Form 8-K to provide a summary of pay-option loans held for investment at December 31, 2005.”
Total pay-option loan portfolio
2004..$4,701,795,000
2005..$26,122,952,000
Accumulated negative amortization (from original loan balance)
2004..$29,000
2005..$74,815,000
The CFC insiders are still at it.
And Reuters reports on a planned IPO. “Clayton Holdings Inc., a provider of services to the mortgage-backed securities market, plans an IPO worth about $100 million. The company provides automated back-office services for mortgage processing. However, analysts noted widespread concerns that the U.S. housing market is cooling could spook investors.”
“‘When you’re in an industry that’s out of favor, a lot of times it doesn’t matter what you do, just the fact that you’re in that sector is a concern,’ Tom Taulli said. ‘This is an IPO they should have taken out last year when the market was hot.’”
Try to stay out of the way when this elephant takes a dump…
‘“Countrywide Financial Corporation is filing this Current Report on Form 8-K to provide a summary of pay-option loans held for investment at December 31, 2005.”
Total pay-option loan portfolio
2004..$4,701,795,000
2005..$26,122,952,000
Accumulated negative amortization (from original loan balance)
2004..$29,000
2005..$74,815,000′
I assume there is a typo in there: $29K s/b $29,000K???
Even so, $4m to $26m in one year is rather astonishing…
I checked it again. They just weren’t neg-am much in 2004. CFC is a big outfit. Those are billions, not millions.
Ohmi…. They accumulated 74.8 BILLION in negative amortization in one year? So people missed their targeted interest only payments by about 75b…. nope, nothing to see here… move right along….
No, sorry for the confusion. The neg-am number is $74 million. The pay-option number is $26 billion.
Ben: Sorry for the additional confusion, but the 8-K says:
“Pay-option loans with accumulated negative amortization: $13.97 billion”
Holy smokes, your right. I was just working from the #’s not the text. Thanks for pointing that out!
Okay, I’m new at this and I want to be sure I’m understanding this. Is what you are saying “CFC pay-option loans accumulated $13.97 B in neg. amortization in 2005″ or is it “the total value of CFC’s pay-option loans with neg. amortization (thus orig. loan amount PLUS the add’l neg. am.) in 2005 was $13.97 B?
Thanks for a clarification. Either way, scary, but of course the former is much worse that the latter.
-L
CFC is reporting its “Pay Option” portfolio is $26 billion. Of that $26 billion, $13 billion worth of loan principal has accumlated negative amortization. That means borrowers have “opted” to pay less than the interest due on some portion of this $13 billion. The “Accumulated negative amortization” (from original loan balance) equals $74.8 million. I am not completely clear on the final number, but I think it means that $74.8 million has been “opted” on to the back end of the $13 billion in loan principal subject to “neg am.” Sorry to belabor this, but I am short CFC and need to know I’m not nuts.
Sorry if I’ve posted this twice -
The numbers say CFC’s portfolio of Pay Option loans is $26 billion. Of that, $13 billion worth of loan principal has incurred negative amortization of $74 million. In English, it means borrowers have “opted” not to pay the full interest due on half of the loan portfolio. $74 million has been slapped onto the back end of the portfolio as additional principle on which interest must be paid. In bank accounting, that means CFC’s “assets” increase everytime borrowers skip the monthly interest on the mortgage. Only in America.
Thanks DC_too. That is extremely helpful.
It also reinforces the point that I have absolutely NO idea what some people are thinking–adding to their principle like that. Sad. What is that old line: no one ever went broke underestimating the intelligence of the American public (Menken)…
Wow!!! FNM is supposedly “only” $11b in the red. Is it possible that CFC’s collapse might turn out worse than FNM’s? And are they systemically related?
I dunno. I am not even sure CFC will collapse, but the company is certainly exposed, and their profit margins are getting squeezed by the flat/inverted yield curve. CFC is not in Fannie’s league either. If CFC goes under, it is front page of the business section, nothing more. Fannie drowns, I become a gold bug in a New York minute.
DC. too — How many accoutants does it take to account for lending $3 trillion dollars on residential housing>>>>>>???? If you have 1200 CPA’s working full time for 3 years..don’t you think by NOW they would agree on the stinking numbers? Logic dictates that the reason for NOT filing is truth is worse than being out of compliance for 2yrs..Any other company would be trading below $5 dollars and be OFF the NYSE!!…Besides these 2005-6 investors “can’t handle the truth”!!! They want their cool-aide! Even when they don’t get it, they create some!
Fannie has had 80% or more of its entire Profolio refied or pay off in the last 4+ yrs. They are holding (so has CFC) they greatest Real Estate PUT since the persian Muslim hoardes crashed Constantinople..now called “Istanbul”. The Avg. portfolio must be near 6% coupon…(current market> than 6.25%… They have purchased credit swaps, and commmodity derivatives to offset risk (ie OIL/ Gold) and are most likely offside these in a huge way! In fact the $70 Katrian oil top was forced by their covering (I heard)..then our /US Bush/ FED team intervened to stem the tide. Six months later oil stands @ $62….and all is well..
They tell the sheeple!
Now here is the gas…The US government (corporation) has posted a $2-3 billion dollar credit support for Fannie…now that their assets and exposure is in the $TRILLIONs…what % of losses are truly gaurenteed /covered?
Inspired - I don’t follow FNM for the same reason I can’t respond to your post - way to complicated for a simpleton like me to get my hands around it and address the issues. Warren Buffet stays away from things he claims he doesn’t understand - I live by the same rule.
DC-too..the questions were just food for thought.
Fannie produces or buys over 50% of the mortgage market..
The regulators have a problem…and the people have a FALSE belief that Fannie is a 100% protetectd Government company….
Yes, it may be toooooo big to fail..but it may also be tooo big to protect from failing!
GetStucco…of course!
I’m not sure what the big deal is. $74 million on a $26 Billion portfolio is 0.3%. It’s a drop in the bucket. It tells me people with these accounts aren’t letting their mortgage balances increase, even if they have the option.
Will the previous leadership be facing criminal prosecution? They should - just like Lay (Enron), Ebbers (WorldCom), and the other executives at other companies. Too many to name, and don’t remember all of them. I hope that they show their faces on trial, and on the way to jail (like Lay and Ebbers).
No,
In fact, they have been given Million dollar retirement portfolios. I don’t remember the numbers, but something like 110k per month.
And also, that they have to forfeit any and all ill-gotten gains.
There is actually a bill in congress that would force the executives to give back any bonus money that was the result of accounting manipulation. You would think it’d be automatic, huh?
Remember Charles Keatings from the S&L scandle? He shipped millions out of the country before the court could lock his accounts, then he applied for a public defender lawyer because he was “broke”.
I remember a fellow named Neil Bush who was involved in an S&L scandal (Silverado). I am sure the identical spelling of the last name to the CIC’s is merely coincidental…
I beleive a Mr. McCain was involved as well.
The one Republican among “The Keating Five”. I believe McCain’s culpability stemmed from being in the room for one meeting.
I guess Neil Bush is not a Republican? Or was he not one of the Keating Five?
From Wikipedia:
The ethics committee’s investigation focused on five senators: Alan MacG. Cranston (D-Calif.); Dennis W. DeConcini (D-Ariz.); John H. Glenn Jr. (D-Ohio); John S. McCain III (R-Ariz.); and Donald W. Riegle Jr. (D-Mich), who became known as the Keating Five.
The ethics committee’s special counsel concluded that of the five, Glenn (a former astronaut) and McCain (a former Prisoner Of War) were not substantially involved in the influence-peddling scheme. Indeed, it was believed at the time that the Democratic party, which at the time controlled the Senate, wanted McCain — the only Republican in the group — to remain a target of the investigation in order to avoid the impression that the scandal was only a Democratic problem. As Glenn’s involvement with Keating was equivalent to McCain’s, the only reason that Glenn was made a subject of the investigation was to keep McCain in the suspected group. After months of testimony revealed that all five senators acted improperly to differing degrees, the senators continually said they were following the status quo of campaign funding practices. In August 1991, the committee concluded that Cranston, DeConcini, and Riegle’s conduct constituted substantial interference with the FHLBB’s enforcement efforts and that they had done so at the behest of Charles Keating. The committee recommended censure for Cranston and criticized the other four for “questionable conduct.”
I guess Neil Bush had nothing to do with.
Not to forgot Bubba and Hillary with the McDougals and a little Real Estate venture called Whitewater. Funny how people died that were involved with that, isn’t it? At least Bill & Hillary cover their trails- Jim Mcdougal, Vince Foster, Ron Brown, etc.
What the hell…. throw up a few bureaucrats against 25,000 american casualties in Iraq. I mean…. what the hell…. Right?
McCain was his buddy and took lots of slush from the aforementioned Mr. Keating. McCain is a bigger crook than Ted Kennedy.
weren’t they just crying there wasn’t enough land?
New York Times
March 16, 2006
Picket Fence to Skyline View: Big Builders Come to Town
By MOTOKO RICH
FOR decades, home builders have fed the seemingly endless appetite for the suburban four-bedroom house with the backyard and the picket fence. But increasingly, they are recasting the American dream as a two-bedroom condominium with a gym in the basement and a skyline view from the living room.
Some of the biggest names in suburban home building are getting into urban condominium development or greatly expanding their presence there. In the New York metropolitan area, urban condos now represent nearly a third of sales for K. Hovnanian Homes, a national suburban home builder based in Edison, N.J., up from 5 percent five years ago. KB Home, a national developer that has built more than 146,000 homes in suburban subdivisions in the last five years, launched a new urban division last year, which is now building its first project, 200 condo units on top of a hotel in downtown Los Angeles.
At WCI Communities, a Florida-based builder that sold 1,900 single-family homes last year, high-rise development has risen to 40 percent of the company’s sales last year from 27 percent of sales in 2000. And in the Bay Area of California, fully half of the sales at Pulte Homes, the nation’s second-largest home builder, come from urban condos and town houses, up from none five years ago.
The business decision represented by these moves may reflect a major social shift, in which, after two decades of rezoning, promoting and hoping on the part of city governments and urban planners, cities are finally becoming attractive again for large numbers of middle class residents. “The suburbs are overbuilt, crowded and continuing to spread, and the commutes are getting longer,” said John K. McIlwain, a senior resident fellow for housing at the Urban Land Institute, a nonprofit research group. Meanwhile, “cities are actually much cleaner, healthier and better run than they were 20 years ago.”
Meanwhile, “cities are actually much cleaner, healthier and better run than they were 20 years ago.
Just like New Orleans 4 months ago-civilization to anarchy in 72 hours.
Don’t forget to stock your 2 AK-47’s in the broom closet to shoot yer way out, when all the illegals and low-lives riot and burn the place down.
Cal Poly College Republicans are having a tri tip barbeque and trap shoot on April9 at the range off of Hwy 1. Bring your double or auto with 7-8 shot. We’ll put up some pickures of Fox for your practice.
Be sure to bring your face guard
Wow, KB Homes building high-rise condos. That’s a pretty scary thought. I wouldn’t want to live anywhere it could fall on.
Sorry NO, condo’s top first and go up last!
Condo or Russian comunie style living is NOT as social change.. but a reflection of the BUBBLE TOP in the making!!!!
the interest rate is going up. the effective cost of houses is still rising, so actual prices must accommodate. so simple.
the fingers will start pointing when the elephant collapses over the dinner table. that’s a lot of money for the government to bail out. that will surely put the debt over 10 trillions for sure.
Gee, what a surprise. Another corrupt government agency. Bet you a $1 some poor lower level putz gets thrown in the grease and Franklin skates.
Thats the neo-con method. I’m sure it will happen.
Once again, the facts never stand in the way of your ignorance
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/1996/04/13/MN30680.DTL&type=printable
Yeah,,, the man at the helm is a neo- con. riiightt.
damn democrats. wish we could vote them out of office, put republicans in charge.
Amen… damn dems!!
Never expect a republiCretin to admit their colossal economic failures. It’s easier to deflect by blaming those who created good economic fundamentals.
LOL! The Dems were already voted out of office lol.. Now what do we have?
Borrow and spend republiCretins of course.
I think the neo-con statement was made as a reference towards the current Bush Administration.
Nine times out of ten, the person using the term “neo-con” has no clue what the word actually means.
The flailing desperation of blind loyalists in the face of the colossal failures of their leaders is truly fun to witness.
You lovable wacky hippy boomers. Your summer of love fades into a hazy twilight of incoherent rage.
Cheer up Connie, the Democrats have done a wizbang job in Vermont.
From the NYT
“Vermont Losing Prized Resource As Young Depart”
March 4, 2006, Saturday
Brought to you by your friends from the Garden State.
Have a matzo ball Rabbi.
What’s a “matzo ball” brother?
Is that like a bong hit?
democrats are just pot-smoking hippy commies baby-and-jesus-killers. they never do anything right. i mean, come on, the democrats have controlled the federal government for 6 of the last 38 years. they’re the reason we’re in the mess we’re in today.
Damn straight Chillidog! [lmao]
Chilldog
Lingus has posted here about his smoking “grass” back in ye olden days.
Comment by The Lingus
2006-03-02 08:27:10
“People are going to keep coming here from the Northeast, from Europe and from South America,” Dweck said. “When the dust settles, there’ll still be 10 percent to 12 percent annual appreciation.”
I gave up grass years ago but I’d be tempted to try the magic weed he’s smoking.”
I think i was being accused of being a Jesus killer. AKA Rabbi
PS: As for the hippy ref, I’ll bet lingus knows who The Fabulous Furry Freak Brothers were.
good night and may all wood chucks sleep well tonight.
Fat Freddy’s Cat?
Zippy the clown?
The NJ slimer is obsessed. [lmao]
Maybe Fannie and Freddie are planning on having the PMI family for dinner?
What is the size of the Fannie Mae mortgage portfolio again?
Option ARMs are wonderful not just for borrowers who can’t afford their houses, but also for investors who look only superficially at a bank’s earnings report. Banks book the entire amount that a customer owes as income each month, not the minimum payment that’s actually paid. Presto we have noncash earnings to drive the stock price up.
If that doesn’t get you then maybe this will: The unpaid interest gets tacked on to the bank’s outstanding loan total, allowing the bank to display loan growth, which investors love. “You get earnings and growth.
Definitely a time to watch not only housing but mortgage companies and HB’ stocks. However, if you are of the opinion that more monies can be wrung for the housing market, by all means put you money where your faith is an buy some REITS.
I did by a REIT. Specializing in storage units. Figured when this thing crashes, the one thing displaced homeowners will need is storage to stash all that crap their bought with their HELOC’s. Smart play or not, but I’ll find out in a year or so.
My crystal ball says that now is not the time to be long storage unit REITs. Too much of what got stored was manufactured crap from China that spilled over from the garage. Now that the housing ATM is sputtering, the disposal of cheap manufactured junk will happen faster than the accumulation thereof, and the demand for offsite storage will wane…
Yeah and one day, they might pay their dividends “inkind” assets confisicated from the bankrupt borrowers…that had hoped they could hide their assets at a “storage place.”
that’s very funny! I’ll bet it works out for ya!
That is exactly the same practice that got Enron in trouble…mark to market accounting. This housing market is going to crash and burn the same way.
I like the idea of storage unit reits. Could you share which ones we should research and see if we like?
Simmssays…americaninventorspot.com
Shurgard. Also listed as SHU on the Dow.
turnoutthelights
Those storage units may well turn into the new condo’s of tommorrow.
I once set up an office in a storage unit.
That’s my new idea. Storage condos. They will go on the market for $200 grand, but you can only live in them 2 months out of the year. The other 10 months we get to control who we rent it out to for storage. We will give you 10% of the proceeds.
Think of the appreciation, it’s a no brainer investment.
My motto could even be “This is a no brainer investment, if you don’t have a brain or know how to use one, then this is the investment for you!”
We will call them storage /housing condos. Good for storing your teenage children. Will be a lot quieter around the house and I can watch tv in peace.
“…extensive retained portfolio which..in our judgment is something that presents systemic risks.’”
********************************************************************************************************
Wha’s the Prollum? Surely you don’t think they made I/O loans? Or Neg Am loans? And any ARMS in the portfolio will surely reset without any defaults? They wouldn’t make those NO DOC “stated income” loans, surely. And all of them were made with substantial down payments because this is a GSE and they are going to be extremely prudent.
So wha’s the prollum?
I’m pretty sure that Fannie and Freddie don’t buy neg ams, and IOs and ARMs are less than 5% of their holdings. They certainly do buy low downpayment stuff, and if it’s less than 20% down they have private mortgage insurance. For Fannie or Freddie to fail because of credit risk, you’d need to see at least one big or two small PMIs go down in flames first (mind you I’m not saying that can’t happen). Why doesn’t anyone discuss the state of the PMIs in terms of balance sheet or investing?
It’s amazing how the coming Fannie Mae scandal is being ignored. As a GSE, in the end, WE are going to have to pick up the pieces, and because of its size, there will be many pieces to pick up. No one cares.
Countrywide’s numbers are just amazing. How is that not a problem?
It’s really incredible that there is a bubble debate at all with these kind of numbers, and scandals, ala Enron going on..
BubbleTrack.blogspot.com
IMHO the numbers from Countrywide are not nightmarish. At an average mortgage of $500,000 that is only 150,000 SFR with an average appraised value of $640,000. There will certainly be nightmare scenarios for individuals, but with 3 million houses for sale in the US if 150,000 more were added to the mix at reduced prices, the bank would make out like thieves. Fannie Mae scares me - not Countrywide.
I agree - Fannie is scary, Countrywide is just a good, garden variety short play. What the 8-K loan to value info does not reflect is piggyback loans. CFC writes the first trust at 80% LTV and sends the borrower up the street to the shylocks for the 2nd trust piggyback. It’s bullsh*t. Borrowers have little or no skin in the game and they will walk away. Do not buy this stock.
Exactly! And don’t forget these homes are often priced 5x to 12x the median income at the outset, so it’s risky paper any way you cut it.
hoz
A price drop of 29% would put those 150,000 mortgages underwater. There is an impending wave of mortgage resets in 2006 and 2007: $2 trillion dollars worth of mortgages, to be exact, or about 1/4 of all mortgages.
Many borrowers in this category still have plenty of equity. For instance, someone who took out an ARM with a 3-year reset is sitting on a pile—although these folks will receive quite a payment shock. Recipients of 2-year resets have less equity, but still a little something. Those who got a 1-year ARM in 2005 will get a substantially higher payment with no equity to show for it. As time progresses, this mix will get worse… as will the number of resets. If interest rates don’t cooperate things will be ugly in 2007… but either way, this is yet another headwind facing the housing market.
OT….From today’s The Daily Reckoning:
” *** Former Goldman Sachs investment banker John Talbott says in his new
book, “Sell Now! The End of the Housing Bubble,” that many Americans could
be facing a 50% decline in housing prices. He estimates that America’s top
40 cities will see an average 47.2% decline: Boston is 49.4%, Miami 44.8%,
New York 44.6%, and Chicago 27.3%.
In the space of five years, Alan Greenapan’s cheap-money policies have
added $30 trillion to housing prices worldwide, an unsustainable 75%
increase, he says.
And this from Gary Shilling writing in Forbes:
“The current housing weakness will develop into a full-scale rout.It’s
clearly a bubble and is nationwide…The house price collapse will induce
a painful recession that will send U.S. stocks into a tailspin…China
will suffer a hard landing…and weakness in the U.S. and China will
spread worldwide.”
I wonder if the CEO of WLS has read the book?
Wow. ziprealty shows Phoenix area inventory at 38,600 today. It was 37,000 just about a week ago. 1,600 added in less than a week. San Diego County still adding 50-100 daily, 17,900 today.
I predict 40,000 by June in Phoenix. Queen Creek is going up about 20 a day. It appears to be flipper central.
What’s the weather like, or has been like, in Phoenix? Wonderin’ if that spring season comes earlier there, giving us all a future look at the reat of the country.
Forget spring, we came here at the beginning of February and as far as I could tell, it was already summer.
If this rate keeps up Phoenix will easily reach 40,000 by April. 1600 last week, 1400 by the end of the month? Somebody call Guinness.
did someone say “guinness”? It’s time to go get one! Happy St. Paddy’s Day!
May the road rise to meet you.
May the wind be always at your back.
May the sun shine warm upon your face.
May the rains fall soft upon your fields.
And until we meet again,
May God hold you in the hollow of His hand.
I think the bankers are off a bit with their prediction.
We’re just beginning to see 40yr, and soon, 50yr loans.
Just like Japan back in the 80’s before it all fell apart.
100yr loans are on the way.
http://www.calhfa.ca.gov/
If California state government is getting into the 40yr loan game- we aren’t done yet.
Since it’s pretty much been proven that some of the folks in the Federal Reserve come here to see which way the wind is blowing…
…I’ll address my thought to YOU.
Dear Federal Reserve…
Please keep raising the interest rate all the way THROUGH September.
Then, you can sit back, and watch.
We need to make it clear to Real Estate people that the party is over.
If you stop raising rates just before, or during the summer…
…this non sense will continue.
Just my two cents, Federal Reserve people.