MGIC and Regional Banks: Goodbye Fannie and Freddie

by: Judy Weil

MGIC Investment Corp.’s (NYSE:MTG) Q408 conference call shows that the company is still struggling under the weight of delinquent mortgages. Especially the conforming ones of Fannie Mae (FNM) and Freddie Mac (FRE):

Q: You have 282,000 delinquent loans as we sit here today. I mean, first of all what percent of them today are eligible for some sort of modification program?

A: We said 60% are Freddie/Fannie delinquencies, 40% are other investors by the label, but because of the variables of loan-to-value and HTI’s we don’t know exactly how many are eligible.

MGIC’s press release notes that its rating downgrade will prevent it from doing business with Fannie and Freddie as before. On top of that, the company thinks the GSEs will be nationalized:

Changes in the business practices of Fannie Mae and Freddie Mac could reduce our revenues or increase our losses… The majority of our insurance written is for loans sold to Fannie Mae and Freddie Mac… The appointment of FHFA as conservator or our industry's inability, due to capital constraints, to write sufficient business to meet the needs of Fannie Mae and Freddie Mac may increase the likelihood that the business practices of Fannie Mae and Freddie Mac change in ways that may have a material adverse effect on us. In addition, these factors may increase the likelihood that the charters of Fannie Mae and Freddie Mac are changed by new federal legislation. Such changes may allow Fannie Mae and Freddie Mac to reduce or eliminate the level of private mortgage insurance coverage that they use as credit enhancement.

Nouriel Roubini recommends that investor component of Fannie and Freddie be terminated as the model isn’t viable.

Many regional banks that own Fannie and Freddie preferred are following suit and writing them off:

First Place Financial Corp. said on its FQ209 conference call: (OTC:FPFC)

The good news if there is any is that all of our exposure to many Fannie Mae or Freddie Mac preferred securities has been eliminated as we have sold all of those positions. We still do have a mutual fund with fair value exposure.

Southern First press release: (NASDAQ:SFST)

Net income for the fourth quarter 2008 was $370 thousand compared to $770 thousand for the fourth quarter of 2007… Included in 2008 was a non-cash impairment charge of $1.9 million on our Fannie Mae (OTCQB:FNMA) preferred stock… Shrinking margins, higher loan loss provisions, and the loss on our investment in Fannie Mae preferred stock resulted in performance that we believe is not typical of Southern First Bank.

Community Trust Bancorp's press release: (NASDAQ:CTBI)

Community Trust Bancorp, Inc. reports earnings of $6.5 million or $0.43 per basic share for the fourth quarter 2008 and $23.1 million or $1.54 per basic share for the year 2008. During the fourth quarter, CTBI recorded an other than temporary impairment charge of $1.1 million based upon the current market value of Freddie Mac and Fannie Mae trust preferred pass-through auction rate securities. CTBI held $14.9 million of these securities on June 30, 2008 and took an other than temporary impairment charge of $13.5 million during the third quarter of 2008.

Hudson City Bancorp's press release has no preferreds, only MBS. Not very hopeful: (NASDAQ:HCBK)

The accumulated other comprehensive income of $58.3 million at December 31, 2008 includes a $74.6 million after-tax net unrealized gain on securities available for sale ($126.1 million pre-tax). We invest primarily in mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, as well as other securities issued by U.S. government-sponsored enterprises. We do not purchase unrated or private label mortgage-backed securities or other higher risk securities such as those backed by sub-prime loans. In addition, we do not own any common or preferred stock issued by Fannie Mae or Freddie Mac. There were no debt securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the security.


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