Fannie Mae Conference Call Stresses the Good and the Bad

The bad news first: Fannie Mae (FNM) has taken a large write down, cut its dividend and is raising capital (shareholder dilution) (full conference call transcript). In addition to falling home prices, rising fees has caused an unrealized loss in value of the existing fee business. Defaults are up, especially in the Florida and California Alt-A business.

On the positive side: Guarantee fees are continuing to rise, portfolio spreads are widening, and all businesses are covering their cost of funds. Fannie’s capital surplus requirement has been lowered.

Fannie had made a point of placating politicians by: Raising $6B in new capital, refinancing their own mortgages that are up to 20% underwater, creating a $10B first time buyer program, aggressively pricing jumbo conforming, and creating a rent-to-own program for REOs. The borrowers must have good credit on their existing loans to refinance. Initially, the mini-jumbos will be priced equal to standard conforming loans. Fannie will eat the market price difference.

Fannie is following statements by Ambac (ABK) and MBIA (MBI). Fannie audits every defaulted loan for representations and warrantees. Fraudulent loans must be repurchased by the servicers. Again, Florida and California are at the heart of the troubles. Florida is a recourse state, and Fannie will aggressively pursue borrowers for deficiencies. California does not provide recourse for quick foreclosures, but lenders have recourse in the longer drawn out bankruptcy procedures. Fannie did not state its California policy in today’s conference call.

Disclosure: Author is long ABK, FNM and MBI.

Comments

[drposhmoney]

In really *simple* terms (ignoring the new ideas and rhetoric), at the top end of their (new) range of defaults (0.17%), that's about a 15B loss on their 44B in total equity, then with a 6B dilution, that gives a book value of about $25. Given that the housing inventory tide is still going out and therefore the risk of .17% defaults may ultimately be exceeded, my guess is that we will ultimately see downside south of $25, maybe as low as $15.

[gabeborenstein]

Fannie Mae's problems are reflective of the broader economic issues.The most important objective must be stabilization of the economy .That may require more aggressive easing from the FED and some additional ehnamcement of the fiscal stimulus.In 2006 some 20% of the homes were financed by the subrime funding.This is the sector responsible for the problems on the "Street" and the problems for the various financial institutions including the FNMA and the bond insurers.Let's not focus on the past but objectively evaluate the future.Finally ,most of the key issues are out in the open and are being addressed.The financial sector has been decimated in the market place(stock prices),without allowing for the various measures directed at the rectifications of the issues.The FED had provided a record liquidity and continues to lower the rates.Fiscal stimulus is in place,but we must allow for the lag.Clearly some of the unrealized losses recorded to date ,will become realized profits in the period ahead as the economy rebounds and the markets stabilize.Perceived risks of today are not reality in the period ahead.