Subprime News: Fannie, Freddie, Regional Banks [Housing Tracker]

Quote Of The Day 

“We have over 60,000 people working every day. All the efforts of these people were overwhelmed by the write-downs in the mortgage-related assets.” - Merrill Lynch CEO John Thain, saying he decided to sell off mortgage investments at fire sale prices last week mainly because Merrill's workers were demoralized by having them on the books.  (NY Times, Aug. 5^th)

Subprime Banking Fallout

Fannie / Freddie Reality Check: Here Comes the Big Bailout?  “Freddie Mac CEO Richard Syron… revised his forecast for home price drops, peak to trough, from 15% to 18-20%... but [assured] everyone that Freddie (FRE) would be able to withstand $40 billion worth of credit pain through 2009… Freddie wrote down the value of its subprime and Alt-A portfolio by $1B in Q2… claiming that they can hold these securities to maturity and not have to take a loss, because.. the dire predictions of defaults on these loans just won’t come to pass. Freddie’s subprime and Alt-A portfolio is about $130B. Think of that. Just $1B in writedowns. Armando Falcon, a former head of OFHEO: "At some point they [will have] to mark these assets down to their true market value.” (Michael Shedlock in Seeking Alpha, Aug. 7^th) 

Don't Discount the Fee Income at Fannie Mae.  “In raising the fee that it collects for buying and guaranteeing mortgages from .25% to .50% of the loan value, Fannie Mae (FNM) has successfully expanded its fee generation possibilities.  If the company can survive its current predicament, which is still very questionable, the company may just be able to drive earnings – excluding loan loss provisions and other charges – that will allow the company to create an asset and fee structure capable of supporting all of the dilution that has taken place over the last year.” (Prudent Speculations in Seeking Alpha, Aug. 7^th) 

FirstFed Grapples With Payment-Option Mortgages. “FirstFed Financial Corp… posted a loss of nearly $70 million in Q1 -- reversing years of profit. Forty percent of its borrowers became at least 30 days delinquent after the payments on their adjustable-rate mortgages were recast. The number of foreclosed homes held by the bank doubled in Q2 from Q1… FirstFed (FED) was ranked last year as one of the top five banks in the nation by a trade publication, partly because it appeared to have pared back on risky mortgage loans. Yet this year, the bank is on the front lines of what could be the next big mortgage debacle: payment option mortgages.” (WSJ, Aug. 6^th) 

Tempest for a Bank That Bet on Risky Loans. “By aggressively peddling a popular type of high-interest loan to risky borrowers, Bank United, Florida’s biggest regional bank tripled its profits in 2006 as real estate on Florida’s Gold Coast peaked, only to lose nearly $100 million in late 2007 and early 2008 as the market cratered. Now, it’s… scrambling to raise $400M in capital, an amount nearly eight times the bank’s shriveled value on the stock market. Analysts and a corporate governance group are monitoring the bank’s asset quality… At one point the pool of volatile loans… represented 75% of the bank’s mortgage portfolio.” (NY Times, Aug. 6^th) 

Freddie Mac Posts Fourth Straight Loss, Cuts Dividend. “Freddie Mac will slash its dividend at least 80% after posting a quarterly loss that was three times wider than analysts' estimates. The second-quarter net loss of $821 million, or $1.63/share, compares with the $0.54/share average estimate. The common-share dividend will be reduced to $0.05 or less from $0.25. Freddie had credit-related expenses of $2.8 billion, double the first quarter, and wrote down the value of subprime and low- quality mortgage securities by $1B.” (Bloomberg, Aug. 6^th) 

Ambac Posts $823 Million Net Income; CDO Losses Rise. “Ambac Financial Group Inc. (ABK), the bond insurer that lost 92%  of its stock market value in the past year, posted… net income [of] $823.1 million, or $2.80/share, [up] from $173M, or $1.67, a year earlier. Excluding gains and other changes in the value of securities it holds and insures, Ambac had a loss of $1.53/share because of expected claims on collateralized debt obligations, compared with an average estimate for a loss of $0.61. Ambac expects $1.1 billion more in CDO claims, bringing likely impairments to more than $3B… Ambac [is] struggling with a decline in new business after losing its AAA bond insurer ratings this year.”  (Bloomberg, Aug. 6^th) 

Feds Hire Morgan Stanley to Analyze Fannie, Freddie. “Morgan Stanley (MS) confirmed on Tuesday that it had been retained by the Department of the Treasury to provide capital markets advice to support the Treasury’s responsibilities associated with its new authorities regarding Fannie and Freddie . The recent housing bill signed by President Bush at the end of July provides the Treasury historic authority to backstop both ailing GSEs, including an unlimited expansion of a preexisting $2.25 billion credit line to both Fannie and Freddie. The government also has the authority to purchase shares in one or both GSEs, if needed. As part of the assignment, Morgan Stanley said it will “support the Treasury’s work to promote market stability and the availability of mortgage credit.” (Housing Wire, Aug. 5^th) 

Fannie Mae Raises Fees, Changes Loan-Level Pricing. “Fannie Mae [is] doubling its so-called adverse market delivery charge on all loans it purchases from 25 to 50 basis points… effective October 1, and applies to all loans sold to the GSE. Fannie’s adverse market fee, and a similar fee levied by sister GSE Freddie Mac (FRE) (called a market condition delivery fee), have come under fire from various industry groups since they were first introduced last year.” (Housing Wire, Aug. 5^th) 

At Freddie Mac, Chief Discarded Warning Signs. “The CEO of mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others. Richard F. Syron, in 2004 received a memo from Freddie’s CRO warning him that the firm was financing questionable loans that threatened its financial health... Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie insiders say Mr. Syron heightened those perils by ignoring repeated recommendations.” (NY Times, Aug. 5^th) 

Freddie Mac Fights Back. “Charles Duhigg's [NYT] story [above- Ed.] fell far short of the standards New York Times’ readers have every right to expect from the paper," Freddie Mac's statement said. "Given the consequence of the subject, readers deserved more than a superficial tale spun on the purported comments of a collection of anonymous former employees and unspecified ‘others’– likely including the well-worn band of ideologues and self-interested detractors who have opposed the GSE model for years. … In fact, a full review of the facts makes clear that Freddie Mac has helped to keep a bad situation in the housing market from becoming even worse." (Builder Online, Aug. 5^th)

Merrill’s Chief Defends Recent Sale. “A week after he stunned Wall Street by selling billions of dollars of toxic mortgage investments for pennies on the dollar, Merrill Lynch (MER) CEO John Thain defended his decision on Monday, saying he needed to take decisive action to shore up the Wall Street giant and morale among its employees. Mr. Thain disputed notions that he misled investors about his intentions to raise capital. And he said he sold the mortgage assets, a difficult but necessary step, because he did not know if Merrill would have a similar opportunity again.” (NY Times, Aug. 5^th)

Wachovia Loses Another Key Exec. “Wachovia isn’t just losing money these days — it’s losing much of its top executive team, as well: A second senior executive in as many weeks has made plans to leave the company, Wachovia Corp. (WB) said hursday. CRO Donald K. Truslow “plans to retire once a successor is named to the role,” the bank said, noting that it would immediately begin searching for a replacement… News of Truslow’s retirement follows the announcement last week that CFO Thomas Wurtz is leaving the bank.” (Housing Wire, Aug. 1^st)

 

Seeking Alpha's Housing Tracker is a collection of housing-related excerpts from various sources, grouped by topic. Feel free to post any interesting links on the subject in the comments section below.

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Comments

[sbenard:]

One of CNBC's guests from the banking industry said this morning that up to 10% of American's banks may have to be nationalized by the FDIC over the next six months, but they only expect about half that amount. Still, he said, this would amount to TWICE as many bank failures as during the last credit crisis. Wow!

2008 Aug 07 09:06 AM