Nate C

Six Quotes from Fannie Mae on the Mortgage Industry

Consider these facts.

1. Fannie Mae currently has $40 billion in available capital

2. Fannie Mae currently holds $74 billion in loans with FICO scores of less than 620 (subprime).

3. Fannie Mae also owns $196 billion in ALT-A loans (basically loans with no documentation where people lied about how much money they make)

4. According to Michael Mayo at Deutsche Bank (a very credible analyst) the default rate on subprime mortgages is estimated at 30-40% and a loss rate of 40-50% on subprime mortgages. This would mean losses for Fannie Mae of between $29.6 - 37 billion.

5. Fannie Mae’s AlT-A porfolio could see losses of between $19.6- 39.2 billion assuming a 10-20% loss rate (which is conservative) The real number is closer to 33%.. Many of these loans were given to subprime individuals who lied about their wages to justify the loan.

6. Fannie Mae faces losses of between $49.2-76.2 billion even though they only have $40 billion in capital. This means at the very least, Fannie Mae would have to raise $9 billion in outside capital to remain solvent. At the worst Fannie Mae would have to raise upwards of $36 billion. It is becoming more difficult for companies to raise new capital. Previous capital injections from foreign governments and private equity have all lost money, making many investors hesitant of investing in financial companies (just ask Warburg Pincus about their Mbia investment).

7. But doesn’t Fannie Mae hedge portions of their mortgage portfolio. Short answer is yes, but to do this Fannie enters into various swap agreements with bond insures like MGIC, PMI, etc. which exposes them to enormous counter-party risk. Many of these companies are themselves on the verge of bankruptcy (PMI trading at $1 a share) and face impending credit downgrades from Moody’s and S&P. Fannie Mae could be in the unenviable position of making money on their hedges but unable to collect the money from their counter-parties.

8. But won't the government save Fannie Mae and Freddie Mac from bankruptcy? The short answer is yes, but that does not mean that shareholders will be pleased with the outcome. When Fannie and Freddie get near bankruptcy, the US government is more likely to nationalize the firms then simply giving them more capital. This scenario is more likely if Senator Obama is President. When the government nationalizes a company, shareholders often receive next to nothing (think JP Morgan buying Bear Stearns for $2).

Bear Stearns’ Bailout by the Fed, JPM: A Century Old Conspiracy

Hi Lee,

Thank you so much for writing this article. Talking about the legality of the Federal Reserve has become taboo. We never ask wether it is constitutional. The truth of course is that the Fed is an illegal institution that was created for the banks to bail them out with taxpayer money. The Fed Reserve banks are all owned by corporations.

If you read the constitution only Congress can issue currency. The Fed, through its criminal operations devalues the dollar and severely reduces our purchasing power through inflation.

If we want to solve the financial crisis, we should abolish the Fed and let the banks solve their own problems. I assure you that if the FED was not there to bail out the banks, the banks would not be handing out sub-prime loans.