Fannie and Freddie Need Another $14 Billion, but Losses May Be Slowing

More

Although their performance was worse in the third quarter, it had more to do with derivatives than the housing market

600 fannie mae diag REUTERS Jason Reed.jpg

Late Tuesday, U.S. taxpayers got some more bad news: Fannie Mae announced a big quarterly loss and requested another $7.8 billion from taxpayers. This comes a few days after Freddie Mac posted a big loss and needed $6 billion more from the government. These Treasury draws, which amount to nearly $14 billion, easily dwarf their second quarter cash request of $6.6 billion. As bad as this looks, it isn't really due to housing market deterioration.

The Devil's in the Derivatives

Although each company still lost plenty of money due to defaulted mortgages, their bad derivatives bets really hurt them this quarter. The firms use derivatives to hedge interest rate risk. In this case, the hedge created a sizable loss for each company as long-term interest rates declined more in the third quarter than in the second. How big were those losses? Freddie lost $4.8 billion, and Fannie lost $4.5 billion -- on derivatives alone.

Here's a brief breakdown of the companies' financial performance in the third quarter:

fannie freddie q3-2011.png

As you can see, without those massive derivatives losses, the firms wouldn't have done nearly as badly. They won't have done well, but they wouldn't have needed nearly as much money from taxpayers.

What About the Housing Market?

Of course, you can see above that these companies still had pretty significant credit losses thanks to foreclosures and guaranty losses. So how did they stack up? Here's how the firms' credit losses looked compared to a quarter and year earlier:

fan and fred credit 2011-q3.png

So actually, credit losses were worse in the third quarter than in the second, but better than a year earlier. To explain the better year-over-year tally, each company notes that foreclosures have slowed due to procedural challenges, which may lead to higher charge-offs in 2012. Fannie, however, also notes that more aggressive repurchase requests (wherein they force bad loans back to the lenders that created them) have helped to drive down charge-offs.

A clearer way to measure the health of these firms' portfolios would be to look at serious delinquencies:

fan and fred delinq 2011-q3.png

In each case, delinquencies are down significantly compared to a year earlier, but appear to be treading water from last quarter.

So the story here isn't a great one, but it could be worse. As the economy continues to move sideways, these companies aren't seeing their portfolios deteriorate much -- but they also aren't seeing them improve much. Yet home prices have stopped dropping dramatically, which should help to limit loss severity. Taxpayers aren't off the hook yet, but unless the economy clearly worsens, Fannie and Freddie's losses should begin to wane.

Image Credit: REUTERS/Jason Reed

Jump to comments
Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
Get Today's Top Stories in Your Inbox (preview)

Why Are Americans So Bad at Saving Money?

The U.S. is particularly miserable at putting aside money for the future. Should we blame our paychecks or our psychology?


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

The Death of Film

You'll never hear the whirring sound of a projector again.

Video

How to Hunt With Poison Darts

A Borneo hunter explains one of his tribe's oldest customs: the art of the blowpipe

Video

A Delightful, Pixar-Inspired Cartoon

An action figure and his reluctant sidekick trek across a kitchen in search of treasure.

Video

I Am an Undocumented Immigrant

"I look like a typical young American."

Video

Why Did I Study Physics?

Using hand-drawn cartoons to explain an academic passion

Writers

Up
Down

More in Business

Just In