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