Note to Michael Williams and “Ed” Haldeman: if you’re going to imitate Tiny Tim, then at least learn how to enunciate it in the pathetic, heart-tugging tone Anthony Walters used in “A Christmas Carol.” It makes it easier to handle crap like this:
Freddie Mac, the second largest US mortgage finance company, said on Wednesday it would need an additional $10.6bn from the US Treasury to offset losses on bad loans, reports the FT. The company said it lost $8bn, or $2.45 per share, in the 2010 first quarter.
Although Treasury’s funds under the senior preferred stock purchase agreement permit us to remain solvent and avoid receivership, the resulting dividend payments are substantial. Given our expectations regarding future losses and draws from Treasury, we do not expect to earn profits in excess of our annual dividend obligation to Treasury for the indefinite future. As a result of these factors, there is significant uncertainty as to our longterm financial sustainability.
In addition, there is uncertainty regarding the future of our business after the conservatorship is terminated, including whether we will continue in our current form, and we expect this uncertainty to continue. On April 14, 2010, the Obama Administration released seven broad questions for public comment on the future of the housing finance system, including Fannie Mae and Freddie Mac, and announced that it would hold a series of public forums across the country on housing finance reform. Treasury Secretary Geithner testified in March 2010 that the administration expects to present its proposals for reform to Congress “next year.” We cannot predict the prospects for the enactment, timing or content of legislative proposals regarding longer-term reform of Fannie Mae, Freddie Mac and the Federal Home Loan Banks (the “GSEs”).
Talk about throwing good money after bad.
So now we have a combined request for another $19bn for the two behemoths, after we hear about mortgage performance that is, shall we say, beyond horrid:
Serious delinquencies in Freddie’s single-family conventional loan portfolio — those more than 90 days late — came in at 4.13 percent, up from 2.41 percent for the period a year earlier. Delinquencies in the company’s Alt-A book, one step up from subprime loans, totaled 12.84 percent, while delinquencies on interest-only mortgages were 18.5 percent. Delinquencies on its small portfolio of option-adjustable rate loans totaled 19.8 percent.
The company’s inventory of foreclosed properties rose from 29,145 units at the end of March 2009 to almost 54,000 units this year. Perhaps most troubling, Freddie’s nonperforming assets almost doubled, rising to $115 billion from $62 billion.
But meanwhile, more talk is circulating that the Fed is looking to extricate itself from the mortgage purchases it made.
May 10 (Bloomberg) — Words may speak louder than actions for Federal Reserve Chairman Ben S. Bernanke when the time comes to outline plans to raise interest rates and shrink the central bank’s balance sheet.
Altering a pledge to keep short-term borrowing costs low or articulating plans to begin selling the $1.1 trillion in mortgage-backed securities it now holds will amount to a tightening of monetary policy because the announcements will send bond yields higher, raising borrowing costs, said Mitch Stapley, chief fixed-income officer at Fifth Third Asset Management in Grand Rapids, Michigan.
The problem, of course, is presented later in the same BusinessWeek article:
An announcement outlining how the Fed plans to unwind its portfolio will likely widen by as much as 50 basis points the yields on agency mortgage bonds relative to benchmark rates, according to Scott Buchta, head of investment strategy at Guggenheim Securities LLC in Chicago.
Removing the “extended period” language would cause yields on two-year Treasury notes to increase by as much as 50 basis points in the following two weeks, said Paul Gifford, chief investment officer at 1st Source Investment Advisors in South Bend, Indiana. The notes yielded 81 basis points, or 0.81 percentage point, last week, according to Bloomberg data.
“You’re obviously going to see rates back up,” said Gifford, who manages $1 billion in fixed-income assets.
I don’t quite agree with Gifford. Removal of that “extended period” language will give markets pause about the current levels of rates, for sure. But to me, there’s an implicit assumption being made: no flight to quality bid. I actually think we can see agency MBS leak wider than 50bps, more like 100-125. Why? Because you need to take a look at the delinquency data Freddie presented. Then factor in the collateral: its residential real estate for crying out loud. Recoveries from a loss given default perspective are bound to be horrible. Once you do that, then ask yourself if the credit risk justifies mortgage rates being where they are and whether or not you’d want higher yield from the MBS. Plus, let’s think about who would be willing to purchase agency MBS in size from the Fed, at the prices paid by the Fed. I can’t think of any group of asset managers, sovereign wealth funds or anyone else that would be willing to do so. So now you have a liquidity risk issue to contend with on top of your credit risk problem.
Needless to say, I’m not touching these things without a hazmat suit…