Into the abyss

Every time it seems like the credit crunch and housing downturn can't get much worse, it does. This week is proving to be a particularly grim one, with the FDIC reporting that banks and savings and loans aren't boosting loss  reserves at the same pace borrowers are getting behind on their loans, and Standard & Poor's releasing numbers showing home prices plunged 8.9 percent in the fourth quarter -- meaning more borrowers are going to be upside down.

Even OFHEO, which tracks the more stable prices of homes purchased with mortgages purchased or guaranteed by Fannie Mae and Freddie Mac, says prices fell during the fourth quarter in 116 of 291 MSAs it ranks in its home price index.

When Congress and the Bush administration passed an economic stimulus bill that will temporarily raise the limits on loans eligible for backing by FHA, Fannie, and Freddie, the hope was that would boost housing sales in high-cost areas. But since those increases are tied to median home prices, the $417,000 conforming loan limit will probably go up less than many had anticipated.

Even if Fannie and Freddie are given lots of additional leeway to buy up or guarantee jumbo loans, there are other issues that will constrain their ability to do so -- and limit the benefits for borrowers as well.

Because Fannie and Freddie will have to package the new "jumbo light" loans up separately from conforming loans, the 1 percent spread that exists today between conforming and jumbo loans isn't going to disappear entirely. And Fannie and Freddie's own problems mean that the government-chartered mortgage financers can't just go out and buy jumbo light loans to their hearts' content.

Last fall, as Fannie and Freddie posted billions in third quarter losses and bumped up against capital constraints, I wondered: "What if, at precisely the time they are needed the most, Fannie Mae and Freddie Mac are forced to cut back on their mortgage loan purchases, guarantees, and securitizations?"

We're going to see another round of worries like that this week, as Fannie is expected to report a $1.8 billion fourth quarter loss tomorrow and Freddie a $2.1 billion loss on Thursday, Reuters reports.

Analysts at Credit Suisse have estimated Fannie and Freddie might have to recognize $16 billion in write-downs on $230 billion in mortgage-backed securities backed by subprime or alt-A mortgages.

Although Fannie and Freddie were able to raise more than $13 billion in capital last quarter, both companies have seen their shares shed about half their value since reporting their big third-quarter losses, which means it's going to be harder for the GSEs to raise capital now.

Is it any wonder that Bank of America executives actually see eye-to-eye with Sen. Chris Dodd's plan to create a Federal Homeownership Preservation Corp. to buy up billions in mortgages that might otherwise end up in foreclosure at deep discounts?

I guess, from the industry's perspective, anything's better than letting bankruptcy judges do cram-downs.

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