Freddie Mac must raise capital as losses grow
Loan modifications, short sales up in Q2
By Inman News, Wednesday, August 6, 2008.Bookmarking Sites
Government-chartered mortgage financier Freddie Mac posted an $821 million net loss in the second quarter, bringing losses for the last 12 months to nearly $1.6 billion.
The news raised concerns that the company will have to raise more capital than the $5.5 billion it pledged to raise in May, which could restrict future purchases of mortgages. The company announced it will cut common stock dividends from 25 cents to 5 cents per share, but announced no timetable for raising new capital by issuing stock and securities.
In a regulatory filing, the company also revealed that it's picked up the pace of loan modifications and short sales, but that its inventory of foreclosed homes is still growing at a rapid pace, especially in California.
Freddie Mac executives say that as of June 30, the company's $37.1 billion in core capital represented a $2.7 billion surplus over minimum requirements set by federal regulators, which are 20 percent higher than statutory minimums set by Congress.
Freddie Mac said it boosted its mortgage portfolio -- mortgage-backed securities it holds for investment -- by 9.8 percent in the first half of the year, to $728 billion. The portfolio includes $212.7 billion in "private-label securities" not issued by Fannie and Freddie, including $85.6 billion in securities backed by subprime loans and $47.6 billion in alt-A loans purchased during the housing boom.
During the second quarter, Freddie Mac recognized $1 billion in impairments related to its investments, which included $826 million in write-downs on its private-label securities.
Freddie is relying on private mortgage insurers for coverage of up to $65 billion in losses on $338 billion of agency-issued mortgage-backed securities it's holding for investment. Only $17 billion of its private-label securities are insured.
The value of mortgage-related securities partly guaranteed by Freddie Mac grew by 5 percent in the first six months of the year, to $1.82 trillion. Freddie's guarantee business racked up a $1.4 billion loss during the quarter, as provisions for credit losses on single-family guarantees increased to $2.6 billion. The 90-day delinquency rate on Freddie's single-family credit guarantee portfolio increased to 93 basis points at the end of June, up from 65 basis points at the end of 2007.
Freddie Mac said it engaged in workouts with 17,415 borrowers during the second quarter, up 39 percent from the same quarter a year ago but down slightly from the 18,281 workouts completed in the first quarter.
Freddie Mac relied less on repayment plans -- which some critics say only delay inevitable foreclosures because borrowers must still repay all they owe -- and engaged in more short sales and loan modifications, which may involve concessions to the borrower.
Freddie Mac arranged 4,687 loan modifications during the second quarter, up 10 percent from the previous quarter and 115 percent from a year ago, although most involved adding past due amounts to the balance of the loan rather than forgiving debt. Short sales were up 51 percent from the previous quarter, to 1,252, an increase of 136 percent from a year ago.
Freddie Mac was nonetheless acquiring properties through foreclosure at a faster rate than it could dispose of them, despite ramping up sales. At the end of the second quarter, real estate-owned inventory was up 115 percent from a year ago, to 22,029, as Freddie Mac acquired 12,410 properties and sold 8,800. Freddie Mac recognized losses of $183 million on sales of REO properties during the second quarter and $292 million for the first six months of the year.
More than 40 percent of the homes acquired by Freddie Mac during the first six months of the year were purchased with interest-only or alt-A loans, even though those loans comprise only about 9 percent of the company's single-family mortgage portfolio.
About one of every four homes owned by Freddie Mac at the end of June was in California, which also accounted for 30 percent of the company's credit losses.
Freddie Mac recently announced that it's doubling the amounts paid to loan servicers who are able to engage in workouts with borrowers that help them avoid foreclosures. Payments to servicers who close short sales or pre-foreclosure sales have been upped to $2,200, while those who arrange loan modifications will earn $800 and those who draw up approved repayment plans will be paid $500 (see story).
Despite worries about Fannie Mae and Freddie Mac's financial health, their regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), reduced their excess capital requirements in March and lifted 2 percent annual growth caps on their mortgage portfolios, saying they had made progress in correcting management and accounting problems uncovered in 2003 (see story).
In an attempt to soften the impact of the credit crunch, Congress and the Bush administration also boosted Fannie and Freddie's loan limits in March, from $417,000 to as much as $729,750 in high-cost areas. Freddie reported doing relatively little business in the new "conforming jumbo" mortgages, a situation that's not likely to change.
Purchases of jumbo conforming loans amounted to only $471 million in the second quarter, as Freddie saw "increased competition in the mortgage finance market" for that product from FHA, which also had its loan limits boosted.
"Given market conditions and competition especially from FHA, we do not anticipate purchasing material amounts of conforming jumbo product in 2008," Freddie Mac said in its quarterly report to investors.
Under the new housing bill, Fannie, Freddie and FHA will be limited to backing loans of no larger than $625,500 in high-cost areas beginning Jan. 1 (see story).
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Submitted by Dale Corbett on August 6, 2008 - 2:00pm.
This is very true they better raise capital.
Frisco Real Estate Texas
Submitted by Gregory Schreiber on August 6, 2008 - 3:48pm.
They should stop paying dividends entirely. The same goes for Fannie.
Submitted by Wenceslao Fernandez Jr on August 6, 2008 - 4:02pm.
Not at all surprising but...the markets will have a field trip with this tomorrow.
This economy requires that Freddie and Fannie remain predictably strong, so that lenders can regain confidence, so that housing can begin to strengthen, so that the rest of our economy can begin to heal and improve.
Hopefully, all this will happen sooner than later, although I don't foresee this begining to take hold until after the swearing of our new president, early in 2009.
www.MiamiRealEstateKing.com
Certified Distressed Property Expert
Miami-Dade County, Florida.
Submitted by Benjamin Dona on August 6, 2008 - 4:49pm.
Man, I think everybody knew this was coming. Now you just have wonder how long it will be before "Uncle Sam" will have to come to the rescue.
Florida Home Loans | Southwest Florida Blog
Submitted by Michael LittleBig on August 6, 2008 - 5:00pm.
What we have here is the second oldest profession in the world, banking, who have shifted the blame for the credit crisis, the foreclosure crisis, the banking crisis and the Freddie Mac crisis on the homeowner.
This is how the homeowner did it. He voted for the wrong people.
First he voted for a Congress where the elected representative really represents his self interest and not the interest of the person that elected them. Now how do we know this, elected officials equals : better pay, better hospitalization and better retirement plus lots other perks( example Chairman Dodd of the Senate Banking Committee got a mortgage loan that you only dream about.).
These elected officials just passed a housing bill to protect their peer group, Banks, Freddie and Fannie, 1st time home buyers and so forth. Was there anything in the bill to protect the homeowner? You bet there was. The homeowner could by meeting certain criteria refinance his existing mortgage loan. However his bank mortgage holder had to give their permission to do so.
What about the 4 million homeowners in foreclosure or that have been through foreclosure? Well forget them, they caused this mess. You see, so far your vote which won the elected office which is protecting the rich and famous.
Now the Federally Chartered Savings Banks (we will call them FCSB) main line of business
is making mortgages. They are regulated by the Office of Thrift Supervision. However the reality is, that this regulator does not have the staff, the knowledge, the time or the experience to regulate these FCSBs. We know this to be true because we have a foreclosure crisis.
Most of these FCSBs are self regulated. Then there are NO federal consumer banking regulations when it comes to mortgage lending. What does that mean? Well it means if your bank unethically, or unprofessionally or incompetently harms you through their mortgage lending activity you have no redress to object, contest or hold the bank accountable within the federal regulatory system, which ironically is the same system in which this bank lends mortgage money. Ok, just who does the Director of the Thrift Supervision report? The President who you elected, appoints the Director who reports to Congress the people that you elected. See your vote does count.
Now the FCSB makes a mortgage. Please understand that the FCSB answers to no one. The FCSB operates with absolute impunity. The FCSB makes the rules, designs their own mortgages
which can be vague and subject to very wide interpretation and conduct their lending without interference from any one, but do meet the standards and criteria for resale let say, to Fannie and Freddie and other Government Service Entities. The banks in essence have no fear of the mortgage borrower screaming about law violations because there are no laws. Here again you voted for the Congress who won’t make laws to control mortgage lending activities for the FCSBs. I told your vote would mean something.
Here comes the fun part. Fannie and Freddie buy the mortgages. There is a little more to it, because of the different financial instruments and financial charlatans that are involved in buying and selling mortgage paper. But for our purpose the Execs that operate Fannie and Freddie are making tons of money (for Freddie Mac and Fannie Mae, well that’s another subject) for themselves.
They buy the mortgages like snow flakes in a storm. And like a hot cinder starts a California
Wild Fire the mortgage meltdown begins. I read 22 Blog sites, I read 11 newspapers, I watch the TV news, and everyone says, no question about it, the homeowner is to blame. The homeowner is living high on the hog, driving SUVs, eating out all the time, taking vacations and eating food. Worse than that, the homeowner did not understand the mortgage papers, the homeowners demanded a variable rate mortgage, wanted zero down payment, wanted a HELOC that was 125% of the house value. These homeowners have to be really illiterate.
If the Treasury Department, Congress, Fannie and Freddie, the Bank Regulators and Wall Street,
told you that they were surprised at what happened, that is a LIE. They all sat there and watched it unfold. Economist Roubini in 2002 predicated exactly what would happen and he was right on target. He was the only one that got it right. Funny thing, he mentions everybody we talked about in this piece having a part in the meltdown but he failed to mention the homeowner.
Is the homeowner to blame for the meltdown; is there a bailout for the homeowner; will the older homeowner recover his lost equity; will the homeowner be a stand up person and demand that his vote be carried out to protect his way of life , only the questions are here. You see, you the homeowner, you the American public have the answers. Our voice needs to be heard through the strength of our convictions.
We need to tell those in Congress no more. If you do not understand our voice then put it on the ballot, we do not trust you anymore. Freddie Mac and Fannie Mae need to be liquidated which includes all the money that the management took. The Banks need meaningful oversight with equal and fair representation of borrower and lender with equal weight. Since the Financial
Institutions of our society can not conduct their business with common sense and integrity, .then they need to be regulated so that their behavior is acceptable.
Hey Remember that old saying: “If you can’t trust your banker, who can you trust?”
My thoughts and prayers are with each of you.
Michael LittleBig- PO Box 16588—Rocky River OH 44116-3065
Submitted by Commercial Mortgage Loans - Privately Funded - MasterPlan Capital LLC on August 7, 2008 - 7:10am.
The dividend cut will help some, but their right on the edge.
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