Freddie Mac Delinquencies Increase at Increasing Rate

Bronte Capital with the implications:

I have been firmly in the “second derivative is good” camp for some time. Green shoots were few and far between – but the economy no longer appeared to be in free-fall. When the free-fall stopped it was time to buy equities – and whilst it was not time to ease up on the looser monetary and fiscal policies – it may have been sensible to limit them somewhere near the levels that they now are.

The data I considered most persuasive was the delinquency data at Fannie and Freddie. It gets worse every month, but until the last data point it was getting worse at a decreasing rate (especially if you adjusted for the foreclosure moratoriums they implemented).

Delinquency Rates of Freddie Loans

Today I am more worried. My favourite data point (rate of increase of Freddie Mac delinquency) has deteriorated – especially in their insured portfolio. Its not sharp deterioration – and it is possible – even likely – that Freddie Mac will have end credit losses considerably lower than the bears anticipate. But as a second derivative bull I am feeling just that little bit less certain.

Three Month Change in Delinquencies


Source: Freddie Mac

New "Bailout" Liabilities = Existing Publicity Traded Debt of U.S.

FT (HT Credit Writedowns):

The two mortgage companies have between them $5,400bn in liabilities, equal to the entire publicly traded debt of the US, alongside mortgage-related assets of about equal value. These will now all be accounted for by the CBO, although public accounting rules mean that its tally of US government debt may not necessarily increase by $5,400bn.

Fannie / Freddie Portfolios: $250B by 2021

The GSEs’ retained portfolios may not exceed $850 billion through December 31, 2009, after which time they will be reduced by 10% per year until they reach $250 billion.

Currently Fannie and Freddie have about $150B of capacity left between them based on that $850B "hard line". A 10% reduction in that figure per year means it will take until 2021 to reach the $250B goal. That means 3 different presidential terms will need to come and go, with each exercising fiscal restraint to make that happen.

Considering that just 5 years ago we were promised a small, fiscally responsible government and our minds seem to trick us into thinking things have materially changed every 3-5 years, does anyone believe this will happen? Case in point, just a little over two years ago Countrywide (and others) were ready to make Fannie and Freddie a thing of the past... in fact Countrywide's market cap peaked less than 2 years ago and remained well above 20 through last November.

Outstanding Mortgages: Agency vs. Non-Agency

Source: Pioneer Investments

Freddie Balance Sheet: Godfather Edition

Fredo, like Freddie, is the "little brother" that tried to do well. All either of them wanted was a little love. The result?

Michael Corleone:

Fredo, you're nothing to me now. You're not a brother, you're not a friend. I don't want to know you or what you do. I don't want to see you at the hotels, I don't want you near my house. When you see our mother, I want to know a day in advance, so I won't be there. You understand?

Barron's: The Endgame Nears for Fannie and Freddie:

It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses.

We all know what happened to Fredo. Isn't it time we put Freddie out of his misery?

Level Three Asset Analysis

Level 3 assets, the "difficult to trade/value/sell junk" have created the following environment per Marc Faber (hat tip Credit Writedowns):

A lot of banks are already bankrupt. A lot of monoline insurance companies are bankrupt and financial institutions hide their rotten assets in level three asset categories where you don’t really need to value them.

Take a look at Freddie's level three assets on a relative basis... yikes!

Source: Bloomberg

Putting the BS Back in MBS

Below is an EconomPic'd version of a great table posted at Calculated Risk which summarizes the percentage of loans with high loan to value "LTV" and/or low FICO (credit) scores made over the last five years. Specifically shown are fixed 30 year loans and fixed interest only "I/O" 10/20 loans (the interest-only portion runs for 10 years and then fully amortizes over the remaining 20- year term).


So what does it show? It shows that recent loans have gotten a whole lot riskier for taxpayers Fannie and Freddie, especially if prices continue to slide.