GSE losses could stand at $448bn, Amherst says | FT Alphaville

GSE losses could stand at $448bn, Amherst says

Here’s something that struck us in a bit of testimony submitted to the FCIC hearings on Wednesday.

In a document that’s well worth reading for some interesting banking statistics, J Kyle Bass, managing partner at hedge fund Hayman Advisors, says:

With $5.5 trillion of outstanding debt and Mortgage Backed Securities Guarantees, the quasi‐public or now in‐conservatorship Fannie and Freddie have obligations that approach the total amount of government‐issued bonds the US currently has outstanding. There are so many things that went wrong or are wrong at these so‐called GSEs that I am not sure where to start…

It looks like things might only get, err, `wronger’ at the GSEs.

An analysis by Laurie Goodman, of Amherst Securities, puts possible cumulative credit losses at the two Government Sponsored-Enterprises’ credit guaranty books at a possible $448bn.

The methodology’s a bit complicated but here’s a basic summary:

There is a lack of transparency with regard to mortgage defaults on GSE and bank portfolio loans. In this article, we harness a new database—the First American Core Logic LoanPerformance Prime Servicing Database to get a handle on information in these sectors. This database contains information on 29 million active loans and 92 million closed loans, considered to be “prime” by the servicers. We find that GSE and bank portfolio loans behave not too differently than prime loans in private label securitizations. We then use this information to estimate eventual losses on the GSE credit guarantee book.

And here are the results, click to enlarge:

In words, that means Freddie will likely lose around $178bn of its $1,860bn credit guaranty book, while Fannie will probably lose $270bn of its $2,810bn book. That’s a loss rate of 9.6 per cent for the two GSEs together.

As Goodman notes, that figure is “very close to the performance of 1983-84 originated loans in the four hardest hit states during the oil bust of the 1980s,” when sharply falling crude prices, coupled with the Savings and Loan Crisis, sparked a real bust in states like Arkansas, Louisiana, Mississippi and Oklahoma.

Note that the losses themselves aren’t all necessarily yet to be taken.

According to Goodman they “will be distributed across four categories – write downs already taken by Fannie and Freddie and reflected in their loan loss provisions, future credit losses to be taken by Fannie and Freddie, losses absorbed by mortgage insurers, and losses absorbed by originators through put backs.”

Fannie’s loan loss reserves currently stand at something like $66bn, while Freddie’s are $30bn.

Full note in the Long Room.

Related links:
Fannie Mae loses $19bn in one quarter of the year – FT Alphaville
Freddie, Fannie doing just fine, thank you very much – FT Alphaville