News that Fannie Mae, the US government-controlled mortgage group, is still bleeding cash shouldn’t really come as a surprise. Nevertheless, the losses continue to astound us here at FT Alphaville.
On Friday the group reported its seventh consecutive quarterly loss in the order of $23bn. What’s more, having found its net worth fall below zero, the company has been forced to ask the US Treasury for another $19bn in capital.
And while all that might be disturbing enough, the key scary takeaway should probably be something else. The fact that it’s now all of Fannie’s loan book that is beginning to rot away. As they state:
Our entire guaranty book of business, including loans with lower risk characteristics, has begun to experience increases in delinquency and default rates as a result of the sharp rise in unemployment, the continued decline in home prices, the prolonged downturn in the economy, and the resulting increase in mark-to-market LTV ratios.
In addition, certain loan types have continued to contribute disproportionately to the increases in serious delinquencies and credit losses we reported for the first quarter of 2009. These include loans on properties in California, Florida, Arizona and Nevada; loans originated in 2006 and 2007; and loans in higher-risk categories such as Alt-A loans and interest-only loans.
What’s even more, Fannie admits to what degree downgrades have now affected assets previously considered much lower risk:
The substantial portion of our Alt-A and subprime private-label mortgage-related securities were rated AAA when we purchased these securities; however, many of these securities have suffered significant downgrades since we acquired them.
As indicated in Table 22 above, approximately 54% and 74% of our Alt-A and subprime private-label mortgage-related securities, respectively, were rated below investment grade as of April 28, 2009. Approximately 25% and 13% of our Alt-A and subprime private-label mortgage-related securities, respectively, were rated AAA as of April 28, 2009.
Although our portfolio of Alt-A and subprime private-label mortgage-related securities primarily consists of senior level tranches, we believe we are likely to incur losses on some securities that are currently rated AAA as a result of the significant and continued deterioration in home prices and the increasing delinquency, foreclosure and REO levels, particularly with regard to 2006 to 2007 loan vintages, which were originated in an environment of significant increases in home prices and relaxed underwriting criteria and eligibility standards. These conditions, which have had an adverse effect on the performance of the loans underlying our Alt-A and subprime private-label securities, have contributed to a sharp rise in expected defaults and loss severities and slower voluntary prepayment rates, particularly for the 2006 and 2007 loan vintages.
That’s right, what you thought was ‘triple A’ just isn’t so anymore — and we’ve gone from triple A to junk in the space of two years in some originations. This should shout-out loud and clear that the issue is no longer a subprime one.
On which note we direct you to an interesting statistic on the matter of prime vs subprime default from the Boston Fed as highlighted by Mike Rorty (H/T Clusterstock). According to one of its recent studies up to 28 per cent of all mortgage defaults and 60 per cent of all subprime defaults were mortgages that started off as prime mortgages anyway. As Clusterstock concludes on the matter:
The Fed study goes on to conclude that even if many of these borrowers hadn’t refinanced into subprime loans with funky repayment schedules, they would have defaulted anyway. It wasn’t just some bad lending that broke the system. It was widespread financial distress. We were much poorer than we thought, and we’re even poorer now.
Which means perhaps subprime wasn’t as much the villain as our own miscalculation of what we could and could not afford all round. Rorty sums up the situation nicely:
This point is key. There’s a real tendency to Other subprime mortgage holders. They are idiots, crooks, dupes, minorities, single mothers, easily mislead, liars and criminals, etc. But right here, 28% of all mortgage foreclosures, and 60% of subprime foreclosures, are from people who started with a prime mortgage. Those are the Us — good credit scores, 20% down, pay the bills on time. They disappear in the data — compilations of mortgage data often don’t follow the original starting point of homeowners, just of mortgages themselves (which is why I trust the Boston Fed papers, and few others) so we don’t see their story after they replace their prime mortgage with a subprime one.
Related link:
Fannie, Freddie, now FHLBs? - FT Alphaville