Tuesday, November 20, 2007

Freddie Mac : 2007Q3

Freddie Mac reported much worse than expected results this morning. Here are the highlights from the press release:

  • Third quarter loss of $2.0 billion reflects a higher provision for credit losses and losses on mark-to-market items.
  • Provision for credit losses of $1.2 billion reflects the significant deterioration of mortgage credit as a result of continued weakness in the housing market.
  • Total GAAP mark-to-market losses of $3.6 billion primarily include $1.5 billion in interest-rate related items and $2.3 billion in credit-related items.
  • Fair value, before capital transactions, decreased by approximately $8.1 billion primarily due to widening of net mortgage-to-debt option-adjusted spreads and valuation losses on credit-related items.
  • Increase in management and guarantee income reflects continued guarantee portfolio growth.
When this 'liquidity crunch' started in July/August, investors would only buy pools securitized by Fannie and Freddie. Prior to that, it was questioned if those two GSEs were needed. Will investors be as willing to buy from Freddie now that their pools are worse than expected?

UPDATE: Some excellent answers to the above questions in Calculated Risk's comments (excerpts are below; follow the links for entire comment).
Tanta said,
The whole idea of having the GSEs continue to buy loans in this market is that they will actually bid when no one else does. That is, they are supposed to be out there saying that there is, actually, a difference between 51 bps and 450 bps and they will bid accordingly.

...their [Fannie Mae and Freddie Mac] securities are "understandable" and the payment of both principal and interest is guaranteed. The loans in their securities are underwritten to more conservative and standardized guidelines, and the securities themselves are more easily analyzed and modeled. Fannie Mae and Freddie Mac guarantee to the bond holder the timely payment of both principal and interest.

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