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This is the Fannie/Freddie recap, and their addition to the Asset Securitization Crisis. They were taken over just before they had to roll over a $223 billion of debt. Nick of time financing measures...
The Asset Securitization Crisis Analysis road-map to date:
- Intro: The great housing bull run - creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble - A comparison with the same during the S&L crisis
- Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
- Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
- The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
- Municipal bond market and the securitization crisis - part I
- Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
- An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
- Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
- More on the banking backdrop, we've never had so many loans!
- As I see it, these 32 banks and thrifts are in deep doo-doo!
- A little more on HELOCs, 2nd lien loans and rose colored glasses
- Will Countywide cause the next shoe to drop?
- Capital, Leverage and Loss in the Banking System
- Doo-Doo bank drill down, part 1 - Wells Fargo
- Doo-Doo Bank 32 drill down: Part 2 - Popular
- Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
- The Anatomy of a Sick Bank!
- Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
- GE: The Uber Bank???
- Sun Trust Forensic Analysis
- Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
- Goldman Sachs Forensic Analysis
- American Express: When the best of the best start with the shenanigans, what does that mean for the rest..
- Pt one of three of my opinion of HSBC and the macro factors affecting it
- The Big Bank Bust
- Fannie Mae & Freddie Mac - Who will finance their future?
Fannie Mae and Freddie Mac were formed as government agencies to expand home ownership and provide stability and liquidity to the secondary mortgage market. The continued decline in housing prices in the US has resulted in huge write downs in the residential mortgage backed securities market. The S&P Case Shiller home price index has been declining consecutively for the last 23 months; it fell 0.5% in July 2008. The imminent threat to Fannie Mae's and Freddie Mac's combined debt of US$1.59 trillion, and lack of financing options have raised doubts about the viability of mortgage companies.
Their net worth has been eroded significantly due to huge losses. It stood at US$54 billion as of June 30, 2008. The underwritten or owned mortgages by these two entities comprise about 50% of the US mortgage industry (worth US$12 trillion). These two large mortgage giants faced a liquidity crunch, due to large write downs that amounted to US$14.9 billion in the last one year. Fannie Mae has raised more than US$14 billion in capital since November 2007, while Freddie Mac raised US$6 billion in the same period to offset write downs on mortgages it owns or guarantees. Consequently, to avoid a severe mortgage market crisis if they failed, they were taken over by the US government on September 7, 2008. The government has decided to take charge of the beleaguered mortgage companies through Federal Housing Finance Agency (FHFA), a government conservatorship, and rescue them from the current situation. The government would back the debt underwritten by these two companies. FHFA, formed by the merger of Federal Housing Finance Board (FHFB) and the Office of Federal Housing Enterprise Oversight (OFHEO), would supervise the two mortgage giants and have the powers of the Board and management. The Chief Executive Officers for both companies have been replaced. Mr. Herb Allison and Mr. David M. Moffett are the current CEOs of Fannie Mae and Freddie Mac, respectively.
Under the government conservatorship, Fannie and Freddie would continue to guarantee mortgage-backed securities without limit, as the government supports the mortgage market. However, there is restriction on the capital raised to refinance securities, which is fixed at US$20 billion per month. Besides, the buyout of the mortgage giants by the government has not offered any support to equity shareholders. Shares of Fannie Mae and Freddie Mac fell 90% and 83%, respectively, on September 8, 2008, the first day of trading after it was taken over by the government. Under FHFA, there would be no dividends issued on either common stocks or preferred shares, thereby saving about $2 billion per year for these firms. Furthermore, the mortgage companies' political lobbying activities would be discontinued and charitable activities are likely to be reviewed. The Treasury, along with FHFA, would buy preferred stock worth US$1 billion each in Fannie and Freddie to provide assurance to the companies' debt holders. This move could strengthen the conforming housing mortgage market (actually, a subset of the actual mortgage market), although it is highly doubtful it will support housing prices which are suffering and extreme inbalance between supply and demand. The US government is expected to have the right to own 79.9% in each company due to the effects of the government conservatorship. The US government is now, in effect, one of the largest financial institutional trading companies in the world!
Source: Bloomberg
Fannie Mae's and Freddie Mac's debt worth US$223 billion (of the total US$1.59 trillion) matures on September 30, 2008. This factor was a prime concern for these companies. The rolling of t debt is an essential phenomenon in the mortgage industry, and with the government backing they would be able to refinance these debts. The 30-year mortgage rate, which stood at 6.35%, is expected to decline as the government would act as a guarantor, and to date has dropped about 60 basis points already. On September 7, 2008, the government's attempt to bailout the mortgage giants received support from all quarters. The Federal Reserve and the US Treasury evaluated the process of bailing out the two companies, and estimated an investment of around US$200 billion for the same.
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PNC
New/forward looking info from PNC at our conference includes: a) in response to the increase in the price of BLK, as of Aug 31, it sees a $120MM ($0.30/share, though we note investors typically look through LTIPs) adverse fee income impact due to an increase in the liability related to its LTIP shares obligation (still its investment is up $1.7B QTD); b) continued widening of CMBS credit spreads has resulted in a $120MM ($0.30/sh) negative mark (7.5% of $1.6B at 2Q). It believes this is due to lack of market liquidity and not credit quality concerns with the underlying assets; c) it owns $80MM ($0.20/sh) of GSE preferred stock and expects a significant OTTI charge in 3Q; d) as of Aug. 31, its OCI loss has increased $0.8B to $2.0B primarily driven by the impact of widening credit spreads on its AFS book; e) it noted its remaining business operations and credit quality migrations are performing as expected and it still expects double-digit revenue growth this year; f) it continues to see $750MM provision for 2008; g) it expects net interest income to increase linked quarter in 3Q; h) it continues to focus on resi construction loans (3%); and i) it does not foresee bank acquisitions near-term.
STI
New/forward looking info from STI at our conference includes: a) expects a $69MM tax benefit tied to the charitable contribution of 3.6MM KO shares in 3Q. It sees a 3Q gain on the TransPlatinum sale. It has $500MM of ARS held by STI investors that it may have to repurchase. These two gains should offset possible ARS marks; b) it further reduced SIV related assets ($800MM at 2Q), though valuations have been under pressure. Still, this adverse impact should be offset by an increased valuation on the FV of its debt. It has reduced its trading assets from $768MM to $420MM QTD; c) it expects 3Q NCOs to increase at the upper-end of its up 15%-20% expectations. 4Q NCOs should be consistent with 3Q; d) while Alt-A delinquencies continued to decline in 3Q, the 2Q improvement in H/E proved to be seasonal, with 3Q heading higher. Also, prime mortgage delinquencies rose in 2Q and have continued to increase in 3Q; e) it stated it has no plans to alter its dividend policy. Still, it recognizes the dividend represents a lever to build capital should circumstances change; and f) it altered its NIM guidance to 'stable' from 'stable to up modestly' due to competitive CD pricing.
Both have stocks have a HIGHER current price than the target (which we know from the past hasnt been that acurate)