Written by Pankaj Kumar
Mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) are suddenly in the news for all the wrong reasons, from issuing large doses of fresh capital and the Fed backstopping short term debt issuance to talks about receivership/ nationalization. As the largest credit guarantors in the troubled mortgage markets, these companies are bearing the brunt of falling home prices, widening mortgage credit spreads, and rising defaults.
We looked up some key data of FNM on the Gridstone platform. A quick analysis of the data throws up the obvious: like all other distressed banks and financial intermediaries, FNM had trouble coming.
Let us look at a chart depicting some key ratios and parameters. FNM’s net interest income plus fees from the credit guaranty book (with guaranties of $2.7 trillion outstanding as of Mar-08), (as annualized percentage of the average value of securities investments and mortgage loans), have trended down from 1.5% to 1.2% over the past two years, except in the past two quarters. Since Dec-07, FNM has shifted its funding mix to a higher proportion of short-term borrowings, giving it some benefit on the net yield, but increasing the refinancing risk in a rising interest rate market.
This marginal net yield of 1% plus was completely wiped out in each of the past three quarters by 1) up to 3% annualized credit losses on the company’s mortgage book, and 2) annualized marked-to-market fair value losses of up to 5% on the company’s securities book. Evidently, FNM’s earnings capability has been inadequate to absorb extreme shocks in the beleaguered mortgage markets.
