Fannie Mae Tanking - Housing Part 2
As you know from recent news, Citigroup just sold 4.9% of itself in a desperate move to get cash.
Meanwhile, Fannie Mae is cutting its dividend and selling new shares.
Add it up and you see that top lending institutions are insolvent. What does this mean and why should you be scared.
Start with FNM. FNM is a very unique entity - it backs mortgages. If a homeowner defaults, FNM is required to buyback these loans at the original price, not the current value. Bearing in mind that FNM basically focuses on folks who couldn't normally get a loan, well, you get the picture. They backed bad loans and must now buy them back. In 1 year, FNM has movde from buying back $37M in bad loans to $670M.
Meanwhile, FNM has engaged in slippery accounting. They are not writing down the losses but, instead, are claiming that the losses can be recovered. If they are correct, no problem. But if they are wrong, then they are hiding the fact that they are now insolvent.
Recall that subprime loans are now trading at $0.30 to the dollar. The FNM and Freddy Mac backed loans have more support: they are trading at $0.70 per dollar. Combined, these two entities have $162B in guaranteed loans. If they are wrong and the market is right that 30% of these loans will never get repaid, then they will lose $40B. But they don't have that money.
The same is true of Citi - their debt to cash ratio is blown. The only way they and other banks like BoA are surviving is by using accounting tricks to hide the true extent of losses and forestall emergency help.
This is the match that will start the fire sale. As more and more properties become bank owned, pressure will build to sell them. At any price. A housing fire sale tend sto be different from a normal fire sale because housing gets handled slower. Repossessions can be delayed up to 6 months or more. And then the house must be sold. It could be 9~12 months from now before the tidal wave of dumped houses finally shows up in the housing numbers.
Meanwhile, governments will be in a bad place. The Fed will find that most financial institutions won't be paying taxes this year. Or next. That's 10s of billions of dollars in tax revenues that won't materialize. At the local level, governments that depend on housing taxes will be in for a nasty surprise. California's housing taxes add up to ~1.5%. With 100K houses already under default, that's ~$50B in property at $500K per house. Almost $1B in tax revenue that won't get paid. Assume that another 50,000 homes will default and you get the picture.
Instead of doing the honorable thing and firing a bunch of workers or renegotiating fat government union salaries, watch the states and municpalities up taxes and increase penalties. This wil lalso take at least a year to materialize.
Invest defensively. The day of reckoning is on the horizon but the stock market is still low-balling the impact.
Meanwhile, Fannie Mae is cutting its dividend and selling new shares.
Add it up and you see that top lending institutions are insolvent. What does this mean and why should you be scared.
Start with FNM. FNM is a very unique entity - it backs mortgages. If a homeowner defaults, FNM is required to buyback these loans at the original price, not the current value. Bearing in mind that FNM basically focuses on folks who couldn't normally get a loan, well, you get the picture. They backed bad loans and must now buy them back. In 1 year, FNM has movde from buying back $37M in bad loans to $670M.
Meanwhile, FNM has engaged in slippery accounting. They are not writing down the losses but, instead, are claiming that the losses can be recovered. If they are correct, no problem. But if they are wrong, then they are hiding the fact that they are now insolvent.
Recall that subprime loans are now trading at $0.30 to the dollar. The FNM and Freddy Mac backed loans have more support: they are trading at $0.70 per dollar. Combined, these two entities have $162B in guaranteed loans. If they are wrong and the market is right that 30% of these loans will never get repaid, then they will lose $40B. But they don't have that money.
The same is true of Citi - their debt to cash ratio is blown. The only way they and other banks like BoA are surviving is by using accounting tricks to hide the true extent of losses and forestall emergency help.
This is the match that will start the fire sale. As more and more properties become bank owned, pressure will build to sell them. At any price. A housing fire sale tend sto be different from a normal fire sale because housing gets handled slower. Repossessions can be delayed up to 6 months or more. And then the house must be sold. It could be 9~12 months from now before the tidal wave of dumped houses finally shows up in the housing numbers.
Meanwhile, governments will be in a bad place. The Fed will find that most financial institutions won't be paying taxes this year. Or next. That's 10s of billions of dollars in tax revenues that won't materialize. At the local level, governments that depend on housing taxes will be in for a nasty surprise. California's housing taxes add up to ~1.5%. With 100K houses already under default, that's ~$50B in property at $500K per house. Almost $1B in tax revenue that won't get paid. Assume that another 50,000 homes will default and you get the picture.
Instead of doing the honorable thing and firing a bunch of workers or renegotiating fat government union salaries, watch the states and municpalities up taxes and increase penalties. This wil lalso take at least a year to materialize.
Invest defensively. The day of reckoning is on the horizon but the stock market is still low-balling the impact.
posted by Andrew at
6:46 AM
3 Comments:
Any bad news is a good news now ..Fed already hinted the rate cut ..rally will start!!!
Andrew.. bought anything today ? *BTW* CLB is missing in your list … too much insider selling? It’s down even on a day like today.
CLB is fine but I think it's near the high end of my valuation.
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