How well are Fannie Mae and Freddie Mac doing?
Better than most news reports might suggest.
Testifying before the House Financial Services Committee, the chief regulator of Fannie Mae and Freddie Mac, James Lockhart, testified that the two companies own or guarantee 56% of the single family mortgages in this country or $5.4 trillion.
Lockhart also said for both companies that “first quarter net losses were $23.2 billion at Fannie Mae and $9.9 billion at Freddie Mac. The provision for credit losses — to build loan loss reserves — remains a primary driver of net losses at both Enterprises. Loan loss reserves at both Enterprises increased substantially in the first quarter to reflect higher expectations of credit losses from increasing mortgage delinquencies. Loan loss reserves increased by 70 percent at Fannie Mae to $42 billion and by 50 percent at Freddie Mac to $23 billion.”
Translation: The loss reserves were increased so, for accounting purposes, there was a “loss” at each company. However, loss reserves are a guess, they are NOT actual losses. Who decided how much the loss reserves should be? The federal government which took over the two companies last year.
The Fiction of Loss Reserves
In other words, by increasing loss reserves the government also creates accounting losses that are reported to the public.
But how are Fannie Mae and Freddie Mac actually doing? On page 22 of his 23 pages of testimony, Lockhart offered the delinquency chart below. Here’s how the delinquency picture actually looks:
Subprime ARMs Seriously Delinquent: 36.5%
Subprime Loans Seriously Delinquent: 24.9%
All Loans Seriously Delinquent: 7.2%
Prime Loans Seriously Delinquent: 4.7%
Fannie Mae Delinquencies: 3.2%
Freddie Mac Delinquencies: 2.3%
Anybody notice something curious here? Fannie Mae and Freddie Mac have far fewer delinquencies than lenders in general. Less than half the rate for all mortgages. Far less than even prime mortgages.
Unlike loss reserves, delinquency counts are real and objective. Hmmm. Makes you wonder why Fannie Mae and Freddie Mac were taken over by the Bush Administration….