Fannie Posts A Big Loss: Did Anyone Notice?

It’s indicative of the times we live in that Fannie Mae (FNM) can announce a loss of $23.17 billion for the first quarter of the year and not even cause a stir. Oh, as an aside, they need an infusion of $19 billion from the Treasury.

Continuing losses from Alt-A and subprmine loans as well as a deteriorating book of prime loans continue to plague the company. In addition, they started out this down cycle woefully under reserved so they’re still playing catch up. The company is pretty upfront in admitting that they expect to continue to rack up significant losses which means they’ll continue to keep coming back to the government.

If you read Fannie’s latest 10Q what strikes you is the tone of the document. There is perfunctory discussion about the financial results and pages of discussion of all that they’re doing to ameliorate the foreclosure problem. It reads precisely as you would expect a document from a government bureaucracy to read. Long on soft issues, short on meaningful business issues.

The problem is that Fannie and Freddie (FRE) are still ostensibly private companies. The government owns 79.9% of each but their shares are still listed. If you want you can go buy a few. It’s a bizarre situation that exists for a reason. So long as the government’s share of the companies stays where it is, the balance sheets of the two don’t have to be consolidated with the federal balance sheet. The advances like the one Fannie now needs are recorded as loans not expenditures and magically, the cost of maintaining these zombies is not recognized.

All of this enables the two GSE’s to operate in a sort of shadow land. Essentially unaccountable to anyone but their regulator, who is in reality a puppett controlled by Congress, they can pursue whatever housing related initiatives that they choose or more precisely whatever initiatives they are directed to pursue. Several years ago we worried about political control and influence of the two as well as their overly agressive lobbying. By any measure we are in a much worse situation. Yes, they don’t lobby anymore but that’s small comfort. Now they have become creatures of the government with no oversight and apparently little outside scrutiny from the press.

If you control the financial levers of the housing market you control the housing market. Currently that control has been socialized.

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About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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