Wednesday, February 27, 2008

Fannie Mae (FNM) Makes Huge Reversal on OFHEO Increase in Allowance

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Well the hits just keep coming for the stock market - bond insurer bailout finalizing, more Fed cuts coming, and now OFHEO has found it in their heart to raise the cap on how much Fannie (FNM) and Freddie Mac (FRE) can own in their portfolio. Ahem. Another free market move I am sure. Either way, this news is making investors forget about this morning's terrible news in Fannie (FNM) and is taking Thornburg Mortgage (TMA) up (+7%) with it as well.
  • The regulator to Fannie Mae and Freddie Mac will remove limits on their $1.5 trillion mortgage portfolios, bringing an end to a restriction that hobbled their ability to provide financing for the housing market.
  • The cap, imposed in 2006 after the mortgage finance companies uncovered $11.3 billion of accounting errors, will end on March 1, the Office of Federal Housing Enterprise Oversight said in a statement today. Fannie Mae today reported a $3.55 billion fourth-quarter loss and Freddie Mac plans to issue results tomorrow, releases that Ofheo characterized as ``timely.''
  • ``These steps constitute an important milestone in remediation of their respective operational and control weaknesses that led to multi-year periods when neither company released timely, audited financial statements,'' Ofheo Director James Lockhart said in the statement.
  • Ofheo also soon may ease requirements that Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, hold 30 percent more capital than normal as they fix their book-keeping, according to the statement.
So in summary, two companies that have been among some of the most poorly run in the past, and are bloated with junk loans, are now being allowed to take a lot more junk into their portfolios .... because the rest of the mortgage market is acting in very risk averse manner. That's the reality, but that last phrase won't be mentioned - they are saying "it's due to good behavior" :)

What is happening is these mortgages have lost their market - the banks who actually hold loans on their own books are putting a lot of scrutiny on borrowers because they actually now care that a person has more than a heartbeat - they actually want to know that the borrower has the means to pay back the loan. But for the rest of the mortgage market, there are no more suckers left to buy bad mortgages, sliced/diced and securitized. So the mortgage market is shrinking. So how are we solving it through back channels? Since we can find no one with a brain who wants to buy this securitized junk... we are going to feed said junk it into our two quasi government institutions. And if they go bad? Well that's ok - there is always the backstop of the US taxpayer. Let's check back in 2 years to see how this turned out....

But it is good news for mortgage originators. We now have a huge new supply of "dumb money" willing to buy new mortgages.

Long Thornburg Mortgage in fund and personal account

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