Fannie Mae (FNM), Toll Brothers (TOL), and Mortgage Applications

I am awaiting to hear the spin on these issues... as we now know every bad piece of news is now discounted with "well that's the past, just wait 6 months from now when everything booms". Ironically, this was the same commentary we got last August, September, and October during the boom in equity markets. So 6 months from "then" is February, March, and April so the "boom" they told us to watch for back then should be happening any minute now. But if that doesn't work just keep pushing the boom out another 6 months and tell bears to stop whining so much... keep repeating this process until eventually you are correct. This is the stock market right now for the bulls.

So all the bad economic news items, can be washed away because that's already priced in and just you wait, the economic boom starting in August 2008 is going to blow you away. Also ignore such news as below because housing shortage begins by end of the year. Just you wait...

Credit Woes Spank Fannie Mae (FNM)

• Fannie Mae(FNM) swung to an fourth-quarter loss of $3.56 billion on spiking credit-related costs, including a steep increase in money set aside for loan losses, the government-sponsored entity said Wednesday.
• Fannie, the nation's largest mortgage buyer, lost $3.56 billion, or $3.80 a diluted share, vs. a profit of $604 million, or 45 cents a diluted share in the year ago period. Analysts polled by Thomson Financial had expected a loss of $1.24 a share.
• The biggest factors driving the declines in the fourth quarter were a $3.2 billion loss to the value of derivatives used to hedge its net assets and a $2 billion increase to reserves for credit-related losses. For the full year, Fannie increased its loan loss provision to $5 billion from $783 million in 2006.
• "We are working through the toughest housing and mortgage markets in a generation," said President and Chief Executive Officer Daniel Mudd. "Our results for 2007 reflect the challenging conditions in the market we serve. While we are pleased that demand for our mortgage guaranty businesses has surged as we respond to the market's urgent need for liquidity and stability, this positive trend has been far outweighed by the negative financial impacts of rising mortgage defaults, falling home prices, and extraordinary disruptions in the credit markets."

My take: Don't you worry. Just wait 6 months. Housing will boom as we have a shortage of housing stock by end of year 2008. And on a serious note, Fannie is only surviving due to the government's implicit backstopping (it won't fail) and you - the tax payer have a good chance of bailing out this company if things continue down this path for another 18 months. Also, remember Congress' bright idea to stuff this institution with even bigger loans since those markets are frozen, and what do you do when the market is frozen? The government rides to the rescue.

Toll Brothers (TOL) Wishes People Would Stop Talking about Recession because if they did Housing would be BOOMING

• Luxury home builder Toll Brothers on Wednesday swung to a fiscal first-quarter loss and said "ceaseless talk" about a recession is dampening the mood of consumers.
• Toll Brothers said it posted a loss in the fiscal first-quarter to Jan. 31 of $96 million, or 61 cents a share, after $153.3 million in write-downs. It earned $54.3 million, or 33 cents a share, in the year-ago quarter.
• Revenue dropped 23% to $842.9 million, and its backlog fell 42% to $2.4 billion. Excluding write-offs, it would've earned 35 cents a share during the quarter.
• Toll said "ceaseless talk" of a recession is dampening the consumer mood, though it noted "glimmers of hope" in a few markets, including Naples, Fla. and suburban Washington D.C.
• "Ceaseless talk of a recession continues to dampen the mood of consumers in general, whether or not a recession actually occurs. For home buyers, we believe this drumbeat, coupled with concerns over mortgages, the direction of home prices, and foreclosures, has kept pent-up demand on the sidelines," said Robert Toll, chairman and chief executive, in a statement.

My take: The stock should rally between 50-80% in the next week due to "glimmers of hope". Further, if people would stop being such downers and instead talked about unicorns, mermaids, and four leaf clovers the housing market would be booming. So if we all just stopped talking, housing would be booming. Thankfully, we've isolated the problem in housing... nothing to do with overpriced homes, and useless lending standards.... it's talking. Too much of it. Less talk. More buying of overinflated assets. Solves everything. So get to it.

Last, going back to item 1, I have been buying Thornburg Mortgage (TMA) because of the government's hair brained idea to stuff Fannie Mae and Freddie Mac with $500K, $600K, 700K mortgages. Unfortunately, Uncle Ben's helicopter drops are causing massive inflation expectations and the long bond (on which 30 year rates are dependent) continue to rise. Which is the opposite of Greenspan's conundrum (when he was increasing rates, the long bond stayed low). So now we have the opposite issue. So Ben cuts, but long term rates continue to go up as the smart people (bond traders) see inflation ramping. The tantrum throwing toddlers (equity traders) just cheer and are glib over each rate cut. More bad economic news! Yee Haw! More rate cuts!! Gimme gimme!

Anyhow, mortgage refinances are one of the main themes in my Thornburg investment, and they are getting shafted the past 2 weeks as mortgage rates spike. That's a problem. So I have to think this thesis over further - it was based on both the stuffing of our quasi government institutions with high priced loans along with massive refinancing of desperate homeowners who need cash flow. So the latter is becoming an issue as Helicopter Ben continues cutting rates. And people, no matter what the pundits say, or what lip service the Fed folks put to inflation - THEY DO NOT CARE. They are going to cut rates. Period. But this looks like it is just going to continue to drive the long term rate up as the non toddlers realize inflation is going to sky rocket.... oh what a box Ben is in!

• Mortgage application volume tumbled 19.2 percent during the week ending Feb. 22, according to the Mortgage Bankers Association's weekly application survey.
• The MBA's application index fell to 665.1 from 822.8 the previous week. It was the third straight week application volume fell. During that time, volume has dropped 39 percent as interest rates have risen steadily.
• Application volume fell as refinance volume plummeted 30.4 percent during the week. Purchase volume increased 0.2 percent. Refinance volume accounted for 52 percent of total mortgage applications. Refinance applications accounted for 73 percent of all application activity about a month ago.
• Application volume declined as interest rates continued to rise. The average rate for traditional, 30-year fixed-rate mortgages increased to 6.27 percent from 6.09 percent. In 2008, the average rate was as low as 5.49 percent during the week ending Jan. 18.

My take: I am trying to think like a Kool Aid Bull, and how to spin this. I have nothing. All I can tell you is just wait 6 months, because it will improve and all this current refinance nonsense, is what bears want to scare you with. Just wait 6 months. Please. Just remember.... in 6 months, everything will be better. I know I told you that last fall, but I was kidding. I meant the next 6 months. And if I am wrong in 6 months. Well, just wait for the next 6 months. Ok? It will all be better. In some 6 month period in our life. Trust me.

Long Thornburg Mortgage in fund and personal account