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Freddie Mac’s Trailing Six Quarter Performance
By Markham Lee on August 15, 2008 | More Posts By Markham Lee | Author's Website
On Monday we took a look at Fannie’s abysmal performance over the last five quarters, and today we’ll take a look at Freddie Mac’s. As you can imagine it’s just more of the same:
First here is a look at the increase in their lending reserves since Q4 2006:
Graphic courtesy of Freddie Mac; Click image to see a larger version
Lending losses have increased 839% since Q4 2006
Net Charge-offs have increased 1,373% since Q4 2006
It’s worth noting that over the same time period lending losses as a % of their overall mortgage portfolio have increased by about 500%.
Now let’s look at the financials over the last six quarters:
Graphic courtesy of Freddie Mac; Click image to see a larger version
*The number in parenthesis is the performance over the last four quarters
Operating (Pre-Tax) Losses: -8.4 Billion (8.7 Billion)
Tax Benefits: 4.4 Billion (4 Billion)
Net Losses: 5.8 Billion (5.4 Billion)
I just can’t stress enough how spreading out these losses (and the risk to the economy) over multiple companies is an absolute must right now, if this had been handled properly years ago we could very well have a situation where some of our mortgages GSEs were profitable and the cost of potential bailouts, economic risks, etc, was greatly reduced. Instead of thinking solely in terms of injecting liquidity into the housing markets, Congress needs to think in terms of striking a conservative balance between mortgage market liquidity and risk.
You can read the Q2 “financial statements and core tables” here, and view the slides from the conference call here.
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“Congress needs to think in terms of striking a conservative balance between mortgage market liquidity and risk”.
The situation will continue to worsen if the increase in cohabitation continues.
This line of thinking is supported by an interesting paper “Mortgage Default among Rural, Low-Income Borrowers” printed in the Journal of Housing Research in 1995 and [ironically] apparently funded by Fannie Mae.
It is quite an old paper and may not be entirely relevant. But I think it is indicative that potential changes in lifestyle have not been factored in sufficiently to lenders’ thinking. It includes:
“On average change in marital status increases the risk of default 4.5 times”.
This is supported further by other research, “Why have a rising number of Americans defaulted on their mortgage payments in recent years? When economist Darryl E. Getter of the U.S. Department of Housing and Urban Development set out to answer this question, he discovered that the problem was often not chiefly financial, but rather marital: many of the American homeowners who fall behind in their mortgage payments are experiencing the economic distress occasioned by divorce or separation from a spouse …. Whether looking at all households or just at those with “normal and unusually high” incomes, Getter finds unusually high default rates for home mortgages among Americans who are divorced/separated ……… (Source: Darryl E. Getter, “Contributing to the Delinquency of Borrowers,” The Journal of Consumer Affairs 37.1 [2003]: 86-100.)
In “Research Into Mortgage Default and Affordable Housing: A Primer”, [2002] Charles A. Capone, Jr., Ph.D, Congressional Budget Office, Center for Home Ownership, Local Initiatives Support Corporation writes, “….. statistical results are reported as multiplier ratios. These ratios give the relative strength of various influencing factors on incentives to default. Deviations from a value of one (1.0) tell direction and strength of effects. For example, the ratio reported for marital problems is 4.48. That means the incentive to default is 4.48 times as high for families experiencing marital problems than for those without such difficulties. This is not quite the same as saying probabilities of default will be 4.48 times as high, but it is close.”
Cohabiting couples break up at a much faster rate than married ones. The situation is unlikely to improve until this is understood by both borrowers and lenders.