The latest turmoil concerning Freddie Mac and Fannie Mae likely represents one of the most significant blows to have hit the housing markets and the overall economy since the start of this historic downturn.
Given the eroding results of Freddie Mac's third quarter operations and other tumultuous events, there has been a clear loss in confidence in these two government sponsored enterprises (GSE) both closing the door to many of the proposed opportunities for market relief and further revealing the true extent of the housing decline.
Putting aside the recent “fuzzy math” episode, today Freddie Mac has disclosed a tremendous deterioration of mortgage credit in the third quarter of 2007 resulting in a whopping $1.2 billion of expenses (this is technically a 971% increase in expenses over the same quarter last year) related to increasing loan loss provisions and REO (real estate owned) operations.
Although, Freddie Mac’s single family delinquency rate has been rising and now stands at .51% of their current mortgage holdings, that number EXCLUDES losses coming from their more risky “Structured Security” transactions and delinquent loans that have had their terms modified under individual agreements with borrowers.
The unpaid principle balance of Freddie’s single family "Structured Transactions" as of September 30, 2007 was $20.2 billion, representing approximately 1% of their total mortgage portfolio and carrying a delinquency rate of a staggering 9.0%.
Keep in mind, this is the government sponsored “conforming loan” market we are talking about.
Both Freddie and Fannie, being highly regulated, are presumed to have adhered to a greater degree of standards when transacting mortgages.
Obviously, we are now seeing a clear indication of a substantial deterioration of the near-prime and prime mortgage markets.
Additionally, given the current circumstances, I believe it is safe to say that any opportunity for either Fannie Mae or Freddie Mac to assist the Jumbo loan market, as has been suggested by both Senator Charles Schumer (D-NY) and Federal Reserve Chainman Ben Bernanke, is now totally gone.
