With the signing of the housing “relief” act, the process has now officially begun in what will be not only the largest taxpayer bailout of private enterprise in history but the largest legislative blunder as well.Allowing the Treasury Department of an immensely debt-laden country carte-blanche to utilize taxpayer money to engineer an essentially unaudited unwind of the GSEs, the two massive risk-laden failures, seems to smack of the essence of the times and further, at least in my mind, marks a decisive push into the absurd that would likely precede a wider scale crisis for our economic system.
Given the sheer size of these government sponsored companies, with loan guarantee obligations recently estimated by Federal Reserve Bank of St. Louis President William Poole of totaling $4.47 Trillion (That’s TRILLION with a capital T… for perspective ALL U.S. government debt held by the public totals roughly $4.87 Trillion) and the “fuzzy” interpretation of their “implied” overall Federal government guarantee should they experience systemic crisis, these changes are reckless to say the least.
One key to understanding the potential risk that these entities face as the nation’s housing markets continue to slide lies in considering their current lending practices.
Although it’s been widely assumed by many that Fannie Mae and Freddie Mac have utilized a more conservative and risk averse standard for their loan operations, it now appears that that assumption is weak.
Whether it’s their subprime loan production, low-no down payment “prime” lending practices, or their conforming loan-piggyback loophole, the GSEs participated as aggressively in the lending boom as any of the now infamous bankrupt or near-bankrupt mortgage lenders.
Additionally, it’s important to understand that Countrywide Financial has been and continues to be Fannie Mae’s largest lender customer and servicer responsible for 28% (up from 26% in FY 2006) of Fannies credit book of business.
To that end, let’s compare the performance of Fannie Mae’s operations with that of Countrywide Financial.
NOTE: Since Countrywide Financial has discontinued reporting their monthly operational status in February the data supplied below is based on a estimates generated by a simple linear extrapolation of the actual data supplied between 2005 – February 2008. I will update the data when and if Countrywide ever provides data on its internal state.
The following chart (click for larger) shows what Fannie Mae terms the count of “Seriously Delinquent” loans as a percentage of all loans on their books.
It’s important to understand that Fannie Mae does NOT segregate foreclosures from delinquent loans when reporting these numbers and that should they report the delinquent results as a percentage of the unpaid principle balance, things would likely look a lot worse.
In order to get a better sense of the relative performance of Fannie Mae as compared to Countrywide Financial, the following chart (click for larger) compares Fannie Mae’s “Seriously Delinquent” loans (which include foreclosures) to Countrywide Financials loans in foreclosure.
Finally, the following chart (click for larger) shows the relative movements of Fannie Mae’s credit and non-credit enhanced (insured and non-insured) “Seriously Delinquent” loans versus Countrywide Financials delinquencies as a percentage of total loans.
