Why is Fannie Mae buying foreclosures

The US mortgage crisis is widespread

The major US mortgage company Freddie Mac suffered a net loss of $ 2 billion or far more than expected in the third quarter. Credit losses and the need for write-downs on securities portfolios are likely to increase in the coming months.

Cls. New York, November 20

Hypo financier Freddie Mac posted a net loss of $ 2.02 billion, or $ 3.29 per share, for the third quarter, compared to a loss of $ 715 million or $ 1.17 for the same period last year. The loss is 15 times greater than the Wall Street augurs expected. Until now, it was generally assumed that the state-sponsored Freddie Mac, like its larger sister institution Fannie Mae, would be less affected by the subprime crisis because they invested in traditional fixed-rate mortgages in advance and only to a small extent in low-quality loans. The payment problems and foreclosures have increased significantly against the background of falling house prices, even in the "solid" segment, and in Freddie Mac's judgment they should continue to increase. This means that high losses can also be expected in the future. Freddie Mac, like Fannie Mae, buys mortgages and mortgage-backed notes, and also insures home loans. The two institutes cover around 40% of the $ 11.5 trillion market.

Price drop on the stock exchange

Freddie Mac's share price soared 30% on Tuesday morning. Since Fannie Mae announced third-quarter net loss doubled to $ 1.4 billion on Nov. 9, Freddie Mac's price had fallen 15% by Monday in anticipation of bad news; since the beginning of the year, Freddie Mac has lost 61% of its value. Fannie Mae was downgraded by 25% on Tuesday morning, down from 53% since the beginning of the year.

Corporate actions

The business magazine "Fortune" recently reported that both Freddie Mac and Fannie Mae may underestimate the extent of credit losses due to accounting changes. Freddie Mac's latest earnings include provisions for bad loans of $ 1.2 billion and write-downs on securities holdings of $ 3.7 billion. Losses on loan guarantees are stated to be $ 396 million (last year: $ 103 million) and those on mortgages to be $ 483 (30) million.

Freddie Mac has a major accounting scandal behind him and as a result had to correct the books in the billions. As a consequence, the supervisory authority increased the necessary capital backing by 30%. As a result of the losses, the capital has now almost melted to the legal minimum. Freddie Mac has hired investment banks Goldman Sachs and Lehman Brothers to examine ways and means of raising capital. In addition, consideration is being given to halving the dividend. That would save about $ 163 million in the fourth quarter. If a quick fundraising fails, Freddie Mac would have to limit growth or reduce the portfolio, which was reported at $ 703.1 billion as of October.