According to a report published by Federal Housing Finance Agency (“FHFA”) on Thursday, government-backed mortgage finance giants Fannie Mae (FNMA) and Freddie Mac (FMCC) lost $226 billion in capital in the last three years.
As these two mortgage finance companies have absorbed $148 billion in taxpayers’ money since their takeover two years ago to keep themselves afloat, the immense capital losses have drawn the attention of critics, pressuring Democrats to find a way to address the housing crisis.
According to the FHFA report, the majority of the losses (about $166 billion) were a result of guaranteeing mortgage loans on single-family homes. Also, there was an additional loss of $21 billion on the mortgage finance giants’ investment portfolios. In addition to these losses, Fannie and Freddie have paid $13 million in dividends on senior preferred stock issued to the U.S. Treasury for taking government bailout money. The rest of the losses were related to accounting adjustments and write-downs on low income tax credits.
As unusual home loans had taken a significant role in the housing market from 2004 to 2007, Fannie and Freddie lost market share to banks that issued mortgage-backed securities during that period, the report says. In order to regain their market share, these two mortgage finance giants started buying more high risk loans and this caused massive damage in 2006 and 2007.
Finally, with the commencement of the financial crisis in mid 2008, the private mortgage market became stationary. As a result, Fannie and Freddie became the only players in the mortgage market.
However, amid increasing concerns that Fannie and Freddie did not have enough capital to withstand losses in their portfolio, the Government ultimately announced the takeover of these companies to prevent their collapse.
As expected, the biggest losers were the shareholders of the company. As part of the bailout, the U.S. Treasury received warrants to buy 79.9% of the companies' common stock, effectively wiping out shareholder value. Finally, Fannie and Freddie were placed under the conservatorship of the FHFA.
Now an increase in mortgage rates would bring house prices down. If this happens, it will definitely stabilize the market for unsold houses. However, the banks that have taken taxpayers’ money and not repaid yet would incur immense losses. Now the issue to ponder is that whether this would be a preferred scenario.
Earlier this month, Treasury Secretary Timothy F. Geithner said that the government should ensure that these mortgage finance giants don't require more bailouts. According to Geithner, the government should reduce its support to Fannie and Freddie as these companies took market share from private competitors with support from the government.
However, the two mortgage finance giants are trying to recover losses on bad loans by forcing big banks including JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) to repurchase troubled mortgage loans. Buyback of faulty mortgages by the big banks would help offset billions of dollars of losses of taxpayers.
As these two mortgage finance companies have absorbed $148 billion in taxpayers’ money since their takeover two years ago to keep themselves afloat, the immense capital losses have drawn the attention of critics, pressuring Democrats to find a way to address the housing crisis.
According to the FHFA report, the majority of the losses (about $166 billion) were a result of guaranteeing mortgage loans on single-family homes. Also, there was an additional loss of $21 billion on the mortgage finance giants’ investment portfolios. In addition to these losses, Fannie and Freddie have paid $13 million in dividends on senior preferred stock issued to the U.S. Treasury for taking government bailout money. The rest of the losses were related to accounting adjustments and write-downs on low income tax credits.
As unusual home loans had taken a significant role in the housing market from 2004 to 2007, Fannie and Freddie lost market share to banks that issued mortgage-backed securities during that period, the report says. In order to regain their market share, these two mortgage finance giants started buying more high risk loans and this caused massive damage in 2006 and 2007.
Finally, with the commencement of the financial crisis in mid 2008, the private mortgage market became stationary. As a result, Fannie and Freddie became the only players in the mortgage market.
However, amid increasing concerns that Fannie and Freddie did not have enough capital to withstand losses in their portfolio, the Government ultimately announced the takeover of these companies to prevent their collapse.
As expected, the biggest losers were the shareholders of the company. As part of the bailout, the U.S. Treasury received warrants to buy 79.9% of the companies' common stock, effectively wiping out shareholder value. Finally, Fannie and Freddie were placed under the conservatorship of the FHFA.
Now an increase in mortgage rates would bring house prices down. If this happens, it will definitely stabilize the market for unsold houses. However, the banks that have taken taxpayers’ money and not repaid yet would incur immense losses. Now the issue to ponder is that whether this would be a preferred scenario.
Earlier this month, Treasury Secretary Timothy F. Geithner said that the government should ensure that these mortgage finance giants don't require more bailouts. According to Geithner, the government should reduce its support to Fannie and Freddie as these companies took market share from private competitors with support from the government.
However, the two mortgage finance giants are trying to recover losses on bad loans by forcing big banks including JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) to repurchase troubled mortgage loans. Buyback of faulty mortgages by the big banks would help offset billions of dollars of losses of taxpayers.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
FREDDIE MAC (FMCC): Free Stock Analysis Report
FANNIE MAE (FNMA): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
Zacks Investment Research
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