Well, at least Freddie didn’t lose $25 billion
Monday, November 9, 2009
Freddie Mac, the once powerful mortgage-finance company that now is controlled by Uncle Sam, posted a net loss of $6.3 billion in the third quarter of 2009.
That may seem ugly. But Freddie Mac lost $25.3 billion the year before.
Freddie Mac is a government-sponsored entity responsible for maintaining a stable housing market. The federal government stepped in to keep it afloat when the housing market went bust. Whether or not the worst is over, there still is plenty of bad stuff, as its latest filing with the Securities and Exchange Commission shows.
Here is a link to the full Freddie Mac filing, though we at ProtectConsumerJustice.org have culled through it, so you don’t have to. The filing is not for the faint of heart, especially for Californians.
There is, for example, a warning that there will be “a variety of factors” that “will continue to place downward pressure on our financial results in future periods, and could cause us to … request additional draws from Treasury under the Purchase Agreement.”
Then there is this:
Key factors include the potential for continued deterioration in the housing market and rising unemployment, which could result in additional credit-related expenses and security impairments, adverse changes in interest rates and spreads, which could result inmark-to-market losses … While the housing market has experienced recent modest home price improvements beginning in the second quarter of 2009, we expect home price declines in future periods. Consequently, our provisions for credit losses will likely remain high during the remainder of 2009.
There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following our conservatorship, including whether we will continue to exist.
Home prices nationwide increased an estimated 0.3% in the third quarter of 2009 (and an estimated 0.9% during the nine months ended September 30, 2009) based on our own internal index. However, many regions and states suffered significant home price declines in the last two years. The percentage decline in home prices in the last two years has been particularly large in the states of California, Florida, Arizona and Nevada, which comprised approximately 25% of the loans in our single-family mortgage portfolio as of September 30, 2009.
Certain states experienced much higher unemployment rates, such as California, Florida, Michigan and Nevada, where the unemployment rate reached 12.2%, 11.0%, 15.3% and 13.3%, respectively, at September 30, 2009. Loans originated in these states comprised approximately 26% of the loans in our single-family mortgage portfolio as of September 30, 2009. Many financial institutions continued to remain cautious in their lending activities during the third quarter of 2009. Although there was overall improvement in credit and liquidity conditions during the third quarter, credit spreads for both mortgage and corporate loans remained higher than before the start of the recession.
Matters continue to deteriorate. In August, mortgage lender Taylor, Bean & Whitaker Mortgage Corp., or TBW, filed for bankruptcy. Freddie Mac estimates that its net potential exposure related to the loan repurchase obligations was approximately $500 million as of the end of September.
As has been know for some time, Freddie faces federal investigations by the U.S. Justice Department in Virginia. The Securities and Echange Commission issued subpoenas to Freddie Mac and some employees early this year. The entity also is fending off serious lawsuits brought by pension funds and others. Here is one of the Freddie Mac lawsuits.
There are certain common allegations. Freddie and its executives were paid exorbitant salaries and bonuses tied to Freddie Mac’s short-term performance. Some employees intentionally misled investors into believing that its mortgage portfolios were sounds, its underwriting criteria were the gold standard and its capitalization was sufficient. The reality was that Freddie’s mortgage portfolios were at tremendous risk because of exposure to the subprime market. Several news accounts have focused on the suits, including this one in the New York Times.
Before all the unpleasantness of the housing bust, Freddie Mac was a major lobby force in Washington, spending $5.8 million as it headed down in 2007-2008, as the Center for Responsive Politics notes. It had a more modest presence in California, spending $235,705 on lobbying during this decade in Sacramento and attempting to convince lawmakers and staffers over pastries that it knew what it was doing. Freddie’s presence in Sacramento ended last year.