Rebel Traders – Analysis Without The Hype

Breaking -

What is the best way to announce news that people may not be too thrilled with? You do it on Christmas Eve, when Wall Street is entering ’sleep mode’ for the Christmas break, and when it is also a time when many Americans are too busy with holiday preparations to be watching the financial press.

This afternoon, Treasury Secretary Tim Geithner (TurboTax Timmy) announced that the Government (tax payers) will essentially backstop any and all losses above the already pledged funds that Fannie Mae and Freddie Mac incur out to December 31, 2012.

SECOND AMENDMENT dated as of December 24,2009, to the AMENDED AND
RESTATED SENIOR PREFERRED STOCK PURCHASE AGREEMENT dated as of
September 26,2008, between the UNITED STATES DEPARTMENT OF THE TREASURY
(“Purchaser”), and FEDERAL HOME LOAN MORTGAGE CORPORATION (“Seller”), acting
through the Federal Housing Finance Agency (the “Agency”) as its duly appointed conservator
(the Agency in such capacity, “Conservator”). [...]

Amendment to Section 1 (Relating to Definition of “Maximum Amount”).

The definition of “Maximum Amount” in Section 1 of the Existing Agreement is hereby
amended to read as follows:

“Maximum Amount” means, as of any date of determination, the greater of
(a) $200,000,000,000 (two hundred billion dollars), or (b) $200,000,000,000 plus
the cumulative total of Deficiency Amounts determined for calendar quarters in
calendar years 2010,2011, and 2012, less any Surplus Amount determined as of
December 31,2012, and in the case of either (a) or (b), less the aggregate amount
of funding under the Commitment prior to such date. [...]

That’s right, a blank check has now been handed to Freddie and Fannie, and the routing number on the bottom of the check reads  :TAX PAYER:

Perhaps this decision was necessary due to the still rising delinquencies that I reported on earlier today. Delinquencies across all income classes are still rising, and this trend is expected to continue. So as more and more homes are foreclosed and banks must then acknowledge the actual value (mark to market) which will result in significant losses from the make believe value they currently sit at on the books (thanks to mark to make believe accounting rule changes last year).

It could also be that the housing market has not yet reached bottom. A scenario that I still see as very real. Some have said the worst has passed with regards to the housing market, I say there is still more pain ahead for this sector, much more.

Everyone should feel like Santa Clause on this Christmas Eve because we just gave Fannie and Freddie a free ride, and we will pay for it all.

Fannie Mae (FNM) and Freddie Mac (FRE) are among this nations most embarrassing organizations, and together they stand to loot the tax payers dry in mounting losses.

Let us begin with the latest news concerning mortgage delinquencies:

December 23 – Freddie (Mac) said November delinquencies on single-family residences rose to 3.72% from 3.54% in October and 1.52% a year earlier.

Freddie Mac Delinquencies

And on a much broader measure we have this:

December 22 -WASHINGTON — The U.S. housing market continued to deteriorate in the third quarter as even the most credit-worthy borrowers increasingly fell behind on their mortgages, highlighting the problems policy makers have faced in trying to address the problem.

A new report from the Office of Thrift Supervision and Office of the Comptroller of the Currency found that the percentage of current and performing mortgages dropped for the sixth consecutive quarter, as foreclosures in process topped 1 million mortgages at the end of September. The report covers roughly 34 million loans totaling $6 trillion in principal balances, or approximately 65% of the U.S. mortgage market.

The regulators said that serious delinquencies, loans that are at least 60 days past due, increased across all loan categories and climbed to 6.2% of the loans in the portfolio during the third quarter. The report said that just 67.7% of option adjustable-rate mortgages were considered current at the end of the third quarter, while 27.9% were either seriously delinquent or in the process of foreclosure.

The most troubling finding was that even borrowers considered “prime,” or the least risky, increasingly can’t pay their loans. The report said that 3.6% of prime mortgages were more than two months behind on payments, more than double from a year ago. (emphasis added)

To date, both Fannie Mae (FNM) and Freddie Mac (FRE) were put into conservatorship last year due to enormous losses, have been bailed out by the tax payer to the tune of $100 Billion dollars, and now with losses continuing to escalate the Obama administration is set to announce another infusion of tax payer funds into these black holes. It is being rumored that President Obama will make the announcement of “providing additional support to these critically important institutions” with the next week or two. And the amount of additional support bailouts is anticipated to be somewhere between $200 to $400 Billion.

What ever happened to ‘no more bailouts’ ?

And finally, because Fannie and Freddie are so critically important to restoring health to the housing and mortgage industries the CEO’s will enjoy a nice holiday pay package between $4 and $6 Million. An official announcement is expected on Christmas Eve.

And just how well of a job is the Obama administration doing at saving homeowners?

This reminds me of Hurricane Katrina :

“You’re doing a heck of a job Brownie”

This morning the Q3 GDP was revised lower to 2.8% (from 3.5%) and personal consumption was also revised lower to 2.9% (from 3.2%).

The mortgage industry is still falling apart from within. Consider this news out of Freddie Mac (FRE) this morning:

Freddie Mac Reports Oct monthly metrics; Single Family delinquency rate 3.54% v 3.33% m/m

Until there is a significant improvement in delinquencies this data still suggests much steeper losses lay ahead of us in the financial sector.

S&P Case Shiller Price Index came in ‘not so hot’:

SEPT S&P/CASESHILLER-20 Y/Y: -9.36% V -9.10%E;   HOME PRICE INDEX: 146.5 V 146.9E

It had been showing the slightest sign of stabilization in recent reports, now it is headed back down again.

During the overnight hours we got confirmation of the channel on the S&P E-mini’s with the /ES trading down to 1098, right at the channel support line.

Watch this channel carefully, a move below the channel is the dynamic change needed to set this market into a new downward path. The range of the channel is 1100 on the bottom and 1120 on the high side.

S&P Futures

Freddie Mac (FRE) reported a quarterly loss of $23.9 Billion and has said it will need another $30.8 billion cash injection from the U.S. Government and says that even with the Government injection of more funds it may not be able to remain solvent.

Freddie Mac Reports Q4 -$7.37 v -$3.97 y/y, Sales negative $15.8B v negative $9.56B q/q

- Q4 loss $23.9B v loss $2.5B y/y

- Q4 shareholders deficit $30.7B

- Expects 2009 credit losses to remain high.

- Says the Treasury’s funding may not be enough to keep company solvent.

- Says the SEC is conducting interviews of its employees and the company has received subpoenas as part of a formal probe.

The following is the official press release by the White House / Treasury Department announcing how they will add more funding to Fannie and Freddie to support the housing rescue plan.

—–

Washington, DC — Today, the Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market, to help maintain mortgage affordability, and to help keep interest rates low.

Fannie Mae and Freddie Mac are critical to the functioning of the housing finance system in this country and play a key role in making mortgage rates affordable and maintaining the stability and liquidity of our mortgage market. In 2008, almost three-quarters of new home loans were financed or guaranteed by Fannie Mae and Freddie Mac.

Using funds already authorized by Congress for this purpose, Treasury is amending the Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities designed to ensure that each company maintains a positive net worth, to $200 billion each from their original level of $100 billion each. The increased funding will provide forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners.

(read more…)

How nice of Freddie Mac to announce this news after the market closed on a Friday when attention to the markets would be greatly reduced. Yep, they snuck this in on a Friday night.

Freddie Mac, the mortgage-finance company under federal control, said it will ask the U.S. Treasury Department for as much as $35 billion more in aid. Freddie, which took $13.8 billion from Treasury in November, said in a securities filing today that its fourth- quarter operating losses will again drive its net worth below zero.[...]

[...]The request comes as Freddie and Fannie Mae, the other government-sponsored enterprise, cope with the fallout from a slumping housing market that’s spurred a jump in delinquencies. Treasury officials have pledged as much as $100 billion to each to ensure solvency. The companies need aid if the value of their assets drops below the amount they owe on obligations.

(read more…)

We have learned that there will be an announcement of some kind at 11:00am (US EST). Supposedly it will be Hank Paulson and the Federal Housing Finance Agency Director James Lockhart who will make the announcement.

Speculation of what the plan will be has been running wild to say the least. And the resulting impact to the bond markets, currency markets, and the equities markets remain in just as much ‘cloud of uncertainty” as well.

The NY Times broke a story that Fannie and Freddie have been over stating their capital reserves. In other words they have been lying all along as to how well capitalized they really were. And you know we have been telling you for many months that there was no way that their capital reserves could be healthy.

Here is part of the NY Times article:

The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced on Sunday, came together after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter. (emphasis added)[...]

[...]Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.[...]

The Full NY Times article can be found HERE

It may very well be that Fannie and Freddie were so close to a complete failure that the Government had to step in NOW. Or, it could also be all a big ‘master plan’ that is orchestrated to give the markets something to cheer about and create a rally as we head into the last 2 months before elections. It all depends on WHAT the plan announced is, and just how it is perceived by the markets.

From my point of view ANY intervention by the US Government into these two companies is nothing short of a complete bailout and places great risk upon the tax payers of this Country.

Lisa and I have written for many months about how the credit markets have been deteriorating with each passing week almost. Mortgage delinquencies have been rising, yields on bond sales by Fannie and Freddie have been rising (equating to higher risk), and the entire mortgage (and housing market itself) has been falling apart rapidly.

Will the bailout of Fannie and Freddie create a “whoopee, lets rally” in the equities market as risk will be thought to be forever ‘backstopped’? Or will the recognition of just how dire the situation has become be a “oh crap” and create a massive sell off in equities as the acknowledgement of just how bad the conditions have become forces people to unload shares of anything tied to financial institutions?

This will indeed be a monumental day and one for the stock market history books.

The US Government needs to stop handing out OUR money to any company that screws up. I run my own company, can I go to Hank Paulson and ask for free money too? Hey.. let every company in America just go about reporting false income statements, keep the common shareholders happy, keep ripping off the public, and then when it all falls apart go to Paulson and ask him to fix everything.

Free enterprise and free markets… my ass.

Chime in with your thoughts…