U.S. Losses on Fannie, Freddie May Be $300 Billion, Poole Says
By Christopher Swann and Pimm Fox
Sept. 7 (Bloomberg) — William Poole, former president of the Federal Reserve Bank of St. Louis, said taxpayers may face a $300 billion bill to revive Fannie Mae and Freddie Mac, the mortgage giants being taken over by the Federal government.

“I would not be surprised if their total losses aggregate about 5 percent of their obligations” of about $6 trillion, Poole said today in an interview on Bloomberg Radio. “Five percent does not seem to me to be an outrageous guess.”

Poole welcomed the decision to put the companies into conservatorship by the Federal Housing Finance Agency, calling it preferable to action by the Federal Reserve. He said financial fallout from Fannie and Freddie was likely to be a long-term drain on the Treasury.

“It’s extremely healthy that it’s now the Congress and the Treasury and not the Federal Reserve putting funds in,” he said. “It’s not the purpose of a central bank to put funds in to save or bail out failing companies.”

Treasury Secretary Henry Paulson said today he would replace the chief executives of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac and eliminate their dividends. The Treasury will purchase up to $100 billion of senior-preferred stock in each company as needed to maintain a positive net worth.

The Treasury said it would reduce the portfolios of both companies by 10 percent a year starting in 2010. “I think that’s a good way to go, and I just hope that the government can complete that course,” Poole said.

To contact the reporters on this story: Christopher Swann in Washington at cswann1@bloomberg.net; Pimm Fox in New York at pfox11@bloomberg.net;

Last Updated: September 7, 2008 16:39 EDT

You’ve misread this. Of course they file a NOD and count a loan delinquent after 90 days. The change is that they allow for longer workouts/short sales and do not write down values of loans (for balance sheet purposes) while they are being worked out. (Which may in principle take up to 2 years, but never really does)

http://www.fanniemae.com/markets/debt/pdf/fundingnotes_05_08.pdf

Many investors and analysts view the serious delinquency rate as an indicator of potential foreclosures in the future. However, most loans that become seriously delinquent do not result in foreclosure.
Fannie Mae classifies a single-family loan as seriously delinquent when it meets one of the following three criteria:
(1) When a borrower has missed three or more consecutive monthly payments,
and the loan has not been brought current or extinguished through foreclosure, payoff or other resolution;

If only what’s coming would be so forgiving as the 1970’s…

What’s coming directly ahead is so ‘out there’ that to discuss it would immediately relegate one to the tin-foil hat crowd.

Most of us either believe (or have believed) that because we live here, that nothing bad could ever happen. ‘Bad’ in the context of what routinely happens or has happened in countries outside our boundaries in terms of economic, political and social strife.

I can only state that it’s probably a good thing we don’t know precisely what is right around the corner, because at least not grasping the full extent of what lies ahead, allows for some preparation and reflection. As this slow-motion (but rapidly accelerating into fast-motion) Smack-down plays out, you will at least have an ‘ignorant’ chance at survival.

If you had full knowledge of just how bad things are going to get – from all angles, it would likely be too depressing to confront.

Peace -

CC

From Treasury Secretary Paulson:

“These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.”

Translation:

The Feds have BOTH a moral and practical obligation to make the holders of current MBS and debt whole.

Can’t state it any simpler than that.

Recall the dramatic downdraft we had in January. This is coincident with a little known fact.

Quarterly earnings reports are not audited. Annual statements, typically issued in January, are.

AUDITED reports, especially after the Enron scandal, are far more probative of a company’s ACTUAL financial health. This story deals with the difference between an AUDITED and an UNAUDITED view of a company’s balance sheet.

Under current case law, accounting firms are FULLY LIABLE for ALL of the losses not properly represented on AUDITED statements. This means that just one poorly performed audit of a corporate behemoth can wipe out any of the large accounting firms. Again, recall Enron and Arthur Andersen. This case law has not changed.

As yet another sign of their central role in intensifying this crisis, the SEC (NOT the FED) is likely to argue in court against this case law. However, it is by no means clear they will prevail.

Think of Arthur Andersen’s extinction at the hands of Paul Volcker and the courts. They were thought to be “too big to fail”. Their very public dismemberment chastened EVERYONE working for a large accountng firm.

Because ONLY annual reports are audited, this accounts for why there were so many huge earnings “surprises” in January. Last January, corporate Treasurers were shocked by the intensity and pugnaciousness of the auditing firms, said firms determined not to go the way of their dear friends at Arthur Andersen by failing to include enormous risks posed by asinine derivatives accounting practices in their comprehensive audits.

The story above is but one example why in this current environment quarterly earnings reports are virtually worthless and the ONLY rational accounting treatment occurs from the AUDITED reports, issued every January.

Matt Dubuque