UPDATE: "Obama Keeps Fannie, Freddie Off U.S. Budget, Counts Dividends (FNM; FRE)"
Original post:
We'll post the relevant portions of the President's Budget when it becomes available.
In the meantime the Wall Street Journal has been taking a look under the hood of the mortgage biz:
The Congressional Budget Office has lopped $20 billion off its estimate of the cost of keeping Fannie Mae and Freddie Mac afloat for the next decade—to a mere $79 billion. That will have to pass for good news, even if the estimate comes loaded with caveats. The bigger story is why the White House continues to keep these wards of the state off-budget.
As the CBO notes in a recent background paper, the standards for when to include government-sponsored entities in the budget go back to the 1960s, when a Presidential commission laid out a set of questions.
To wit: "Who owns the agency?" (In the case of Fan and Fred, taxpayers.) "Who supplies its capital?" (Taxpayers.) "Who selects its managers?" (The federal government.) And finally, "Do the Congress and the President have control over the agency's program and budget, or are the agency's policies the responsibility of the Congress or the President only in some broad ultimate sense?" (The feds have control in every sense.)
Since Hank Paulson placed them in conservatorship in September 2008, Fan and Fred have stopped even pretending to be run for profit. Losses have mounted accordingly: Some $291 billion for taxpayers through 2009, $48 billion for the cost of new business in 2009 alone, and $21 billion more this year. Last August, CBO estimated the 10-year cost to taxpayers of keeping Fannie and Freddie afloat at $389 billion.
Yesterday's estimate reduces that by some 5%, but this assumes the companies will stabilize at a loss rate of nearly $8 billion a year on average over the next decade. CBO bases its projection on an expectation that the housing market will "normalize" as the recession ends. However, there is no more normal in a housing market that now depends almost entirely on government subsidies. The full cost of subsidizing mortgages via Fannie and Freddie, the FHA and Ginnie Mae remains hidden and off the official balance sheet, so there is little political pressure to stop the losses.
As the CBO notes, Fannie and Freddie "purchase mortgages at above-market prices," driving down interest rates and passing some of the savings to home buyers. That subsidy is felt right away, but the risks in providing it are stored up over time, and their real costs may not be felt for years or even decades—as was the case in the years leading up to their spectacular collapse in 2008.
Yet this is precisely the fiction that the Obama Administration seeks to preserve by keeping the cost of Fan and Fred off the government's books. The Administration's budget accounting assumes Fannie and Freddie are private companies. So under its preferred treatment, the only recognized cost to taxpayers is the money that is being pumped in to keep them afloat—$110 billion so far....MORE
They continue with "Fannie, Freddie Chase Bad Mortgages":
Lenders Like BofA, J.P. Morgan Repurchase Billions in Faulty Loans; Just a Drop in the Default PoolIt is payback time for Fannie Mae and Freddie Mac on some mortgages sold to the finance companies by lenders.
Stuck with about $300 billion in loans to borrowers at least 90 days behind on payments, Fannie and Freddie have unleashed armies of auditors and other employees to sift through mortgage files for proof of underwriting flaws. The two mortgage-finance companies are flexing their muscles to force banks to repurchase loans found to contain improper documentation about a borrower's income or outright lies.
The result: Freddie Mac required lenders to buy back $2.7 billion of loans in the first nine months of 2009, a 125% jump from $1.2 billion a year earlier. Fannie Mae won't disclose its figure, but trade publication Inside Mortgage Finance said Fannie made $4.3 billion in loan-repurchase requests in the first nine months of 2009.
"Because taxpayers are involved, we're being very vigilant," said Maria Brewster, who oversees Fannie's repurchase team. "No taxpayer should have to pay for a business decision that caused a bad loan to be sold to Fannie Mae."
The get-tough stance comes amid pressure on Fannie and Freddie to make the most out of more than $100 billion in taxpayer funds they got to stay afloat. The U.S. government took them over in September 2008.
The biggest losers are likely to be Bank of America Corp., J.P. Morgan Chase & Co. and other mortgage lenders when the housing bubble burst. Such lenders also are being deluged with loans kicked back to them by holders of mortgage-backed securities who uncover deficiencies with loans bundled into the pools. One common example: a borrower who said the loan was for an owner-occupied home but used it for a second house.
Overall, banks repurchased about $14.2 billion in loans from holders of mortgage-backed securities in the first nine months of last year, up from $3.6 billion a year earlier, according to Barclays Capital. The figures are based on data reported to regulators by federally insured banks and savings institutions.
Forced loan buybacks threaten to "wipe out a significant portion of the [loan] origination profits…made in the last year," said Nicholas Strand, a Barclays analyst.
Strong-arming lenders to swallow loans that were guaranteed by Fannie Mae and Freddie Mac helps cushion the mortgage-finance companies from defaults, though repurchases represent a sliver of all defaulted loans.
Fannie reported Thursday that borrowers of 5.29% of the loans it guarantees were at least 90 days behind as of November, up from 2.13% a year earlier. Fannie guarantees $2.9 trillion in loans.
At Freddie, such delinquencies reached 3.87% at the end of December, up from 1.72% a year earlier.
While growth in subprime defaults is slowing, defaults on prime loans are accelerating. Such loans account for 90% of all mortgages guaranteed by Fannie and Freddie.
"Delinquency rates are up, so it's not surprising" that buyback demands are up, said Brad German, a Freddie Mac spokesman. "Consequently, the number of loan put-backs will reflect that."
Keefe, Bruyette & Woods analysts warned this week that repurchases would "contribute to further weakness in mortgage banking profitability in 2010, which is difficult for an industry that will already have to cope with materially lower production volume.">>>MORE
Finally, "Mortgage Funds Brace for Major Shift"
The end of a U.S. program supporting the home-loan market could reduce returns to investors
There may be an Arctic front looming for mortgage-focused mutual funds as the Federal Reserve prepares to stop buying securities backed by home loans next month.
The Fed kept mortgage rates low in 2009 by acting as a buyer of securities issued by or backed by three government-controlled entities: the Government National Mortgage Association (known as Ginnie Mae), Fannie Mae and Freddie Mac. These so-called agency securities provide funding for more than half of all U.S. home loans outstanding.
But the planned withdrawal of that government aid may cause mortgage rates to rise and the prices of mortgage securities—which move in the opposite direction—to fall, according to many money managers and analysts, potentially reducing returns for investors in mortgage-focused funds.
"Low underlying yields made even lower by an artificial and temporary market stimulus…just the prescription for bad fun," John Rekenthaler, vice president of research at Morningstar Inc., wrote in an online post titled "Bad Investment Ideas for 2010."
Some portfolio managers have cut their agency holdings ahead of the Fed's planned exit and started looking for returns in a much riskier part of the market: "non-agency" securities backed by "subprime" and other risky mortgages, the area that took such a massive beating in 2007 and 2008. Among those who say they have been selectively buying these securities recently are fund managers at firms including BlackRock Inc. and Goldman Sachs Group Inc.
Helped by Uncle Sam
The performance of agency mortgage securities has hinged on government backing for the past two years....
...Even with the government guarantees, however, rates on those agency securities didn't stabilize until the Fed committed to buying $1.25 trillion in Fannie, Freddie and Ginnie Mae securities in March 2009. (Earlier in the crisis, it had pledged to buy half that amount.)
Most mortgage-fund portfolio managers and analysts agree that the market's reaction to the Fed's withdrawal will be pivotal for returns this year. How disruptive it will be to financial markets remains a matter of debate.
Morningstar's Mr. Rekenthaler says he expects Ginnie Mae investments this year to "make about 4% in yield and then give that back in principal losses." He says that if he were a fixed-income investor, he would shift his money into corporate-bond funds, hedging that by betting against higher-quality bonds in a "barbell" strategy.
Curtis Arledge, co-head of U.S. fixed-income at BlackRock's portfolio-management group, says he thinks the Fed's withdrawal is largely reflected in current prices already, though he "wouldn't be surprised to see a little more volatility as that program evolves in 2010." He expects Ginnie Mae securities to hold their value this year without suffering principal losses....MORE
Ginnie Mae mortgage securities emerged unscathed from the credit crisis because they—along with Treasurys—had an explicit government guarantee. The average fund focused on Ginnie Maes showed a net return of 5.24% in 2008, according to research firm Lipper Inc., compared with an average loss of 1.6% for a separate category of U.S. mortgage funds that venture more broadly into other agency and non-agency mortgages. Last year, the general mortgage funds rose an average of 9%, while Ginnie Mae funds gained an average of 8%.Many firms have funds dedicated to Ginnie Mae mortgage investment, including
Vanguard GNMA,
Fidelity GNMA and
BlackRock GNMFannie and Freddie mortgage securities, on the other hand, lost value during the credit crisis in 2008 because there was uncert
ainty about the extent to which the government, which had chartered the companies but allowed them to operate as for-profit corporations, stood behind their securities. In September 2008, the U.S. took over Fannie and Freddie and as part of the "conservatorship" agreed to keep bondholders whole no matter what happened with the underlyina
I wrote about 
sentiment
GE's 10-day ISE call/put volume ratio arrived today at 1.79, as speculators have bought to open nearly two times more calls than puts during the past couple of weeks. This ratio ranks in the 70th annual percentile, revealing that traders have snapped up calls over puts at a faster pace only 30% of the time during the past year. 
![[Pushback]](http://sg.wsj.net/public/resources/images/MI-BB116_Pushba_NS_20100129182218.gif)
