Bronte Capital’s John Hempton has gone on a Freddie Mac, Fannie Mae modelling extravaganza. And his conclusions are somewhat refreshing. Namely, he’s certain Freddie and Fannie are not the endless black hole of losses their topline numbers suggest them to be — or in the case of Freddie, the one-off accounting and mark-to-market benefits that recent profits were mostly put down to.
The reality is that the collapse in the market has turned the GSEs into a veritable monopoly in the market, bringing all the obvious advantages that come with that status. As Hempton explains:
To prove his point he offers the following quarterly sequence of net interest income for Freddie Mac, adding that the numbers for Fannie are also similar...Lack of competition means fat margins — and just as the revenue at Bank of America rose sharply during the crisis so does the revenue at the GSEs.
They wrap up by saying:
...All that said, for the time being — at least in the case of Freddie — pre-provision profits could add up to at least $15bn a year as private sector competition in the mortgage market, notes Hempton, is unlikely to return rapidly. And as he says, $15bn per year can offset an awful lot of losses.Here's Part V:
In Parts I to IV of this sequence I explained where the losses already realised at Fannie Mae and Freddie Mac came from – and where future losses might come from. I showed that the companies have almost reached reserve adequacy – a conclusion diametrically opposed to the consensus view that these companies are hopelessly insolvent even to the point that they threaten
government solvency. On losses the consensus appears to be simply wrong. US
In this post I show how the revenue of the GSEs is up very sharply.
As far as Fannie and Freddie are concerned, the best thing about the mortgage crisis is that these institutions are now the whole market. The private sector market in US mortgages has almost entirely disappeared. They are even allowed now to do jumbo mortgages.
Lack of competition means fat margins – and
just as the revenue at Bank of America rose sharply during the crisisso does the revenue at the GSEs....MORE
Here's analyst Gloria Gaynor's commentary:
I was petrified
Kept thinking I could never live
without you by my side
But I spent so many nights
thinking how you did me wrong
I grew strong
I learned how to carry on
and so you're back...MORE
Here's the video: