NEW YORK (Reuters) - Fannie Mae (FNM.N), shrunk its gross mortgage portfolio by an annual rate of about 28 percent in October and delinquencies on loans it guarantees rose sharply in September, the largest U.S. home funding company said on Tuesday.
The key in the story is that the single-family "serious" delinquency rate (that is, 90+ days behind - in the "forget it, they're hosed" bucket) is now 4.72% of the entire portfolio, where a year ago it was 1.72%.
That's 275% of the previous rate.
Where's the MBS portfolio going? Fannie isn't running it down, you know.
Oh no - those MBS are going right onto The Federal Reserve's balance sheet through "outright purchases" - that is, monetization.
Unlike a loan, which is recourse and can be "put back", these can't. They're owned by The Federal Reserve, which printed up new money (debasing the currency) to purchase an "asset" of questionable (or worse) quality.
The perversity of The Fed's "purchase" program is that it has dramatically boosted the price of these "securities", even as their quality has gone into the toilet.
The outcome of this should not have been in question, of course - you can always drive up the "price" of something by intentionally overpaying for some of that thing. The wise owner of said "asset" will immediately sell it to you, of course, detecting that you are willing to overpay on purpose.
The perversity of such a "program", however, is that it destroys the market. The claim is that such "quantitative easing" is in some way "supportive" of the market for these securities. Nothing could be further from the truth - what has instead happened is that private demand has disappeared as The Fed has been paying more for them than the market price - and as a consequence anyone who might have been a buyer has immediately turned into a seller instead. Worse, the cost of funding new securities has become unattractive for Fannie and Freddie.
Net-on-net the risk of default is being transferred to you as The Fed, if they have taken in so-called "good securities" by intentionally overpaying for toilet paper their actions amount to nothing more than raw printing of money.
The dollar is reacting to this, along with the fact that the so-called "independent" Central Bank has effectively correlated its actions with Treasury, which instantly issued more than $1 trillion in new debt right into its "low interest rate" environment and "Quantitative Easing" program.
Reality is this:
The housing market's performance is not improving - it continues to deteriorate, with loan performance deteriorating, not stabilizing.
Virtually all of the Fannie/Freddie paper that is "Seriously Delinquent" will foreclose. Nobody 90+ delinquent (statistically) cures - those are "hard" defaults that are either in foreclosure or will be in foreclosure.
The Fed will, by the end of the first quarter of 2010, own 20% or more of this paper - and it intentionally overpaid. The losses will be real, they will be in the tens if not hundreds of billions of dollars, and you will eat it via devaluation of the currency and deterioration of your living standard - even if you were prudent.
There is no exit from this policy. Should The Fed dump the MBS paper on the market the price would collapse. Should they not and run it off the value will collapse. Either way the losses are real and will be absorbed - by you.
"Independent" Central Bank eh? Contemplate the wisdom of a so-called "independent" central bank having the right to levy a tax on all Americans - because that's what they're doing, in point of fact, to the tune of hundreds of billions of dollars.
Oh, and to Darrell Issa, who made the comment to a constituent when challenged that HR.3221 of 2008 provided a "full faith and credit" guarantee to Fannie and Freddie, thus making their MBS purchase-eligible by The Fed: That was a lie sir.
HR.3221 did no such thing. It in fact authorized but did not require the purchase of MBS and Debt Instruments by Treasury, to wit (Sec 1117, P30)
‘‘(A) General Authority - In addition to the authority under subsection (c) of this section, the Secretary of the Treasury is authorized to purchase any obligations and other securities issued by the corporation under any section of this Act, on such terms and conditions as the Secretary may determine and in such amounts as the Secretary may determine. Nothing in this subsection requires the corporation to issue obligations or securities to the Secretary without mutual agreement between the Secretary and the corporation.
That's crystal clear. TREASURY is authorized to buy an unlimited amount of Fannie and Freddie paper - either MBS or outright debt issue. But nowhere in this act is Treasury required to do so in satisfaction of debt - that is, nowhere is the implied Fannie and Freddie guarantee modified to an explicit full faith and credit guarantee issued by The Federal Government.
Further, Fannie filed a 10Q effective as of September 30th of this year in which it stated ON THE FIRST PAGE:
Although we are a corporation chartered by the U.S. Congress, and although our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.
End of discussion Mr. Issa. Fannie issued that 10Q as a document filed with the SEC by a firm that has publicly-traded capital stock. Not only does the general rubric of fraud apply should they make a knowingly-false claim, SarBox provides that such documents are specifically attested to as true and correct by the officers of the corporation responsible for said filing.
The reason that Treasury isn't buying these securities, and The Fed is doing so (and in my opinion illegally doing so) is quite simple: If Treasury were to buy these securities it would have to issue Treasury Debt to fund the purchases. This would lay bare on the table the fact that The Federal Government is not running a $1 trillion annual deficit it is in fact running a $2 trillion annual deficit, and the consequence of that recognition by the market would likely be the instantaneous collapse of Treasury Bond prices with a commensurate rocket shot in demanded coupon.
This would force fiscal discipline on The United States Government - a reality you and the rest of Congress, along with Treasury, refuse to face.
This sort of cock-and-bull game of outright lies, which you used to dodge a legitimate question from a constituent at a charity event related to why Congress is allowing The Federal Reserve to buy MBS and Debt that lacks the REQUIRED full faith and credit guarantee, is outrageous.
You should be ashamed of yourself Darrell. I had a much higher opinion of you before you pulled that crap, but it takes only one intentional act of deception to destroy my formerly-high opinion of you.
If you have a cite to an explicit full-faith-and credit guarantee in the law you claimed provided for it, fax it to me and I'll be happy to retract this in public. Until then it stands: your intentional deception, along with that of The Fed and Treasury, is designed to cover up the fact that we're not running a $1 trillion annual deficit, it is in fact double that and Congress, Treasury and The Fed all know that should this become apparent to the market the result will be an instantaneous detonation of the government's ability to fund its operation on anything approaching reasonable terms.
Quite frankly, we deserve exactly that outcome given the outrageous actions taken by both the previous and current administrations along with the willing handmaiden games played by both The Fed and Congress, and I hope we get it - and soon.
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