The disappointing third quarter results for Fannie Mae, which saw its net income cut in half, and Freddie Mac, which took a comprehensive loss of $501 million, have many already questioning whether the current financial status of the government-sponsored enterprises is stable.
Richard Bove, vice president of equity research at Rafferty Capital Markets told clients earlier this week that Freddie Mac is “insolvent” and “playing financial games that are not acceptable.”
Others, including the two prominent groups of community lenders and several major civil rights groups are calling for the recapitalization of Fannie and Freddie because the GSEs are in danger of needing another bailout from the government.
New analysis from Compass Point Research & Trading suggests that it’s no longer a question of if the GSEs will need another bailout. Now, it’s simply of a question of when.
In the new Compass Point report, analyst Issac Boltansky writes that Freddie’s loss in the third quarter reduced its total equity from $1.8 billion to $1.3 billion, adding that due to the 3rd Preferred Stock Purchase Agreement requires each GSE to reduce its capital buffer by $600 million a year until hitting $0 in 2018.
“To that end, the potential for the GSEs to take another draw from the U.S. Treasury increases each year as the capital buffers steadily decline to $0 while accounting-related earnings variability persists,” Boltansky writes.” Our view remains that under the current terms of the bailout agreement it is a matter of when, not if, the GSEs will be forced to take another draw.”
Freddie Mac CEO Donald Layton, for his part, told HousingWire earlier this week that he was not concerned about the loss, referring to the loss as “accounting noise.”
“[The loss] is not the real economics going on,” Layton said in a telephone conversation with HousingWire, where he dismissed any accusation of inappropriate risk management. The GSE did grow its single-family guarantee business 50% annually in the third quarter.
In a statement Layton added: “This $0.5 billion loss was caused mainly by the accounting associated with our use of derivatives, whereby the derivatives are marked to market but many of the assets and liabilities being hedged are not.”