Freddie Mac: “Considerable Time” Until Sustained Housing Recovery

Today Freddie Mac announced their Financial Results for the third quarter of 2010.  Freddie Mac lost a net $2.5 billion in the third quarter of 2010 ($4.1 billion if you include a $1.6 billion dividend payment to senior stock holders).  Freddie lost $4.7 billion in the second quarter of 2010, and $5.4 billion in the third quarter of 2009.  So I suppose things are trending in the right direction.

Freddie plans to ask the Treasury for $100 million, which is practically nothing compared to the $64.2 billion tab they’ve run up so far.  Government Sponsored Entities Freddie Mac and Fannie Mae were seized by the federal government and put under the conservatorship of the Federal Housing Finance Administration (FHFA) in 2008 in order to avoid insolvency.  The federal government has pledged an unlimited amount of capital to backstop the GSEs.  Thus far they have drawn more than $150 billion from the Treasury. The estimated total cost of the bailout ranges depending upon who you listen to.  I have seen estimates that range anywhere from $200 billion under a best case scenario to $1 trillion in a nightmare scenario.  The final tally will likely fall somewhere in between the extremes.  The only thing that is assured is that this bailout will indeed be costly.

As to the state of the housing sector, Freddie Mac CEO Charles Haldeman remarked:

“As we near the end of 2010, the housing market remains fragile and has recently come under renewed pressure from slowing economic growth, weaker employment, and foreclosure uncertainties.  We believe that it will be a considerable time until the housing market has a sustained recovery”.

With regard to the quality of mortgages that Freddie is issuing now, Haldeman said:

“The actions we have taken together with our mortgage lenders to continue to build a strong foundation of responsible lending practices are working – the 2009 and 2010 books of business are the strongest since 2003 as measured by LTV and FICO scores.  These changes are good for borrowers, Freddie Mac, and the entire housing market, producing loans that help to create sustainable homeownership opportunities for America’s families”.

Reforming Fannie Mae and Freddie Mac is a hot topic in Washington.  Many proposals for GSE reform have been floated, but no clear front-running solution has emerged from the debate.  GSE reform was tabled until after the November elections, so expect it to be a hot topic in the weeks and months to come.  As the situation develops I will do my best to keep you up to date.