Wednesday, May 14, 2008

Freddie Mac Conference Call

by Bill McBride on 5/14/2008 11:01:00 AM

A few notes (webcast here):

On house prices (added: map from Freddie of Year-over-year house price changes): Freddie Year-over-year house prices Click on graph for larger image.

“Now previously we have said that we expect housing prices to fall at least 15% nationally, and today they [have fallen] about 9% through the measure we use which is relative to our market. We want to take a better look at the spring housing market to see whether or not the data is beginning to firm up. It is premature at this point from a data perspective to make a change in our formal estimate. However at this point we must say that the risk to the forecast are strongly weighted on the downside. Give the severity we have experienced, [we took] an increase in charge off in REO expenses associated with higher loan loss severities. As a result of this change, we raised our estimate for credit costs and increased our provision.”
Richard Syron, CEO, May 14, 2008 (emphasis added)
On increasing delinquencies and severity rates: (here are the slides)
"If you turn to slide six as dick noted earlier, as a result of the housing in the first quarter, increasing delinquencies and higher severity rates, in the first quarter [credit costs] moved to -- of 11.6 basis points compared to 5 basis points in the fourth quarter. These same factors drove [us to] raise our guidance for full year 2008 provision. On slide six you can see that our estimated credit losses for '08 have increased to 16 basis points with our 2009 estimate increasing to a rage of 20-25 basis points respectively. Our total credit losses now include the effect of our expected 2008 new business. Finally, slide seven, shows that despite the continued high level of charge offs we remain adequately reserved -- as of March our ratio of reserves was 1.6 times, consistent with where we were at year end. Another way to think about reserve coverage is a ratio to period losses [the ratio of] annualized first quarter charge off is about three times."
Fredde Mac moves entire ABS portfolio into level 3 given the “prices we were seeing in the market that didn’t make any sense.”:
Analyst: There is a headline out there that you have level 3 assets of $157 billion. I was just wondering is that true and is that related at all to the markups of the 1.2 billion gain?

Freddie Mac: No, it is not Paul. We made a determination in the first quarter that given how widely the pricing we were getting on the abs portfolio [varied] that it no longer made sense to leave that into level two. So we essentially moved the entire abs portfolio into level three. We were still using the mean pricing that we were getting from the dealers. So we're not using a model price. That is all that is. It has nothing to do with the trading portfolio.”