Tuesday, May 12, 2009

Freddie Mac: Falling Prices "significantly affecting behavior" of Borrowers

by Bill McBride on 5/12/2009 06:25:00 PM

From MarketWatch: Freddie reports quarterly net loss of $9.9 billion

Freddie's first-quarter loss widened to $9.85 billion ... Freddie set aside $8.8 billion in provisions to cover credit losses during the first quarter. That's up from $7 billion in the final three months of 2008. The rise was driven by increases in the number and rate of delinquent mortgages and the rising severity of losses from foreclosures, Freddie explained.

Freddie also invests in mortgage-backed securities and is suffering as rising delinquencies and foreclosures cut into the value of these holdings. The company recorded $7.1 billion in impairments on securities that are available for sale.
...
Freddie Mac said its conservator asked for $6.1 billion in extra funding from the Treasury Department.
From the SEC filing:
Home prices nationwide declined an estimated 1.4% in the first quarter of 2009 based on our own internal index, which is based on properties underlying our single-family mortgage portfolio. The percentage decline in home prices in the last twelve months has been particularly large in the states of California, Florida, Arizona and Nevada, where we have significant concentrations of mortgage loans.
...
While temporary suspensions of foreclosure transfers reduced our charge-offs and REO activity during the first quarter of 2009, our provision for credit losses includes expected losses on those foreclosures currently suspended. We also observed a continued increase in market-reported delinquency rates for mortgages serviced by financial institutions, not only for subprime and Alt-A loans but also for prime loans, and we experienced an increase in delinquency rates for all product types during the first quarter of 2009. This delinquency data suggests that continuing home price declines and growing unemployment are significantly affecting behavior by a broader segment of mortgage borrowers. Additionally, as the slump in the U.S. housing market has persisted for more than a year, increasing numbers of borrowers that began with significant equity are now “underwater,” or owing more on their mortgage loans than their homes are currently worth. Our loan loss severities, or the average amount of recognized losses per loan, also continued to increase in the first quarter of 2009, especially in the states of California, Florida, Nevada and Arizona, where home price declines have been more severe and where we have significant concentrations of mortgage loans with higher average loan balances than in other states.
emphasis added
There are several key points:

  • Although the foreclosure moratorium "reduced REO activity" in Q1, Freddie did take provisions for the expected losses.

  • The loss severities are increasing.

  • Falling prices are "significantly affecting behavior by a broader segment of mortgage borrowers."

    Sounds like walking away ... in prime time!

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