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Freddie Drops the Mother of all Bombs

Written By Brian Hicks

Posted November 21, 2007


Back in July, which for some reason seems like a long time ago, I wrote an article entitled Fannie and Freddie Drop the Bomb. In it I talked about how guidelines changes at both Freddie Mac and Fannie Mae were going to dramatically change how many people could qualify for a loan in the future.

But what I didn’t know at the time was that the bomb dropping by Freddie Mac and Fannie Mae was far from over.

That’s because this morning Freddie Mac dropped the Mother of all Bombs on already jittery financial markets.

From Bloomberg today, by James Tyson: Freddie Posts Loss, May Cut Dividend; Shares Plunge

"Freddie Mac fell 29 percent, the biggest decline since it went public in 1988, as the second- largest U.S. mortgage-finance company posted a record loss, warning of a possible dividend cut and the need to raise capital.

The worst housing slump in 16 years caused “significant deterioration” in the third quarter that will continue through year-end, McLean, Virginia-based Freddie Mac said in a statement. The net loss was $2.02 billion, or $3.29 a share, three times what some analysts estimated.

“It’s as bad as it possibly could be,” said Howard Shapiro, an analyst at Fox-Pitt Kelton in New York. Shapiro recommended investors sell Freddie Mac shares, reversing his opinion to hold more of the stock than is contained in benchmark indexes.

Freddie Mac and the larger Washington-based Fannie Mae, created by Congress to foster American home ownership, have lost $41 billion in market value this year as mortgage defaults and foreclosures rose to record levels. The companies, which own or guarantee 40 percent of the $11.5 trillion U.S. home loan market, will have less money available for new mortgages.

“There is nothing we see right now to be more optimistic,” Chief Financial Officer Anthony Piszel said in an interview. He told analysts on a conference call that the fourth quarter “is not going to be pretty.”

All of this, of course, is off the charts important because if Freddie and Fannie have to pull back on their lending even a little its affects on the mortgage world will be enormous. After all between them they provide 40%-50% of all the liquidity in the mortgage markets today.

In short, they are the mortgage market.

That liquidity drain would mark a dramatic departure from only a couple of days ago when the Fed and one Congressman after another was talking about how these government sponsored entities(GSE) could ride to the rescue of everyone else by increasing their loan limits and buying up more loans.

Today’s announcement, however, has absolutely cratered all of that wishful thinking.

First it was the problems at New Century Mortgage. Then along came the problems at Countrywide. And now it has spread to the whales– Freddie and Fannie.

Now if that’s not the mother of all bombs I don’t know what is. It just doesn’t get any bigger.

Today’s news was huge. The wave continues to build.