Fannie Mae's Tough Times Continue

When we posted last about Fannie Mae, (FNM), it appeared unlikely that it would be able to repay the government the money it borrowed to stay afloat.

That is still the case, and it's also clear that Fannie Mae is going to need more money from the Treasury Department.

Earlier this month, Fannie Mae filed an 8-K with the Securities and Exchange Commission; you can find it here (although the real meat of this filing is in this press release and this slide presentation).

But if you want more detail about how the battered mortgage giant is really doing, you'll learn more from its 217-page second quarterly report (10-Q), which you can find here.

Although there is plenty of room for debate about how well Fannie Mae was run before President Bush appointed a conservator (the Federal Housing Finance Agency, or "FHFA") to manage its operations in September 2008, it is currently in an impossible position, which Fannie Mae describes as follows:

"Our pursuit of our mission creates conflicts in strategic and day-to-day decision-making that could hamper achievement of some or all of these objectives....

Concentrating our efforts on keeping people in their homes and preventing foreclosures while continuing to be active in the secondary mortgage market, rather than concentrating solely on returning to long-term profitability, is likely to contribute, at least in the short term, to additional financial losses and declines in our net worth. Continuing deterioration in the housing and mortgage markets, along with the continuing deterioration in our book of business and the costs associated with these efforts pursuant to our mission, will increase the amount of funds that Treasury is required to provide to us. In turn, these factors put additional pressure on our ability to return to long-term profitability. If, however, the Making Home Affordable Program is successful in reducing foreclosures and keeping borrowers in their homes, it may benefit the overall housing market and help in reducing our long-term credit losses."

Fannie Mae reported that its net worth deficit as of June 30 was $10.6 billion - a staggering number, yet one that was down from $18.9 billion on March 31 and $15.2 billion on Dec. 31, 2008.

These numbers are important, because if the conservator (the FHFA's director) determines that if Fannie Mae's assets "are, and during the preceding 60 days have been, less than [its] obligations," then he must place it into receivership.  Fannie Mae said that the 60-day countdown starts when it files its quarterly and annual reports with the SEC.  

However, if the Treasury gives Fannie Mae enough money during that 60-day window to eliminate its net worth deficit, the FHFA's Director will not put it into a receivership.  

Under the agreements made in September (and amended in May), the Treasury committed to providing Fannie Mae with "up to $200 billion under specified conditions."

So far, the Treasury has eliminated those quarterly deficits.  It provided $15.2 billion to erase the Dec. 31 deficit, and $19.0 billion to eliminate the March 31 deficit.  It said that on Aug. 6, the Director of FHFA requested another $10.7 billion to eliminate the latest deficit, asking that the money be issued no later than the end of September.

And there appears to be no end in sight to the cycle.  The filing states:

"Due to current trends in the housing and financial markets, we expect to have a net worth deficit in future periods, and therefore will be required to obtain additional funding from Treasury pursuant to the senior preferred stock purchase agreement. As a result, we are dependent on the continued support of Treasury in order to continue operating our business. Our ability to access funds from Treasury under the senior preferred stock purchase agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions."

That's a grim prediction, indeed.  But Fannie Mae is also providing assistance to struggling homeowners. It entered into 124,000 loan workouts in 2008 and another 88,000 in the first half of this year.  Other homeowners are in trial workout programs, and there were additional workouts that weren't completed by the end of June, and  thus were not included in the statistics.

Continuing to pay billions of dollars every quarter to keep Fannie Mae afloat is distasteful.  But the alternative is much worse:  More homeowners would lose their homes, more foreclosed homes would keep real estate prices depressed, and the economy's recovery would take that much longer.