Smart Borrower: The Loan.com Blog

Freddic Mac To Tap Bailout Funds

November 14th, 2008 @ 5:21 PM by Alden Smith

The economy continues to look dismal. Circuit City, the electronics retailer, has filed for Chapter 11. Many retail stores are showing huge losses each quarter. Now we see Freddie Mac dipping into the bailout money for the first time. And AIG? Gave out $500 million in bonuses. I have to admit it - those folks have a lot of moxie.

Freddie has been in trouble for a very long time. The company reported a $25.3 billion quarterly loss on Friday. They attributed much of the record loss to a write down of tax-related assets. The write down put their balance ledgers in the red, so now they will tap the Fed. From what I am reading and hearing, that move is business as usual - banks are tapping into the bailout money and making their balance sheets look pretty once again. A sure move, I think, to get the economy back on track.

Things hit bottom for Freddie at the end of the quarter. They had previously said that things were looking up, but we see no evidence of that. The company said in a securities filing that “The percentage decline in home prices was particularly large in California, Florida, Arizona and Nevada, where Freddie Mac has significant concentrations of mortgage loans.” Freddie has recorded $9.1 billion in write-downs on securities and $6.0 billion in other credit-related expenses. Lot of cash…

The largest issue I can see is that investors are demanding much higher returns than Freddie (and Fannie Mae) can produce. Even though in conservatorship, it appears investors are concerned about the Fed’s commitment to the pair once they come out of conservatorship. Jim Vogel, a strategist at FTN Financial in Memphis, Tennessee, said “It’s not the current size of the losses that’s important, it’s the market’s concern about ‘unending’ losses that represents the biggest drag on MBS and agency spread performance into next year. Freddie’s losses need to slow back to the $2-$4 billion range, and cumulative draws on Treasury need to indicate a maximum of $25-$30 billion by the end of 2009.” Somehow, I do not see that happening.