Late effort to answer SOME of your Qs:
1. I keep hearing that the default rate of the mortgages that freddie and fannie hold is about 1%. This doesn’t make any sense, because if it was only 1% they wouldn’t be bleeding so much red ink. (In fact if it was only 1% they’d have lot’s of positive cash flow!) So what are the actual default numbers?
I think you hear that 1% of **ALL** morts are in default. I think that number is lowish, but that’s just my opinion. I believe 1% is a standard benchmark default rate in good times, and that normal underwriting standards and risk mgmt would accomodate such a def rate without too much pain. Current default rates depend upon geographical area and are different for diff. classes of loans. Without explaining the already overexplained, the default rates are massively higher than that, between 3% and 26%. Do not forget that over the past year, a concerted effort was made to permit banks to dump their worst trash into FNM and FRE, yes, standards were in effect LOWERED in an effort to help the banks get this stuff off their books. You see, nobody thought FNM/FRE would undergo this much scrutiny this soon, and there is a tremendous bias in this whole scheme, driven by the Fed, to help out their buddies at the banks. There are also no crystal clear figures on default rates because many banks are resistant to listing defs [eg; non-performing loans] because it immediately reduces their capital reserve levels, which hurts their stock price which is part of their reserves, and often results in the kind of death spiral we saw in IMB IndyMac. If you are deriving the impression that I am accusing the banks of LYING, committing financial statement FRAUD, offloading bad loans into shadowy and ill-defined “related but not really related” entities, you would be 100% correct in that impression.
FNM and FRE are thought to hold roughly 80% of the home mort market. Their default rate is thought to be 20%. Can I prove it? No. Does their stock trade where their stock trades? Yes.
2: The value of the RE behind their mortgages is a soup consisting of screamingly inflated appraisals and 100% and 98% morts in areas of the country where RE has fallen between 15% and 50%. And 80% LTV performing loans. ANd everything in between. Nobody knows what the value of the collateral RE is. Not even Fannie knows. It only took them four years to almost submit financial statements, an SEC violation that would have caused any other company to be delisted automatically. Loans are increasingly difficult to get now, and it further looks like mort rates will be rising. So this value, whatever you’d feel happy with calling it today, is arguably declining.
3: Nobody can predict what will happen to their stock prices, but I bet they pop for at least half an hour tomorrow! Other than that, they have an appointment with ZERO at some future date. The lower the stk price, the more milions of shares they have to print to gather the capital they may need to remain solvent. And that means more and more dilution for the existing shareholders. As a matter of sound financial mgmt, they should cancel the dividends immediately. Errr, that typically doesn’t help the stock price.
I can’t comment on the bonds. They yield that much because the market is saying there is serious risk of default. The market has a way of being pretty canny about these things. “A deal too good to be true” is another way of saying it.
In short, I don’t believe any form of analysis can be said to be valid on these, because it is bound to change violently. These companies have very little idea of the hole they have dug for themselves and don’t have accurate financials. Thus I don’t consider them investable in any way, except as daytrading fodder. That’s my opinion only.
Regretably, I share your opinion on FRE and FNM. This trainwreck has been years in the making. The problem was assured when banks were castigated for "red-lining" and required not to "discriminate" against uncreditworthy home buyers (many of whom are minorities). If you are not allowed to discriminate (def. "discern a difference") in the ability of a loan applicant to repay a loan, bad thing ultimately occur. The banks thought they "solved" their problem by securitizing their mortgage portfolios and selling them off to investors BUT, as is apparent that that only worked for a few years. The "innovations" of "No-Doc" and "Stated Income" mortgage lending accelerated the process!
Both political parties have trumpeted the high level of home ownership in the country while ignoring the fact that many "homeowners" are really just renting from their mortgage lender until the first economic downturn or personal financial crisis (then they are foreclosed upon and a new "homeowner" takes their place.) Millions of home buyers, besieged with real estate media hype, found it cheaper to "own" than to rent (for awhile).
Everyone has contributed to the real estate boom and most will suffer as home values revert to the longterm mean appreciation rate of 3%. The decline in relative home values will continue for years to "balance out" the bubble appreciation rate of recent years.