[...]
Net loss for the first quarter of 2008 was $151 million, compared to a net loss of $2.5 billion in the fourth quarter of 2007. Improved results reflect reduced losses related to a change in the guarantee obligation valuation methodology implemented under SFAS No. 157, “Fair Value Measurements” (SFAS 157), which better aligns revenue recognition with the economic release from risk under the guarantee. As a result, effective January 1, 2008, the company no longer records estimates of deferred gains or immediate losses recognized upon issuances of single-family Mortgage Participation Certificates (PCs) and Structured Securities in guarantor swap transactions through losses on certain credit guarantees, a component of non-interest expense. In the fourth quarter of 2007, the company incurred $1.3 billion in losses on certain credit guarantees.
Improved results also reflect lower interest-rate related mark-to-market losses as a result of the company’s adoption of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115″ (SFAS 159). Effective January 1, 2008, the company elected the fair value option for certain available-for-sale mortgage-related securities and its foreign-currency denominated debt. Upon adoption of SFAS 159, the company recognized a $1.0 billion after-tax increase to its beginning retained earnings at January 1, 2008. See the Appendix for more detail on the adoption of SFAS 157 and SFAS 159. [in other words, mark to market is out the window--ed]
[...]
Portfolio Activity and Balances
Year-to-date through April 30, 2008, the company estimates that the unpaid principal balance of the company’s retained portfolio increased at an annualized rate of about 7 percent to approximately $738 billion.
During the month of April 2008, the company estimates that the amount of retained portfolio mortgage purchase and sales agreements entered into totaled approximately $43 billion.
The company estimates that its total credit guarantee portfolio increased at an annualized rate of about 10 percent to approximately $1.8 trillion year-to-date through April 30, 2008.
At March 31, 2008, Freddie Mac estimates that its single-family serious delinquency (i.e., 90 plus days late) rate for non-credit enhanced, credit enhanced and all loans was approximately 0.54 percent, 1.81 percent and 0.77 percent, respectively.
Fair Value of Net Assets
The company’s attribution of changes in fair value relies on models, assumptions and other measurement techniques that evolve over time.
At March 31, 2008, the fair value of net assets was ($5.2) billion as compared to $12.6 billion at December 31, 2007, reflecting a net after-tax reduction of $17.8 billion. This change in fair value of net assets includes the payment of preferred and common stock dividends during the first quarter of 2008.
The change in fair value of net assets includes a pre-tax reduction in fair value of $28.8 billion as a result of net mortgage-to-debt OAS widening, partially offset by a pre-tax increase in fair value related to core spread income in the first quarter of 2008. In addition, the company estimates that the change in fair value of its credit guarantee activities resulted in a pre-tax reduction of $3.0 billion. …
A company with a $1.8trn credit guarantee portfolio has net asset FV at -5.2 billion, down $20 billion in three months after accounting for the $2.6bn in accounting rule changes. Given that we’re now reading of houses in Atlanta selling for under $20,000 which local property tax auditors insist on valuing at $100,000, “fair value according to Freddie” and “fair value according to the market” are two very different things, which won’t stop racing apart any time soon.
I’m sure Obama will love being given the job of bailout out Freddie once he’s inaugurated.
Some “change” that will be.
