The Elephant in the Room – Well One of Many…

By Brad Keiser

For those of you who have been to our seminars, (coming to Southern California next month) You have heard me ask about Hank Paulson and Ben Bernanke…”Are they stupid or were they lying when they said everything was OK through out all of 2007 and most of 2008?” You have seen and heard why Neil and I declare we are of the belief that there is simply “not enough money in the world to solve this problem.”

Fannie Mae’s (FNM) 8k has an interesting slide of their questionable assets in the supplement. It can be found below along with the complete 2009 Second Quarter filing. The report describes FNM’s exposure to problematic classes of mortgages on their book. That total comes to almost $1 Trillion. (that’s with a “T”) The total book of business is about $2.7 Trillion, at least 30% and more likely as high as 50% of their book is troubled. The report muddles with the actual holdings, as there are overlaps in the descriptions. The actual numbers they provide include:

  • Negative Amortization Loans: $15B
  • Interest Only: $196B
  • Low Fico: $357B
  •  LTV>90%: $265B
  • Low Fico AND > 90% LTV: $25B
  • Alt-A: $269B
  • Sub Prime: $8B

Those numbers add up to $1.13 trillion. They are troubled for multiple reasons. For example, $25 billion are loans that have BOTH  high LTV and a FICO score less than 620. While there are varying degrees of toxicity when it comes to “toxic” assets these would be considered highly toxic.

 What might all this mean? Some trends are emerging. Based on historical private sector experience with these types of troubled loans, particulary those 30 % of Alt A/No doc and Negative Am loans that are non-owner occupied properties, one could expect that 50% of these borrowers will go into default. On the defaulted loans the losses will be conservatively about 50% of the outstanding loan balances. In other words, losses of 25% on the troubled book are reasonable assumptions. That would imply a loss over time on these loans of $275-$300B. And that does not include losses on Prime loans. And that is JUST Fannie. The Obama Administration has an estimate of $250B over four years for the full cost of cleaning up the ALL the GSE Agencies. These numbers suggest it could be double that, triple that or more.


This is ONLY Fannie…not Freddie or Ginnie or Sallie, not Citi, not BoA, not Wells Fargo, not numerous community banks who owned preferred shares in Fannie or Freddie that had their capital severly eroded when those preferred shares were wiped out last fall. How about the dwindling balance of FDIC reserves? Ladies and Gents we have a veritable herd of these elephants lingering in the room.

Gee no wonder Mr. Lockhart decided now would be a good time to step down from running Fannie, Hank Paulson is getting a tan somewhere now that he has saved Goldman Sachs(for the moment)and something tells me Uncle Ben Bernanke would not be heartbroken if he was replaced by Summers or whomever this fall and could simply go back to pontificating at Princeton.

In the interest of full disclosure I hold no position in Fannie or any of the stocks mentioned….I am long 1200 shares of Smith & Wesson.

Fannie 8k August 2009

Double click chart below to enlarge

Fannie Mae 8k Sup August 09

8 Responses

  1. The not so Golden State of California !

    FYI – every state has different rules regarding proper foreclosure procedure ,
    quite often the banks screw up somewhere , always try to speak to local lawyer , go online & check the rules on foreclosure in your state. Pull a Title report !



  2. Am presently going through the same on my home – MERS assigned to my servicer and the servicer subsequently “lost” the note… also problems on public record where assignments were not posted.

    I work in a (national) title plant and examine land records in all 50 states. Check your local register of deeds or clerk of courts office and examine all recorded docs pertaining to your property.

    Look for missing and incorrect assignments as well as the appearance of MERS on your mortgage or deed of trust instruments.

  3. alan
    thats news [winning] everyone here needs to hear! thanks.
    btw what state [location] are you in?

  4. When the time is right , meaning once the appeal process is over with I will go public and post everything I did to win my home back postforeclosure. What I can say is even if you have been foreclosed upon you can undo it if the bank does not follow the rules set by the state in which you live. In my case they foreclosed in the name of MERS, then 14 days later tried to change title again into the bank name. To everyone pull a title report on your home , it can be eye opening and give you the silver bullet to kill the bank’s case.

    As Neil loves to say “Assume nothing , challenge everything.”

    Don’t be bashful with your good news story! We can use all the good news we can get. Write it up and post it here.

  6. That is great news Brad , To everyone I attended the 1st seminar and it was the main reason that gave me hope that I could undo my foreclosure.

    Which did happen ! Folks this stuff works ! Don’t give up or move out !

    I look forward to telling my story at your next So Cal Seminar .

  7. I would like to register also.
    Please let me know. Thank you

  8. Need to know when and how to register for the S. California Seminar. Please send registration form or let me know where I can find it.

    Charles Cox

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