Mike Shedlock

Taxpayers are already on the hook for $180 billion in losses at Fannie Mae and Freddie Mac. That number is going to rise, perhaps significantly.

The clever synonym for more taxpayer losses is "treasury Advance". With that understanding, please consider Fannie Mae's Losses Narrow but Treasury Advance Requested.

Fannie Mae is reporting a net loss of $2.4 billion for the fourth quarter of 2011 compared to a net loss of $5.1 billion in the third Quarter. For the entire 2011 year it reports a net loss of $16.9 billion compared to $14.0 billion in 2010.

The net worth of the company had a net deficit of $4.6 billion as of December 31 reflecting the $1.9 billion loss and its payment to Treasury of $2.6 billion in senior preferred stock dividends during the fourth quarter compared to $2.5 billion in Quarter Three. The Federal Home Mortgage Finance Agency (FNFA), conservator of Fannie Mae, will submit a request to the Treasury Department for a draw of $4.57 billion to eliminate the net worth deficit.

Bank of America Clash with Fannie Mae Intensifies

In simple terms, Fannie Mae will cost taxpayers another $4.6 billion. That's not the worst of it.

Taxpayers may be on the hook for still more losses as BofA Clash With Fannie Intensifies.

Bank of America Corp. said it’s facing more demands by Fannie Mae for refunds on flawed home loans because mortgage insurers who cover defaults rejected 25 percent more claims last year.

Unresolved insurance rejections rose to 90,000 at the end of 2011 from 72,000 the year earlier, Bank of America said last week in its annual filing with regulators. Last year’s denials equal $1.2 billion in unpaid loan balances, according to a note yesterday by Compass Point Research and Trading LLC.

The rejections heighten tension between Brian T. Moynihan, the bank’s chief executive officer, and U.S.-owned Fannie Mae in their disputes over who must pay for billions of dollars in failed loans made during the housing boom. When mortgage insurers deny claims, the two firms are left to squabble over whether losses will be borne by bank shareholders or the taxpayers who bailed out Fannie Mae.

Shorter Deadline

Pressure on Bank of America, the second-biggest U.S. lender by assets, may rise in July when Fannie Mae shrinks the amount of time it gives a bank to appeal an insurer’s denial to 30 days from 90 days before pressing for a refund. Repurchase costs probably would rise if the firm is forced to adhere to Fannie Mae’s policy, Bank of America has said.

Fannie Mae and Freddie Mac buy mortgages from lenders and package them into securities for sale to investors. Both firms were seized by the U.S. in 2008 to stave off collapse, and have collectively drawn more than $180 billion in taxpayer funds. The bill is likely to rise -- Fannie Mae this week requested $4.6 billion more from the U.S. Treasury Department -- and the firms’ regulator is pressing banks for refunds on bad loans to limit the bailout’s cost to the public.

Insurance Disputes

Bank of America is involved in legal disputes with mortgage insurers, including MGIC, saying the firms are denying valid claims.

In the second half of last year, Bank of America has “materially increased” the percentage of denials it argues are improper, Milwaukee-based MGIC said this week in a filing. AIG’s mortgage guarantor said last week that lenders were devoting more resources to reversing rejections.

Bank of America has committed about $42 billion to deal with flawed mortgages, foreclosures and writedowns since the start of 2007. The lender accounts for half of Fannie Mae’s pending repurchase demands after insurance denials, the Washington-based firm said this week in an annual filing.

Outstanding repurchase claims against Bank of America from all sources jumped 22 percent to a record $14.3 billion as of Dec. 31, the lender said in January. That increase was fueled in part by other demands from Fannie Mae. The mortgage financing firm has started asking for refunds on loans that have performed for 2 years or more before defaulting, requests Bank of America has deemed invalid.

More Public Money

Fannie Mae faces its own squeeze and asked for more public funds this week after posting a $2.4 billion loss in the fourth quarter. The company said that while Bank of America has failed to “honor repurchase obligations in a timely manner,” it still expects to get reimbursed.

“If we collect less than the amount we expect from Bank of America, we may be required to seek additional funds from Treasury,” the company said in the Feb. 29 filing.

By the way, look at the potential losses mounting up at Bank of America if Fannie Mae does succeed on those push-backs. Think Bank of America has sufficient reserves for credit losses? I don't.


Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.
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