Fannie Mae & Freddie Mac takeover

Last week Barons as well as The New York Times reported that the 2 GSEs were under considerable pressure to bring in additional capital. In just last week, total losses in value for Fannie Mae was 45% & 30% for Freddie Mac & both have reported $11 billion in losses in the last couple of months. The New York Times reported that if their problems continued Bush administration was taking into consideration plans of their take over and placing them in a conservatorship.

If any of them is placed in conservatorship, its stock value will be next to nothing and the losses on mortgage loans they guarantee or own will be paid by taxpayers. Right now both companies guarantee or own $5 trillion of debt and about one-half of all residential mortgage loans.

The 2 GSEs are facing difficult situation. If they go for new stock issue for raising capital, they would be diluting shareholder's equity. Right now borrowing costs for both of them have increased as their viability is being reevaluated by debt markets.

Regarding conservatorship, any of the 2 GSEs can be placed into conservatorship if their regulator which is Office of Federal Housing Enterprise Oversight (OFHEO) finds that the GSE is ctitically undercapitalized.

Subprime portfolio by year of issue

In the following chart we see the percentage of subprime portfolio issue in the last few years. As can be seen from the chart, the maxmimum percentage issue has been in year 2004 followed by year 2006.

CIT Group selling home lending business

Recently CIT Group announced that it is selling its manufactured housing division as well as home lending business.

The home lending business with total assets at $9.3 billion & its servicing operations will be taken over by Lone Star Funds for about $1.5 billion. Alongwith it they will also assume debts of CIT Group to the tune of $4.4 billion. The manufactured housing division will be acquired for about $300 million by Vanderbilt Mortgage & Finance, Inc.

From April CIT sold its assets in excess of $2 billion & also secured long term financing of $3 billion from Goldman Sachs. CIT Group also declared that it was expecting to report pretax losses of around $2.5 billion in the second quarter in its home lending business.

Chairman & CEO of CIT Group, Jeffrey Peek has said that -