After the circus surrounding the Fed's QE 2 program is over, it is time to get back to the fundamentals of the US economy. While money printing can do wonders for asset prices (in nominal terms) it cannot help the real economy. Case in point government ward Freddie Mac which today reported a net loss for the 3rd quarter of $2.5 billion. As you probably know you the taxpayer is on the hook for all of the loses suffered by the GSEs, which could reach $400+ billion under a worse case scenario. Well it seems the worst case scenario is coming to fruition. Freddie Mac's non-performing loans surged 33% year over year from $90.5 billion to $121 billion despite all of the trial loan modifications nonsense. This brings non-performing assets to 6.1% of the portfolio and shows no signs of slowing. One of the more troubling aspects of Freddie Mac is that the company has only set aside $38.6 billion for loan loss reserves. This means that it is only a matter of time before the company is forced to tap the Treasury for more taxpayer money. But don't worry the Fed will be printing the money. Why there is no outrage about the GSE's is beyond belief.
One of the more interesting aspects of Freddie's Q3 report was the large increase in REO properties. Freddie now has $13.5 billion in REO on its books after repossessing $6.8 billion in Q3 alone. Expect this number to continue to increase as the government becomes one of the largest homeowners in the US. Karl Marx would be proud! The majority of the real estate is located in the Western region, which has experienced the largest decline in property values. If or when Freddie tries to sell these properties, they will be forced to take large losses, meaning taxpayers get to pay the bill. This is turning out to be one of the worst investments in US history.
Overall, it is really hard to know how bad Freddie is doing because of the way they present their financials. Most of it is based on future estimates of loan losses, etc which means the company can makes itself look better by forecasting a better economic scenario. Hey, it worked for the major banks so why not invsolent GSE's. Only in Zimbabwe...err..America.
Black Swan Insights