Fannie Mae’s Thin Margin

May 7, 2008 at 8:27 pm  ·  Category: Macro Economics, Real Estate, Stocks

“The new capital will enable Fannie Mae to maintain a strong, conservative balance sheet….”

Fannie Mae 1st Quarter Earnings Release 

The Heard On The Street column in today’s WSJ, “Will $6 Billion Do For Fannie?” (subscription required), caught my attention. 

Fannie announced 1st quarter results yesterday (Tue) before the open.  In conjunction, they announced they will be raising another $6 billion in capital (FNM 1Q Earnings Release).

But the article raises the issue of if this is really enough.  They are exceeding their regulatory capital requirements but from a fair value standpoint Fannie Mae appears to be skating on thin ice. 

According to their Fair Value Balance Sheet, they have $854.4 billion in liabilities and $866.7 billion in assets.  That means the net worth of the company, the difference between the value of what they own and what they owe, is only $12.2 billion

That means they can only absorb a 1.4% drop in the value of their assets, which are primarily mortgage backed securities and mortgages, before their entire net worth is evaporated.

Given the current state of the housing, mortgage and secondary mortgage markets, such a drop in the value of their assets doesn’t seem far fetched.  In fact, it strikes me as an all but certainty. 

It appears that Fannie Mae is on pretty shaky ground.

UPDATE (Mon 5/12, 12:15am PST): This weekend I read a more detailed Barron’s article from a couple months ago on Fannie’s precarious situation: “Is Fannie Mae Toast?” (subscription required – if you want a copy of the article e-mail me and I’ll send it to you).

The article really hammers home the idea that Fannie is exposed to some potentially toxic liabilities given the $3 trillion book of mortgages that it holds or guarantees.  With their net worth so small at this point, it wouldn’t take much to bankrupt the company.

Fannie may very well have to be bailed out by the Federal government.

Posted by Greg Feirman  ·  Trackback URL  ·  Link
 

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