Sunday, March 16, 2008

Jonathan Laing of Barrons says that Fannie may fail

He says so here:
The article came out while I was on my way to India, and I just picked it up. In any event, three aspects of the piece suggest to me that he is a little aggressive in his forecast of Fannie's demise.

First, he says that 40 percent of subprime mortgages in Fannie's book will default. This is an extraordinary number (20 percent seems to be closer to consensus), unless his view is that the good subprime stuff has already refinanced, and what remains in the portfolio is toxic. In any event, it would be nice to see how he came up with the number.

Second, he says that 4 percent of the prime book will default. This would be four times the long-term historical average; moreover, most of the defaults would be covered by mortgage insurance, meaning that for Fannie, they would be prepayment events rather than credit loss events (unless the MI companies fail too--that is another story).

Finally, he says that the company's Low Income Housing Tax Credits have little value, because it will be awhile before it will have taxable income against which to apply them. But so far as I know, tax credits are resellable (word?), and there has always been a hefty demand for them. If Fannie can't use the credits, they should be able to sell them at market value to an entity that does (if I am wrong about this, I would appreciate the correction. I am not a tax attorney).

Change these three assertions in the article, and Fannie's capital position looks fine.

Jonathan Laing is a fine reporter. He is also the reporter who in 1989 wrote an article that gave credence to Mankiw and Weil's forecast of a 47 percent decline in real house prices between 1987 and 2007. In the next year or two, we'll see whether his prediction errors are negatively or positively correlated.


Anonymous said...

The LIHTC are readily saleable. But he's talking about Deferred Tax Assets, the tax credit that a company can get in future years for losses in the past. Sometimes those can be sold, and sometimes they can't. GM took a write-down in the tens of billions a few months ago because their accountants determined that their DTA would not be used.

Richard K. Green said...

He was talking about both. He was correct about the deferred tax assets, but incorrect (I believe) about LIHTC.

San Diego real estate lawyers said...

The goverment should take draconian measures like a creating a repo market to hide bank losses ? Or maybe draconian measures like bailing out home speculators because they might incur a loss?

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