December 2015 - Fortune Tellers

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62 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SECONDARY MARKET THE LATEST Freddie Mac Posts Net Loss of $475 Million in Q3 This marks the first time the GSE has reported a quarterly net loss in four years. F reddie Mac reported a net loss of $475 million for Q 3 2015 in its 10-Q filing with the Securities and Exchange Commission in November, the first time the GSE has reported a quarterly net loss in four years. The good news is that Freddie Mac will not need another draw from the Department of Treasury to continue operations. In the second quarter of 2015, Freddie Mac reported a net income of $4.2 billion. The Enterprise also reported a comprehensive loss in Q 3 of $501 million, compared to a compre - hensive income of $3.9 billion in the previous quarter. According to Freddie Mac CEO Donald Layton, the dropoff of $4.675 billion in net income from Q2 to Q 3 is largely due to changes in interest rates that drove down the value of its derivatives (securities with a price derived from underlying assets—a contract between parties based on the assets, with the value of the contract determined by fluctua - tions in the underlying assets). "For the first time in four years, Freddie Mac had a net loss in the most recent quarter," Layton said. "This $0.5 billion loss was caused mainly by the accounting associated with our use of deriva - tives, whereby the derivatives are marked-to-market but many of the assets and liabilities being hedged are not. The resulting dif - ference between GAAP (generally accepted accounting principles) reporting and the actual un- derlying economics, which has created significant GAAP income volatility in our quarterly financial statements, reduced the after-tax earnings in the quarter by an estimated $1.5 billion as interest rates declined significantly. In the prior quarter, we had the opposite result with a $1.5 billion positive contribution to earnings as rates rose significantly." The loss will not cause Freddie Mac to need another draw from Treasury since it was only a frac - tion of the $1.8 billion net worth reserve the Enterprise has under the Preferred Stock Agreement, according to Layton. The dividends paid into Treasury by Freddie Mac remained unchanged at $96.5 billion, which is about $25 billion more than the $71 bil - lion the Enterprise received in a taxpayer-funded bailout in 2008. Fannie Mae Challenges Government's Definition of "Affordability" The GSE has launched the Housing Affordability Primer, which contrasts five common housing affordability metrics used in the industry. A ccording to the U.S. Census Bureau, nearly a third of American households, owned or rented, experienced affordability problems in 2014. Fannie Mae, however, would like to challenge. The U.S. Census Bureau's American Community Survey (ACS) found that more than 18 million homeowner households and more than 20 million renter households experienced hous- ing affordability problems last year, with renters suffering more consistently high "cost burden" issues than owners. A household is considered cost burdened if it spends more than 30 percent of its gross income on housing costs. According to the Census, there were about 115 million households in the United States between 2009 and 2014. "These are big numbers that demand our attention," said Nuno Mota, an economist at Fannie Mae. "However, consider- ing that there are a number of affordability metrics currently used throughout the industry, are these numbers providing the most accurate view of the overall affordability picture, or are we only getting a partial view?" To get better answers, Fannie has launched the Housing Affordability Primer, which contrasts five common hous - ing affordability metrics used in the industry: Housing cost-to- income ratios; researcher N.K. Kutty's residual income ap - proach; and the home purchase affordability indicators of the National Association of Realtors, the California Association of Realtors, and the National Association of Home Builders. The purpose of the primer is to give Fannie Mae insight into which indicators may offer the best insight for different facets of housing affordability. And that plural on "indicators" is empha - sized repeatedly in the primer. "No single measure can give us a complete view of the mat- ter," Mota said. For example, the residual income approach deems that a household faces an afford - ability problem if the monthly income left over after covering all housing costs is less than the amount necessary to purchase a minimum level of non-housing- related items. But Kutty defines minimum non-housing con - sumption as two-thirds of the U.S. Census Bureau's poverty threshold. "Although both metrics in - dicate consistently higher rates of affordability problems for renters than for homeowners, the residual income metric esti - mates markedly fewer affected households than the traditional cost burden measure, regardless of tenure status," he said. "In 2014 the traditional cost burden measure indicated that some 9 million more renter households and 11 million more homeowner households faced affordability challenges than the residual income metric." While Fannie Mae has no answers so far, the agency feels better prepared to find them. "A comprehensive understand - ing of housing affordability's multiple measures is essential for an informed discussion on the issue," Mota said.

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