Who’s next? Part 1, the GSEs’ 2007 buying

January 22, 2008 | Capital markets, GSEs, Markets, Subprime, US News

We’ve barely had two weeks so far in 2008, and already we’ve had mega-writedowns from big Wall Street banks (Citi, Merrill, and Bank of America), a monoline insurer (AMBAC) lose its prized AAA rating, raise new capital and implicitly announce that it was on a voluntary glide path to orderly dissolution.  I thus find myself thinking of Tom Lehrer’s 1964 ditty, Who’s Next?



First we got the bomb and that was good

‘Cause we love peace and — motherhood

Then Russia got the bomb, but that’s okay

‘Cause the balance of power’s maintained that way

Who’s next?


Who, in fact, is next?



Anybody left lending?


Last summer, Inside Mortgage Finance, a relatively obscure publication, read only by the cognoscenti —



“The study of affordable housing finance is infinite, Watson.”


— published a little story entitled, Inside the GSE’s.  I flagged it at the time but didn’t post it, as it was a story for which the world was not yet ready.


… like the Giant Rats of Sumatra, a tale for which the world is not ready


At the time, it caused no ripples and was barely picked up by the larger media.  Now let’s read it again, with the benefit of hindsight, and ask Lehrer’s question:


France got the bomb, but don’t you grieve,

‘Cause they’re on our side (I believe).

China got the bomb, but have no fears;

They can’t wipe us out for at least five years!*

Who’s next?




Inside the GSEs                               

June 20, 2007


GSE Nonprime MBS Up Among Top Issuers


Does this say that, during the summer of 2007 — a period, we now know, when some of the worst new issues were going on the street — the GSEs were busily buying?


In the wake of the much-publicized pledges by Fannie Mae and Freddie Mac to help out subprime borrowers, a review of the latest data provides a somewhat conflicted story.



I’m sure you’ll make it clear soon enough


The two GSEs have increased their purchases of subprime and Alt A mortgage-backed securities from the top 20 issuers by 13.4% during the first quarter, while purchases from all issuers dropped 3.4%.


Does this say that the GSEs were buying heavily in the first quarter of 2007?


Compared to the first quarter of 2006, GSE purchases from the top 20 issuers are off 10.5% and off 19.2% from all issuers.


Does this say that the issues were already being marked down in summer, 2007, seven months ago?


Alt A and subprime MBS issuance among the top 20 issuers for the first quarter of 2007 came to roughly $137.86 billion, according to the latest data from the Inside Mortgage Finance MBS Database, down 5.1% from the fourth quarter of 2006. Of that total, the GSE portion came to $34.95 billion, or 25.3%.


This fairly clearly says that the GSE’s bought $35 billion of new subprime MBS issues in the first quarter of 2007.



Leave my home alone!


As for all issuers of MBS during the first quarter of this year, Alt A and subprime totaled $185.37 billion, down 8.3% compared to the fourth quarter. Of that total, the GSE chunk amounted to $37.58 billion, or 20.3%.


Countrywide Financial remains far and away the top issuer of subprime and Alt A MBS for the two GSEs, providing them a combined $7.257 billion worth of the product in the first quarter, or 33.5% share.


You recall Countrywide — that’s the company Bank of America just bought for $4 billion, a huge discount from its 2006 price. 



From $45 to $4 in twelve long months


For the fourth quarter, the GSEs had a 29.4% share of Countrywide’s subprime and Alt A MBS. But Fannie and Freddie had a combined 39.9% share of such product from Countrywide in the first quarter of 2006.


I’m past the point of trying to calculate how much of the product the GSEs now own.  [And this blog is free, remember? — Ed.]  The IMF article is now behind a subscriber firewall, but I think the following quote comes from someone at Moody’s.


“I think both Fannie and Freddie have said that they are interested in the subprime sector and they have been buying.  […]  It still represents a relatively small portion of their overall portfolios, but it’s growing.”


Back last spring, lots of people — myself among them — though that what we had was a gradual re-pricing, nor the severe credit crunch we’re now facing.  Chances are these purchases are ones Fannie and Freddie now wish they could unwind.


Then Indonesia claimed that they

Were gonna get one any day.


Who’s next?




[Continued tomorrow in Part 2.]