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More Windfalls in the Mortgage Market

Posted February 27, 2009 by Kate Dickman

Two mortgage lenders are losing ground, not surprisingly.

In a single day, the real estate community has been rocked by further distress with the announcement of Fannie Mae’s bailout use and JP Morgan Chase’s weakening mortgage portfolio. Not that these came as a shock to the market but these reports certainly add pressure to the federal government’s rescue plans.

Last Thursday, Fannie Mae announced that it will be finally tapping a portion of the $200 billion line of credit that the government has allotted after putting the company and Freddie Mac under conservatorship. According to Businessweek, the government enterprise will be taking a total of $15.2 billion to cover its last year’s $58.7 billion loss. Some of the reasons include, “the companies’ net worth is declining in part because its mortgage guaranty becomes a costlier obligation as the housing market worsens. Also, its funding costs have run higher as investors demanded higher rates because of the agencies’ perceived riskiness.”

Now, we wouldn’t be skeptic about reading Fannie Mae’s eventual borrowing increase in the coming months. The stated amount will just be used to cover last year’s losses and since the company’s loan default rate remains high, it’ll be in need of more funding after the first quarter (We think Obama’s additional $50 billion raise is already a sign of this financial loss). Worse, it’ll be facing another problem this year.

On the other hand, JP Morgan Chase will be slashing its workforce more than what was projected after its Washington Mutual acquisition last year. According to CNNMoney.com, “During presentations at the company’s investor day in New York Thursday, executives noted that home-equity loan losses could climb as high as $1.4 billion per quarter this year. (It) said “non-credit impaired” loans would suffer in 2009 due in large part to the ongoing decline in home prices across the country, as well as the weaker economic climate.”

Readers should be aware that last December, the bank initially estimated that 3,400 jobs will be nixed. So far, nothing has changed from its projection. Aside from redundancy, we suspect that it would lay off workers to divert its bailout fund from workforce compensation to the bank’s capitalization. Any loans on the way? Probably none.

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