GSE Critic Ed Pinto Has No Idea on GSE Loan Losses

There was a Fox Business news article criticizing the Obama Administration for lowering its loss estimate on the GSEs. Mr. Pinto has no factual basis behind his claim that the Obama Administration is just being “optimist” in lowering its projections of losses for Fannie and Freddie. He has no how well or poorly the credit losses of the GSEs are going to play out over the next few years. The critics of these companies continue to spread negative propaganda that the mainstream press is too happy to publish. The reality is the companies have built up massive loan loss reserves that they’ll never fully utilize. For example in the 3rd quarter of 2009, Freddie Mac provided for $7.6 billion of credit losses, but the company only charged off $2.3 billion of loans.

This over-reserving made Freddie’s net income statement look weaker than necessary. Freddie added $5.3 billion to its loan loss reserve in Q3. In its most recent quarter, Wells Fargo only added $0.5 billion to its loan loss reserve. Freddie would’ve reported a profit in Q3 had it not overly added to its loan loss reserve.

The over-reserving also hides Freddie’s balance sheet strength in the loan loss reserve, instead of the capital account. Freddie’s loan loss reserve now stands at 3.28x their run rate of net charge-offs. This compares to Well Fargo’s loan loss reserve which only stands at 1.16x charge-offs or JP Morgan Chase’s at 1.01x charge-offs.

This raises the question in my mind whether the regulator is forcing Freddie to over-reserve for loan losses to make the company look weaker than it really is. They may be doing this to hide the fact that the company should not have been placed into conservatorship. Or maybe, the regulator knows that over-reserving will deplete the company’s capital accounts and force it to take-down more of the Treasury’s senior preferred stock at the usury 10% rate.

Negative comments about the GSEs must be taken with a heavy grain of salt. The relentless pounding of these companies is part of the big bank/Wall Street agenda to control the mortgage market. Here’s an example of poor the analysis behind the criticism of the GSEs: http://blog.gatorcapital.com/126/rebuttal-to-gse-worthless-analysis/