Editor's note: Following is the first in a series of blog posts by John Hempton, the chief investment officer and founder of Bronte Capital. They originally appeared on Hempton's blog on the Bronte Capital Web site.
The Lack of Analysis in the Public Domain
The discussions about the future of Fannie Mae (FNM) and Freddie Mac (FRE) are taking place in a vacuum, where there are no decent public analyses of the government's contingent liabilities with the two government sponsored enterprises. The main goal of this series will be to remedy that oversight.
I write this series in the face of genuine press and public surprise at the relatively good results of Freddie Mac. I do not mean to sound boastful, but I privately predicted those results quite accurately. This series will explain how I got to that prediction -- and where Fannie and Freddie losses go from here.*
Losses Are Not From Traditional Business
Fannie and Freddie traditionally insure qualifying mortgages. These are mortgages with:
- loan-to-value ratios of less than 80% (or with supplementary mortgage insurance for higher loan-to-value ratios).
- principal amounts owing lower than the qualifying mortgage limit (which used to be below $300,000 but has been increased several times during this crisis).
- income, employment and assets verified.