Dancing on the Graves of Mortgage Lenders

I just now heard of the Web site called The Mortgage Lender Implode-O-Meter, but I guess I’m late to the party, considering that the site has had nearly 30 million visitors since January 2007.

The site is keeping a running tally of the mortgage lending operations that have gone belly-up since late 2006. That number currently stands at 266, the latest additions being Lehman Bros. SBF and IndyMac Bancorp.

That’s entertaining, of course, but the site also links to articles, commentaries and sites related to the housing crisis. It also has several bloggers, including Mr. Mortgage and Option ARMageddon.

The latest ARMageddon post focused on the imminent failure of Freddie Mac and Fannie Mae. The blogger, Rolfe Winkler, who describes himself as a Chartered Financial Analyst (CFA) and an actor, explained the situation more clearly than anyone I’ve read before.

Until now, losses in the housing world have been confined to homeowners, mortgage lenders, banks and investors in toxic mortgage securities. But by virtue of the implicit federal guarantee backing mortgage giants Fannie Mae and Freddie Mac, U.S. taxpayers may be one of the largest mortgage lenders in the world – set to lose billions, like all the others.

Between them, Fannie Mae and Freddie Mac back more than $4 trillion in mortgages. If they fail, it could force an unprecedented taxpayer-funded bailout. And they are much closer to failure than most people realize.

Here’s his explanation for why they’re failing:

In a recent Securities and Exchange Commission filing, Fannie noted that it backs $2.6 trillion worth of single-family home loans. Underneath this pile of debt, the company has only $42 billion of capital. If the value of mortgages backing Fannie’s debt falls a few percentage points, the company’s capital could be wiped out. And because of the implicit government guarantee backing Fannie’s debt, American taxpayers would be on the hook for whatever debt Fannie couldn’t cover.

Freddie Mac has a few hundred billion dollars of high-risk loans in its $2.1 trillion book of mortgages. And Freddie’s capital cushion is a meager $40 billion.

Each has reported billions in losses, and they will report billions more as foreclosures accelerate across the country. What happens if their problem loans fall so far in value that their capital is wiped out? There’s only one bank large enough to take over Fannie’s and Freddie’s debts: the U.S. Treasury. Taxpayers.

Swell. So, whether we like it or not, pretty soon we’ll all be homeowners, because we’ll be footing the bill for all these crappy mortgages that these now-defunct companies handed over to anyone who could fog a mirror.

Anyway, it’s ugly, and it’s going to keep getting uglier. This site looks like a pretty good spot to keep up with the carnage.

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