Lawler: The Washington Post (and Reuters) get it wrong again on the GSEs

From housing economist Tom Lawler:

In today’s “economy & business” section, the Washington Post has a short “article” with the headline “Report: Fannie, Freddie mask losses.” The first sentence begins as follows: “Fannie Mae and Freddie Mac are possibly masking billions of dollars in losses because of the level of delinquent home loans they carry, a federal watchdog said Monday…” The story is credited to Reuters.

Both the headline and the first sentence are extremely misleading (and just plain wrong!), and reflect the shockingly distorted and one-sided reporting on the GSEs by many news services, and especially by the Washington Post.

The article is referring to a letter to Acting FHFA Director DeMarco from Inspector General (of FHFA) Linick, along with an attached staff memorandum, relating to timeline for the implementation of FHFA’s “Advisory Bulletin No 2012-02” which relates to the classification of certain assets. Specifically, IG Linick questioned why the implementation of this Advisory Bulletin had been pushed back – BY FHFA – to January 1, 2015. Both Fannie and Freddie noted this Advisory Bulletin in their latest 10-K’s, and disclosed that (1) the bulletin differed from current policy, (2) that the implementation date was January 1, 2015, and (3) that the companies were evaluating the possible impact of implementation on future financial results.

E.g., here is an excerpt from Fannie’s 2012 10-K.

“On April 9, 2012, FHFA issued an Advisory Bulletin, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention,” which was effective upon issuance and is applicable to Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The Advisory Bulletin establishes guidelines for adverse classification and identification of specified single-family and multifamily assets and off-balance sheet credit exposures. The Advisory Bulletin indicates that this guidance considers and is generally consistent with the Uniform Retail Credit Classification and Account Management Policy issued by the federal banking regulators in June 2000. Among other requirements, the Advisory Bulletin requires that we classify the portion of an outstanding single-family loan balance in excess of the fair value of the underlying property, less costs to sell, as “loss” when the loan is no more than 180 days delinquent, except in certain specified circumstances (such as properly secured loans with an LTV ratio equal to or less than 60%), and charge off the portion of the loan classified as “loss.” The Advisory Bulletin also specifies that, if we subsequently receive full or partial payment of a previously charged-off loan, we may report a recovery of the amount, either through our loss reserves or as a reduction in our foreclosed property expenses.

The accounting methods outlined in FHFA’s Advisory Bulletin are different from our current methods of accounting for single-family loans that are 180 days or more delinquent. As described in “Risk Factors,” we believe that implementation of these changes in our accounting methods present significant operational challenges for us. We have agreed with FHFA that (1) effective January 1, 2014, we will implement the Advisory Bulletin’s requirements related to classification, and (2) effective January 1, 2015, we will implement an updated accounting policy related to charging-off delinquent loans. We are currently assessing the impact of implementing these accounting changes on our future financial results.”

Neither the Advisory Bulletin nor the OIG staff memorandum says that current GSE accounting practices are not GAAP.

The real issue with the IG/OIG has on this issue is with the FHFA, and why it had “agreed” to a delayed implementation of the Advisory Bulletin. Here is an excerpt from the OIG staff memorandum.

Here is an excerpt from FHFA’s response.

And here was another part of FHFA’s response.

Now let’s go back to the Post’s headline: “Report: Fannie, Freddie mask losses.”

Neither the IG letter nor the OIG staff memorandum says anything of the sort.

On a separate note, some articles on this issue have assumed that when this advisory bulletin is implemented, Fannie’s and Freddie’s GAAP earnings will be reduced. While that is possible, it isn’t necessarily correct. From what I can gather, implementation of the directive will probably (I can’t rightly be certain) increase “realized” losses/charge-offs; it isn’t even remotely clear, however, than implementation will result either in a higher loss PROVISION or a higher allowance for losses – the latter of which at both companies currently assumes that there will be a high level of “realized” losses for quite a while.

Last year, after eight years of litigation, a judged dismissed Fannie’s former CEO, CFO, and Controller from a class-action “securities fraud” lawsuit, with the judge ruling that there was no evidence that any had “committed fraud” or knowingly misled shareholders. While not “front page news,” this story was covered by most “national” newspapers and national news services. Yet even though Fannie is a major employer in the Washington Post’s home market, the Post did not report on a story exonerating these former Fannie officials after eight years of hell. Why? The Washington Post editorial staff “doesn’t like” Fannie and Freddie. That is not journalism.