Freddie Mac finally released its fourth quarter 2008 results after market close Wednesday, and the results weren't exactly pretty: a quarterly net loss of $23.9 billion, or $7.37 per share, compared to a net loss of $25.3 billion, or $19.44 per diluted common share, in the third quarter of 2008. The Q4 loss pushed Freddie to a full year loss of 50.1 billion, or $34.60 per share.

"We absorbed heavy financial losses last year, driven primarily by mark-to-market items and credit-related expenses. But we also provided vital liquidity to the strapped housing market–injecting more than $460 billion in mortgage funding in 2008," said Freddie CEO David Moffett in a press statement.

Freddie said its regulator has asked Treasury for another $30.8 billion in government funds to help keep it afloat. The additional government funding comes with additional preferred stock — the dividend payments on which will equal roughly $4.6 billion, enough to bury any future profits for some time to come. In its filing with the Securities and Exchange Commission, the GSE warned that the size of the annual dividend "exceeds our annual historical earnings in most periods, and will contribute to increasingly negative cash flows in future periods."

In late January, Freddie had warned that it expected to request $30 billion to $35 billion in additional funding from the Treasury; but at that time, I don't know that anyone did the admittedly basic math on what the annual dividends would mean for future cash flow.

Parsing Q4's results

Freddie's Q4 loss was driven by $13.3 billion of mark-to-market losses, $7.2 billion in credit-related expenses, and other-than-temporary-impairment charges of $7.5 billion tied to the GSE's non-agency MBS portfolio. Of the GSE's credit expenses, $7.0 billion came in the form of provision for credit losses; net charge-offs actually fell slightly quarter-over-quarter to $863 million from $942 million one quarter earlier. But it's important to keep in mind that much of the slowing in charge-off activity is the direct result of policies the GSE has put into place to freeze foreclosures and evictions since December of last year.

Non-performing assets reached 2.59 percent of the single-family portfolio during Q4, Freddie said — that's up from 1.91 percent just one quarter earlier, and 1.01 percent one year ago.

Of the nearly $50 billion in single-family NPAs, $38.1 billion came in the form of 90+ day delinquencies, while troubled debt restructurings remained essentially flat quarter-over-quarter. This suggests that troubled borrowers are backing up in the 90+ day bucket, and could be a sign of a future surge in foreclosures and REO volume once the GSE (and its regulator) allows a foreclosure and eviction activity to resume.

Nonetheless, the GSE saw the number of loan modifications recorded by its servicers move from 8,456 during Q3 to 17,695 during Q4. The GSE does not report recidivism rates, or the number of loans previously modified that became delinquent again at a later point.

Write to Paul Jackson at paul.jackson@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Either it’s the moon — full today — or the approach of a House Financial Services Committee hearing scheduled for Thursday, but the baying over “fair value” or “mark-to-market” accounting rules has really intensified in recent days.

Late last week, a bill was introduced in Congress to create a board to review the application of accounting principles, including mark-to-market rules. Apparently these elected officials, one from each party, do not understand that’s what the Securities and Exchange Commission does — or that the SEC is to U.S. GAAP what the man behind the curtain was to the Wizard of Oz.

On Monday, the anti-fair-value lobby (the usual suspects: the American Bankers Association, the Independent Community Bankers of America, the Mortgage Bankers Association and the U.S. Chamber of Commerce) passed its letter to the leadership of the House Financial Services Committee to L.A. Times blogger Tom Petruno. Petruno reports that the letter calls for “immediate action” to halt the “spiral of accounting-driven financial losses.” Also on Monday, Warren Buffet (Monday on CNBC) called mark-to-market rules “gasoline on the fire.”

Now, Fed chair Ben Bernanke’s remarks on the subject (Tuesday, in a speech to the Council on Foreign Relations) have been fed into the press particle accelerator as a call to relax fair-value accounting rules.

The New York Times writes that Bernanke “stoked a new controversy by endorsing more flexible accounting rules.” The Washington Post said Bernanke “advocated changing accounting methods he said have exacerbated the financial crisis.”

Not that the truth matters when there’s controversy to stoke, but what Bernanke really said was much more cautious:

we should review regulatory policies and accounting rules to ensure that they do not induce excessive procyclicality–that is, do not overly magnify the ups and downs in the financial system and the economy.

In his speech, he gave equal attention to the pro-cyclical effects of regulatory capital requirements and deposit insurance funding mechanisms. He didn’t, as the New York Times asserted in its coverage, say that “regulators should consider relaxing so-called mark-to-market accounting rules that require financial institutions to value securities in their portfolio on the basis of their current market price.”

What he did say was, given the difficulties of valuing “illiquid or idiosyncratic” securities or setting appropriate levels of loan loss reserves over the cycle:

further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their procyclical effects without compromising the goals of disclosure and transparency. Indeed, work is underway on these issues through the Financial Stability Forum, and the results of that work may prove useful for U.S. policymakers.

If you’re wondering, the Financial Stability Forum is composed of the senior representatives of national financial authorities (e.g., central banks, supervisory authorities and treasury departments), international financial institutions, international regulatory and supervisory groupings, committees of central bank experts and the European Central Bank. This body ponders more slowly than the FASB, which should give you some idea of how quickly Bernanke would expect a further review to modify anything.

The Times’ gloss of Bernanke’s remarks may be too glib, but the reporter –- Edmund L. Andrews –- does get at least one thing partially right: Easing accounting rules is a form of “regulatory forbearance” a phrase, he rightly notes, that became “an epithet among policy after the savings and loan crisis of the early 1990s.” (Except for the whole 1990s S&L thing. Actually, Times fact checkers, the crisis started in the late 1970s and was deeply extended by regulatory forbearance through the early and mid-1980s, until the S&L deposit insurance fund was deeply in the red and the entire industry was restructured by an act of Congress in 1989.)

In fact, a major impetus for mark-to-market accounting standards came from the fact that the accounting treatment banks prefer –- amortized cost –- concealed the fact that, in economic terms, thrifts were insolvent. Thrifts were sunk when their funding costs soared in the late ’70s and early ’80s, while their assets –- largely mortgage loans and investment securities with much longer maturities than their liabilities –- paid low fixed rates. Negative interest rate margins were allowed to eat book capital to zero, while the liquidation value of the institution was negative.

By the time policy makers dealt with the problem, the cost to taxpayers of “resolving” failed thrifts was multiplied by a commercial real estate bubble (fed in part by untrammeled thrift CRE lending), aggressive relaxation of residential mortgage underwriting and outright fraudulent exploitation of thrift charters and federal deposit insurance.

This time, the problem isn’t that rising interest rates have lowered the value of debt securities, it’s that no one really knows whether the MBS and ABS securities will be repaid according to the contractual terms of the security. There are exceptions — but in the case of most mortgage and asset-backed security structures, the best that can be said is that the probability of being repaid increases the more senior a particular bond is in the credit structure of the securitization. Models designed to come up with mathematically robust estimates of that probability are built on historical data that is increasingly irrelevant in the current crisis. Those investors that do buy these securities at “distressed” or fire-sale levels are placing bets.

Banks complain that fair value rules assess their security holdings at “liquidation value” rather than the value they would have in a going concern that can wait to see if they repay in full. But what else than “liquidation value” could the government require if it is going to continue to invest in, stabilize or otherwise resolve the holders of these securities?

All the research and testimony on how fair value rules contributed to the current crisis cannot change the fact that the crisis is fully upon us. Even if fair value accounting led to this crisis, getting rid of it now won’t get us out. Instead, it will raise the uncertainty for taxpayers on the hook for bailouts and for those investors willing to put private capital to invest in banks and other financial institutions holding “distressed” securitizations. And more uncertainty for private capital means less private capital will flow into the financial system at a higher cost to the financial institutions.

Put it this way: would Citigroup (C: 30.87 +1.61%) be worth more today if its subprime, CDO and other leveraged credit investments had not been written down? How can united punditry be so smart as to call for Citi’s nationalization, but not insist on ruthless market valuations of the same investments in all the other balance sheets?

The anti-fair value and banking lobbies also argue that fair value losses stopped banks from lending. This assertion is specious. First, the public rhetoric does not distinguish between unrealized losses on available-for-sale securities and losses realized when a determination is made the contractual cash flows will not be received or the holder can’t or won’t hold the security until the contractual cash flows are received (the security is deemed “other than temporarily impaired” or OTTI). The unrealized losses do not reduce regulatory capital and, as such, should not stand in the way of making good loans. On the other hand, FASB has already adjusted OTTI rules (effective for fiscal years ending December 31, 2008 or later). Nonetheless, opponents of fair value accounting still conflate the two issues.

Second, and probably more to the point, banks are not lending because the risk of default has risen. If banks were convinced they would make money lending to jumbo home borrowers, for example, wouldn’t they be making those loans? Unfortunately, the loans they do have on their books (and their burgeoning inventories of foreclosed houses) provide them with ample evidence that real estate loans are not performing well.

The historical politics of mark-to-market accounting have pitted the “free-market” conservatives against the “regulation loving” liberals. It is, I think, ironic that the free-market forces are now trying to use the liberals’ populist anger at banks’ reluctance to lend to push through some dilution of mark-to-market reporting.

Editor’s note: Linda Lowell is a 20-year-plus veteran of MBS and ABS research at a handful of Wall Street firms. She is currently principal of OffStreet Research LLC.

[Update 1 clarifies geographic locations of some TARP recipients.]

The U.S. Treasury Department purchased just under $284.7 million in preferred stock from 22 banks and financial institutions in states across the country Friday. The government's funds were split relatively evenly between three publicly-traded companies that received 45 percent of the day's infusions, and 19 privately-held firms that took 55 percent of the day's capital, according to details released Tuesday by the Treasury.

Friday's capital infusions through the Capital Purchase Program (CPP) favored Illinois with a $100 million infusion in Urbana-based First Busey Corp. (BUSE: 5.20 +1.56%). Texas-based firms lagged in second, with two Houston-based companies and one Fort Worth-based firm taking a combined $34.5 million. Four Florida-based firms took a combined $24.1 million on Friday. Goff, Kan.-based Community Bancshares of Kansas Inc. now boasts the smallest daily infusion of $500,000, narrowly outdoing the Feb. 27 investment of $541,000 in Limerick, Pa.-based The Victory Bank.

Friday's infusions came after the previous Friday's $394 million in capital injections.  Then the Treasury on March 3 the $20 billion it had promised in late November as its share of the Term Asset-Backed Securities Loan Facility — or TALF — which is intended to support the issuance of new ABS backed by student loans, auto loans, credit card loans and small business loans, which in turn should — if all goes as the Federal Reserve and the Treasury plan — stimulate new lending in these areas. All told, the Treasury had as of Friday distributed $197.04 billion in capital infusions through the CPP and had distributed — and promised — a combined $326.82 billion through its various TARP programs, including the CPP, the Targeted Investment Program, the Systemically Significant Failing Institutions program, the Asset Guarantee Program and the TALF.

Visit www.ustreas.gov for further details on the TARP.

Stocks purchased through the CPP had lost something on the order of $112 billion in value as of early March, according to statistics released by business ethics think-tank Ethisphere Institute, which reports on the government's loss-on-investment based on the idea that as stocks of publicly-traded TARP fund recipients lose value, so too does the government — and ultimately the taxpayer — lose a portion of the investment. “Through the Index, Ethisphere hopes to encourage participating companies to promote transparency, accountability and ethical business practices related to the TARP funds,” officials said in a press statement regarding the index.

Even after the major institutions that received TARP funds have slipped in stock value lately, the market rebounded on Citigroup Inc.'s (C: 30.87 +1.61%) shares as of Tuesday when CEO Vikram Pandit said in an internal memo that although he was "disappointed" with Citi's recent stock prices, he saw a strong start in first-quarter business for the company and assured he is "most encouraged" that the bank may post its best quarter-to-date performance since the third quarter 2007.

Write to Diana Golobay at diana.golobay@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Standard & Poor's Ratings Services said earlier this week that its ratings on 9,430 classes from 1,077 U.S. first-lien Alt-A RMBS transactions issued in 2005, 2006, and 2007 had been placed on CreditWatch with negative implications — otherwise translated as "downgrade imminent." The affected classes had an original par amount of approximately $552.83 billion, and have a current principal balance of $445.43 billion, the rating agency said.

It's almost becoming a yawner to see more RMBS downgrades, but what they mean should not be lost on any market participant, even if they're increasingly common and the hundreds of billions of dollars involved now seem a numbing figure to most of us covering this mess.

A review of the thousands upon thousands of classes by HousingWire shows that roughly half of the at-risk bonds are currently rated AAA by the rating agency; downgrades to securities rated AAA are likely to lead to further write-down pressure for banks and insurers already hard-hit by ratings downgrades.

S&P said the ratings warning came on the heels of a Feb. 24 update to the agency's loss severity assumptions for most Alt-A transactions. S&P cited a "belief that the influence of continued foreclosures, distressed sales, an increase in carrying costs for properties in inventory, costs associated with foreclosures, and more declines in home sales may depress prices further and lead loss severities higher than we had previously assumed" on recent Alt-A deals.

As of the February 2009 distribution date, severe delinquencies — 90+ days, foreclosures and REOs — have accounted for an average of 22.92 percent of current aggregate pool balance for affected transactions, S&P said. And, over the past three months, severe delinquencies in affected deals have risen by a sharp 24.5 percent, illustrating the pressure much of the Alt-A space is now facing.

S&P last made major cuts to private-party RMBS deals in early February. Read previous coverage.

The bottom line here is this: for all of the pain felt in this area already, plenty of banks large and small are still generally carrying securities on their books at a level justifiable against current ratings levels (how many investor presentations have we seen in recent months touting the percentage of securities held rated AAA?). Would-be buyers know the securities aren’t worth the AAA rating they’ve got, and frankly so too do any would-be sellers, but nobody can sell a security still at AAA at C-level prices, and then justify the hit that so doing would have on the rest of their books.

With many of these AAA high-fliers falling officially off their perch, that dynamic appears set to change further.

Write to Paul Jackson at paul.jackson@housingwire.com.