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Shoeshine
Joined: 10 Nov 2007 Posts: 38 Location: Greater Lowell MA
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Shoeshine
Joined: 10 Nov 2007 Posts: 38 Location: Greater Lowell MA
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Posted: Sat Nov 17, 2007 1:48 pm GMT Post subject: |
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This article better explains what fannie mae is doing.
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http://money.cnn.com/2007/11/16/news/companies/fannie_follow.fortune/
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Enron all over again !
Essentially, the company was able to lower the ratio by excluding a certain type of loss known as an SOP 03-3 loss.
Here's how SOP 03-3 losses work: Fannie Mae guarantees mortgages, which have been packaged and sold to investors as bonds. If a homeowner falls significantly behind on his payments, Fannie Mae has to buy back the loan from the bondholder. If the mortgage has an outstanding amount of, say, $100,000 and unpaid interest of $5,000, Fannie Mae would have to pay $105,000 -- its full value -- to make the bondholders whole.
However, the $105,000 loan may actually be worth less on the market. It is Fannie Mae's job to estimate the market value, or fair market value, of the loan and to record that price on its books. So if the fair market value is $80,000, Fannie Mae takes a loss of $25,000 (the difference between $105,000 and $80,000). That loss is considered an SOP 03-3 loss -- so named after the applicable accounting rule.
Until recently, Fannie Mae included SOP 03-3 losses as part of its credit-loss ratio. But here's the trick: Fannie insists that, based on past trends, it can recover a large part of that $25,000 loss by, for example, helping the borrower renew payments. So it simply decided to stop including SOP 03-3 losses in calculating its credit-loss ratio.
This reeks accounting chicanery !
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