Mortgage Giants Teetering

Developments this week revealed the increasing troubles in the home-mortgage industry.

On Thursday, Fannie Mae, the nation's largest mortgage provider, reported a whopping $18.9 billion third-quarter loss and said it would need $15 billion from the U.S. Treasury.

Then, on Friday, Freddie Mac, the second largest provider of residential mortgage funding, posted a third-quarter loss of $5 billion and predicted it would need more government support amid a "prolonged deterioration" in housing.

"I would say we are just beginning to see the impact of the chargeoffs on their guarantee book," said Janaki Rao, vice president of mortgage research at Morgan Stanley in New York.

In its filing, Fannie Mae said that losses will continue and that it remains “dependent on the continued support of Treasury to continue operating,”

Results at Freddie Mac and Fannie Mae are widely watched as a barometer of the U.S. housing market since they own or back nearly half of the nation's $12 trillion mortgage market.

In September 2008, examiners said the two lending giants may be at risk of failing due to the housing slump.

Freddie Mac has taken $51.7 billion in government support since that time, while Fannie Mae's draw will rise to $60.9 billion.

Fannie Mae’s net worth was negative $15 billion as of September 30. The lender has been given a $200 billion emergency lifeline by the Treasury Department.

“They’re going to need that $200 billion in capital, if not more, when this thing’s all said and done,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

“In absolute dollar terms, you’re still looking at outlandish growth in nonperformers, which tells you that reserves will continue to increase,” said Miller.

Banks are supposed to make provisions against future loan losses by estimating future defaults and then putting that amount of money into reserves in response. When the defaults occur, the bank has the cash to deal with the crisis.

But this presumes that banks actually have the massive amounts of cash to put aside in preparation for the coming onslaught.

According to RealtyTrac, a record 2.6 million defaults, scheduled foreclosure auctions, or bank repossessions occurred in the first nine months of this year.

That was a 22 percent increase from a year earlier, as unemployment climbed and temporary programs delaying foreclosure expired.

The ratio of inventory to sales remains high and additional foreclosures may put further pressure on home prices, Fannie Mae said.

Nationwide, about 3.9 million homes are for sale.

According to the Mortgage Bankers Association, an equal number of homes with mortgage payments that are at least 90 days past due (the so-called “shadow inventory") will eventually come onto the market.

This portends the trouble yet to come.

There will be more government rescues and more bailouts of the banking and lending industries.

Housing inventories will continue to rise, and prices will continue to sink.

We are a long way from the bottom.

We are deep in the woods, looking for a way out.