Sales Report Wrapup

The Census Bureau and HUD reported today on sales in the US. I posted earlier that the overall number was down 9%. But after going over the report itself the picture is more interesting in the details.

The West coast was actually up, with the year-on-year January number sold up 17%. The Midwest and the Northeast both had 33% fewer homes sold in the same period. The South was down 3%. Prices were mixed.

With sales sharply down, the number of homes for sale increased by 74,000, a rise of 17% from January 2004. Of these 15,000 were added in January 2005 alone. You can download the Census Bureau/HUD report in PDF, which will require Acrobat Reader to open.

As if this wasn't enough to shake housing stocks, interest yields went on a tear, with the benchmark 10 year bond return jumping up over 2%.

Accounting Woes Grow From Derivatives

The real estate sector has experienced a great deal of accounting problems recently. Last week Countrywide Financial fessed up to a derivative problem, and left investors with this ominous note; "..the Company concluded that its interim unaudited financial statements for the periods ended March 31, 2004, June 30, 2004 and September 30, 2004 should no longer be relied upon."

This is becoming a trend as this note from the Fannie Mae website reminds us. "On December 22, 2004 Fannie Mae announced that its previously issued financial statements should not be relied upon in light of the SEC's determination that the financial statements were prepared applying accounting practices that did not comply with generally accepted accounting principles." Derivatives were largely the cause of this mess as well.

How did we get in a situation where some of the biggest corporations in the world are no longer providing an accounting of their operations?

New Home Sales Down 9%

Bloomberg.com is reporting this morning that new home sales for January were off 9% from December. Another item that will be sure to rattle the markets was the rising inventory of homes for sale. "Measured against sales, the supply of homes increased to 4.7 months in January, the highest since June 2000".

Home Rental, Owner Vacancies At Highs

The number of homes that sat empty were at or near all time highs in the 4th quarter of 2004, the Census Bureau reports.

Median Price Statistic May Prove Faulty

The primary number being reported regarding home prices is the median. As you know, that number is the middle price; if all purchases are listed that price will be both higher than 50% and lower than 50% of the homes sold. So far so good.

But consider that the type of homes sold may be more lavish than the previous period, or the houses could be larger. Here is a quote from DQNews; "A total of 33,107 Golden State homes sold for a million dollars or more last year. That was up 73.5 percent from 19,080 in 2003. The total was 13,871 in 2002...A million dollars just isn't what it used to be when it comes to California real estate."

In the future I will look for more objective data, such as price per square foot.

Morningstar DividendInvestor: REITs Overvalued

Morningstar has released part of a newsletter regarding real estate investment trusts (REIT). Although they like holding some REITs for the dividends, they weren't optimistic about the future valuations.

"MDI: Are valuations excessive enough that existing owners should consider selling?

Perlmutter: If you've already seen a nice capital gain from REIT shares and have higher total-return expectations than the current yields, I think the time to check out is here. I believe prices have nowhere to go but down.

Dobratz: If REIT insiders sold $200 million of their stock in the fourth quarter of 2004, why should you shy away from taking profits? I would walk away in a lot of cases."

Bubble Mentality Reigns; Stocks Soar

The home builders stock prices have rebounded after the sell-off earlier this week. In fact some have blasted to new new 52 week highs.

Fitch Ratings: US Government Will Support GSEs

This morning the global credit evaluation service, Fitch Ratings, held a conference call and issued a position paper titled "GSEs: Are the ‘AAA’ Ratings at Risk." While the short answer is maybe, the statement (registration req'd)makes it clear that the GSE bonds receive a high grade due to the understanding that uncle sam will guarantee them. "Senior debt ratings...include an assumption of support from the US government that would be provided in the event of severe financial stress".

It goes on to say this view is reinforced by current legislation being considered that would increase oversight rather than cut ties to the firms. Fitch also made clear that if the guarantee were removed it would damage the entire economy. "If there was a major problem in their ability to issue debt, then the government would have to step in in order to support not just the GSEs but the overall economy as well," said Fahey. "It's very similar to support that we view in the money center banks in the United States."

In other words, too big to fail. And much of the report focuses on how the failure should be handled! Together with all the hints coming out of the White House and congress about a bailout, todays announcement reinforces the suspicions that the GSEs are in trouble. Consider this: Fannie isn't providing financial statements. Massive drawdowns of Freddie and Fannie portfolios are ongoing. And new legislation that would allow a government agency to take over the firms is expected to pass.

The bond holders will be made whole; the stock holders will not. The property market could be devastated.

Fannie Economist: Slowdown Indicated

The Origination News website has a report today on comments by Fannie Mae chief economist David Berson. He spoke about the preliminary data and indications for the housing market. "(H)ousing data are pointing toward a slowdown in home sales..Recent trends in production versus sales are a bit disturbing, and may suggest the excess inventories of unsold homes may have increased in early 2005 from already relatively high levels."

It is gratifying to hear someone other than myself point out the inventory that is building all over the country. "The obvious implication, if these data are indicative of actual trends, is that housing production may be exceeding demand," Mr. Berson warns.

Sydney Apartment Sales Plummet: Updated

The Australian RE market has flown high in recent years, but trouble spots have begun emerging. This report informs us "Investors have fled the property market, with apartment sales in the Sydney CBD crashing by 70 per cent."

In what may be of relevance to us here in the US, the number of units sold has dropped while prices stayed about the same. "Apartment values remained relatively steady across Sydney, falling by a modest 0.8 per cent between the two periods". The big question is, will prices follow sales down?*see update below

One quote from the story may be coming to a neighborhood near you,"Back in 2001 and 2002 everybody thought 'if I buy a Sydney unit I'll double my money in a couple of years',now they realise that's not going to be the case."

Updated 2.24.05:- It seems prices may be headed down after all; "I know of an (apartment) developer who has dropped prices 20 per cent to make sales and they've already had an impact at the lower-priced end of the market,"

More Accounting Problems At Fannie Mae

The regulator of mortgage giant Fannie Mae has notified its board of directors that additional accounting issues "raise safety and soundness concerns." The companys stock sold off hard initially, only to bounce back to neutral by noon, eastern time.

The issues seem to focus on internal control and manipulation of income and expense. The regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), had no direct comment on the matter. OFHEO did have a release on its web site proposing new regulations requiring Fannie and Freddie Mac to report mortgage fraud.

“This rule will ensure that Fannie Mae and Freddie Mac do their part to help combat mortgage fraud,” said Armando Falcon, Jr., OFHEO Director. “The Enterprises will now have a clear obligation to report fraud and help prevent a repeat of cases like the First Beneficial matter,” Falcon said.

First Beneficial had sold mortgages to Fannie, and bought them back when it was discovered the homes were problematic. First Beneficial then sold them to Ginnie Mae, a government agency. More on that story here.

Big Change In Market Sentiment

Today may be a key move in the housing and lending industries. Fannie Mae started the day at a 4 year low, but gave up another 1.5% today. The builders got hit as well, most of them fresh off 52 week highs. It makes sense that the lenders would precede the builders in a bear market pullback.

Pulte finished down 3.8%, Centex fell 4.4% and KB Home finished 2% lower; all three traded on higher than average volume. The big shocker was the CBOE Volatility Index, which jumped 17% by 5PM Eastern.

Gold was up over $8, the US dollar took a tumble versus the euro, yen, Swiss franc and Canadian dollar. Equities joined in with the Dow off 174 and the Nasdaq down 28 points. Both markets closed at their lows for the day.

Watch Those Stocks: Volatility Index Breaks Out

The big news item may be the awakening of the long dormant Volatility Index which is up over 10% this AM. I will be watch this closely, as it may be a turning point.

0% Teaser Rates And "Home Possible"

Its is obvious that the mortgage industry has thrown all caution to the wind and are making loans to anyone with a heart beat. This is now occurring under the guise of helping lower income people get into a home. My view has been they are helping people get into a home they can't afford and that is probably overvalued.

So I guess it was inevitable that with easy credit being offered by the central bank, some lenders would turn to 0% teaser loans. Here is an example: "Taking a page from credit-card companies and car makers, mortgage lenders are touting loans with rock-bottom introductory rates -- in one case, nearly 0%... the low introductory rate can last for as little as one to three months, after which the rate typically jumps above 4% or more. Plus, rates on these loans adjust frequently, meaning borrowers could see their costs rise as short-term interest rates increase".

In other words, yet another trap that could spring if rates rise or prices fall. Freddie Mac is especially eager to help the downtrodden; "Home Possible Mortgages – a new suite of low downpayment mortgage products with flexible credit underwriting standards that is expected to help thousands of families with savings issues or imperfect credit become homeowners".

Lenders Bottom Fishing For Borrowers

With the howls of condemnation still echoing around Washington DC, Freddie Mac unveils a new mortgage product intended for the "savvy borrowers". "(T)he second-biggest provider of financing for U.S. housing, said that it will expand its interest-only payment option to more adjustable-rate home loans to meet demand from borrowers".

But you really, really have to be serious to get this loan;"(Its) designed for borrowers who fully understand that the monthly payment will rise following the interest-only period," Freddie Mac said in the statement. The story points out "they are popular with consumers who are stretching financial resources and might not be able to repay the loans when interest rates rise."

Downtown San Diego "Canary In A Coalmine"

The good Professor has a new post up today on the number of San Diego condos up for sale. He points us to this nice graph, which will save me some keystrokes, as you will see. Be sure to pass your cursor over the graph bars and reap the data!

Piggington has this to say; "one thing is fairly clear: whatever happens to San Diego County will happen to Downtown a lot worse".

Inventory Grows At Centex

Almost every big home building firm has a growing inventory on its balance sheet. Centex is no different, indeed it has seen the largest increase of the corporations I have checked so far.

On March 31, 2002 you find Centex inventory at $2.7 billion. As of December 31, 2004 that number had jumped to $7.48 billion. That is an increase of 176%. You will find almost $2 billion of that increase comes in the nine months leading up to the end of 2004.

Greenspan Warns : "Unlimited Access To Capital"

Forbes.com reports that Fed Chairman Alan Greenspan raised the spector of "systemic risk" in testimony to congress. He is once again speaking about the two GSEs, Fannie Mae and Freddie Mac. The risks of something going wrong "are almost inevitable" Greenspan said.

He suggested the two mortgage giants be forced to reduce their portfolios in order to prevent unspecified "problems". "It is the time to act to fend off the problems that are almost inevitable" he said, injecting a sense of urgency to the situation.

"Greenspan also noted that Fannie and Freddie both have unlimited access to capital far below normal market rates, giving them unlimited growth prospects. Since the two have very low regulatory capital requirements, the companies have to "engage in very significant dynamic hedging to hedge interest rate risks," he said. Their role in creating the housing bubble has been clear. Maybe the Fed is looking to blame a coming crash on the GSE's and therefore congress.

More On Inventory Growth

To follow up on my post yesterday regarding DR Hortons' ballooning inventory, I pulled up the balance sheets of more home builders. Here is what I found.

Inventory Increases:

Beazer Homes(BZH), 9.30.02 to 12.31.04 - up 89%

Hovnanian Enterprises(HOV), 10.31.04 to 10.31.04 - up 128%

KB Homes(KBH), 11.30.01 to 8.31.04 - up 115%

Ryland Group(RYL), 12.31.01 to 9.30.04 up 117%

Toll Brothers(TOL), 10.31.02 to 10.31.04 up 52%

Pulte Homes(PHM), 12.31.01 to 9.30.04 up 101%

Pardon the uneven dates here, I worked with what was available through Yahoo Finance. It is remarkable that in this random sample of firms, all have a billion dollar increase or more in inventory.

Home Starts Jump With "Perfect Aphrodisiac"

January housing starts surged ahead by double digits in spite of rising inventories. "With cheap mortgages the perfect aphrodisiac, the American love affair with housing continues and developers are more than willing to comply with their customers wishes," said Joel Naroff, chief economist at Naroff Economic Advisors. "Low mortgage rates trump everything else as the housing market continues to boom along."

Upon looking at the Census data, one discovers the increase is steepest when compared to January 2004. "Privately-owned housing starts in January were at a seasonally adjusted annual rate of 2,159,000. This is 4.7 percent above the revised December estimate of 2,063,000 and is 11.6 percent above the January 2004 rate of
1,934,000".

More Inventory At DHI - Updated

Home builder DR Horton Inc. has reported for the final quarter of 2004. I am just getting into the financials, but one item jumps out, and that is inventory. Here you can see in the current assets that number has grown $1.6 Billion in the past year and $3 Billion since September 2002.

Update: In response to questions about what makes up this inventory, I downloaded the annual report dated September 30, 2004. Keep in mind the inventory was up almost a billion dollars more just 3 months later.

Sales Contract Backlog:
Number of Homes:
9/30/04 17,184
9/30/03 15,488
9/30/02 12,697
9/30/01 9,263
9/30/00 7,388

It says "We state inventories at the lower of historical cost or fair value in
accordance with Statement of Financial Accounting Standards (""SFAS'') No. 144. In addition to the costs of direct land acquisition, land development and home construction, inventory costs include interest, real estate taxes and direct overhead costs incurred during development and home construction. Applicable direct overhead costs that we incur after development projects or homes are substantially complete, such as utilities, maintenance, and cleaning, are charged to selling, general and administrative (SG&A) expense as incurred. All indirect overhead costs, such as compensation of construction superintendents, sales personnel and division and region management, advertising and builder's risk insurance are charged to SG&A expense as incurred".

California Turning

Many sources are reporting a potential turn in the hot California real estate market. Usually it takes the form of fewer homes sold even as prices continue to rise. Such is the case with a bit of news from DataQuick Information Systems, which is an information service. In the 6 southern California counties that include San Diego and Las Angeles, the firm found the number of homes sold in January fell 4.9% from the same month last year.

Then there is this data (see the February 11th post) which the good Professor has compiled on the market in San Diego. And here is another excellent data source put together on the San Francisco market. Both seem to show pockets of emerging weakness in what were the highest flying regions.

Multifamily Loan Delinquency Rising: Fitch

On February 9th, Fitch Ratings reported more delinquent commercial multifamily properties. "(M)ultifamily loans are still experiencing stress in some markets,' said Mary O'Rourke, Senior Director, Fitch Ratings. 'A large portion of the new defaults in the multifamily arena stemmed from small balance loans under $4 million with 26% being loans under $1 million and another 34% under $4 million".

The problems are concentrated in a basket of states. "(N)ew defaults, particularly among small balance loans, concentrated in secondary markets in Florida, Louisiana, North Carolina, Oklahoma and Texas". The Fitch Loan Delinquency Index for January climbed to 1.57%.

Fannie, Freddie Stock Slumps;Builders Downgraded

With all the legislation swirling around congress regarding the regulation of the mortgage Government Sponsored Enterprises, the stock of the two biggest have been quietly dropping. Fannie Mae has lost 10% since mid-January, with half of that coming in the last five days. Freddie has lost the same amount with a 5% fall yesterday. Both stocks are well off their 52 week highs.

Home builders have been another story as many hit year-on-year highs last week. Today however the sector took a big hit as Smith Barney downgraded 6 builders.

"Smith Barney analyst Steve Kim on Friday downgraded six home builders to "hold" from "buy," saying he doubts the recent run-up in the sector will translate into higher valuations...It is important to note that this is our first home builder downgrade in over three years," he wrote in a research note.

Fed President Details GSE Risks

In a speech on Jan. 13, 2005, the President of the Federal Reserve Bank of St. Louis gave a detailed list of the risks facing GSEs like Fannie Mae and Freddie Mac ("F-F"). The following is a summary of the full text found here. William Poole said:

1. Credit risk-"Credit risk occurs because homeowners can and do default on mortgage loans".

2.Prepayment risk-"..for many years F-F have been accumulating a portfolio of their own MBSs and directly owned individual mortgages. For the two firms together, these portfolios are very large, amounting to over $1.5 trillion at the end of 2003. Thus, F-F assume prepayment risk by holding these assets".

3. Interest-Rate Risk-"Because of imperfect dynamic hedging, F-F may suffer a significant loss whenever there are unexpected and large interest rate movements in either direction...Fannie Mae and Freddie Mac are (also)exposed to the counterparty default risk in their derivative contracts".

4. Liquidity Risk-"Fannie Mae and Freddie Mac must roll over roughly 30 billion dollars of maturing short-term obligations every week. At a time of disrupted financial markets, the credit markets might refuse to accept the F-F paper..Therefore, if Fannie Mae and Freddie Mac are unable to sell new debt, then they may also be unable to carry out sales of the “liquid” securities from their investment portfolio".

5. Operational Risk-"In the past two years, there have been surprising news reports of accounting irregularities, first at Freddie and more recently at Fannie. In both cases senior executives have left the firms and audit attestations have been questioned. Both firms have been required to restate earnings for a number of years... The recent revelations are another example of our inability to predict shocks that will impact our financial system".

6. Political and Regulatory Risk-"The bottom line is that there is substantial uncertainty over the future regulatory structure that will apply to Fannie Mae and Freddie Mac, and over the likely behavior of the government should the solvency of either firm come into question...even if the federal government bailed out F-F, their obligations might be redeemed eventually but cease to trade actively in liquid markets. Finally, there is of course no guarantee that the federal government would in fact bail out F-F. Many observers, myself included, believe that a bailout would not be a good idea".

10 Year Bond Yield Under 4%

Interest rates on the benchmark 10 year treasury bonds slipped under 4% in the market today. If you have followed the news lately, some of the derivative pain in lender portfolios is coming from their expectation of higher rates. Seems the gee-whiz hedge guys bet that mortgage rates would rise when the Fed hiked the funds rate. See my previous post on Countrywide Financial.

I am one who doesn't believe rates have to rise for the housing bubble to burst. Japans' real estate bubble collapsed as their central bank drove rates down.

US Government To Bail Out GSEs?

For years politicians and financial pundits have repeated the baloney that government-created Fannie Mae, Freddie Mac and the Federal Home Loan Bank are NOT backed by the US taxpayer as banks are. That sounded fine when the going was good, but now that cracks have begun to appear the government is whispering about "receivership" and "systemic risk". Get this; ""The potential for systemic risk arising from the GSEs' size and their central role in mortgage markets combined with the difficulty of managing the risks inherent in a large mortgage portfolio raise fundamental questions about the value they add ... relative to the risks their current operations pose," the White House said Feb 7th.

A new regulator is called for with "expanded enforcement authority, the ability to place the businesses in receivership and "unambiguous authority" to set risk-based and minimum capital requirements, according to the budget document".

This all sounds like the too-big-to-fail reasoning we hear when the establishment has its tail in a crack. If you read my post from yesterday and put it together with this announcement, it seems the administration is preparing us for a massive bailout of the GSEs. What other conclusion can one draw? If the government or its agency will be the "receiver" with "unambiguous authority" doesn't that spell BAILOUT? After all, who could possibly shore up this multi-trillion dollar system but the government, which is what alot of people warned about going into this mess.

Roach: Greenspan Comes Clean, Sort Of

As one of the few economist who has an objective voice regarding the current global situation, Stephen Roach of Morgan Stanley is well positioned to point out the Federal Reserves shortcomings. So when he uncovers the Fed chairmans' admission of titanic blunders, I listen.

"At long last, Federal Reserve Chairman Alan Greenspan has owned up to the central role he has played in sparking unprecedented global imbalances..Greenspan’s admission came when he finally made the connection between the excesses of America’s property market and its gaping current account deficit"..Greenspan is quoted "the growth of home mortgage debt has been the major contributor to the decline in the personal saving rate in the United States from almost 6 percent in 1993 to its current level of 1 percent."

The piece is too long to comment on, blow by blow. Check it out for yourself. As Roach said "The Federal Reserve is trapped in a moral-hazard dilemma of its own making". And the rubber of that dilemma will hit the road that is the housing bubble.

Fannie/Freddie Regulator Preps For Bankruptcy

The Office of Federal Housing Enterprise Oversight is pushing legislation through congress that prepares for the insolvency of the mortgage giants. Patrick Lawler, OFHEO chief economist told a forum "Receivership is a valuable thing".

None of this is reported on the official website of the regulator. Also mentioned in this story was this tidbit;"..a coalition of 37 federal, state, and local groups urged the federal government and Congress to cut ties with Fannie and Freddie Thursday. Warning that Americans are threatened by a potential taxpayer bailout of the two companies".

Las Vegas: Or Bust

As a follow up to the last post, here is a story of some people who found themselves on the wrong side of a home price bubble. "They claim Pulte burned them by inflating it's home prices and steering them to in house lenders who were all too happy to underwrite their dreams"..."We came with the hopes of buying two houses. We left the first day owning four. Within the next week, owning 6 -- all the way up to 19."

Pulte Homes Inventory Explodes: 52% In 9 Months

The revenues are "soaring" over at Pulte Homes and the stock price followed suit Friday. Another 52 week high rewarded investors of the high flying housing giant on news of a 60% increase in net income year on year. But Las Vegas put a fly in the punchbowl. "The increase came despite a high cancelation rate in Las Vegas. Pulte was forced to slash prices there from 5 percent to 28 percent in October".

Upon reviewing Pultes' financial statements another interesting number is growing; inventory. From a low at the end of 2002 of less than $1 billion, the inventory grew to almost $5.5 billion at the end of 2003. But things were just starting to back up. In the first three quarters of 2004, the number grew to $6 B, $6.8 B and $7.7 B as of September 30, the last quarter reported to Reuters. Folks, that is an increase of 52% in 9 months! I did look at Pultes' EOY 2004 numbers but the inventory was not a line item so I will not include that data. However, it does appear to be at least as high as the third quarter number.

10 Year Bond Return Drops

Two days after the Fed made its sixth straight interest rate increase, the benchmark 10 year bond rose 23 basis points, driving rates down to 4.07%, a drop of over 2%. Mortgage rates have already been heading lower recently, and this move should continue that trend.

Social Security Funds To Boost Real Estate?

A writer for Inman News (see links) speculates that the individual savings accounts being discussed for Social Security "account holders" could fuel the home boom. "It could be a huge boom to the real estate industry," a friend commented over coffee this morning. Imagine how attractive it would be to invest Social Security dollars in real estate if people keep reading about the double-digit returns, especially for those who have been earning less than 1 percent on their investment in a money market account, he added".

I can't help but think of the giddy stock market bubble, when every market development was hyped to be in favor of the "new economy". With the government in the deepest financial hole in the history of man, can one reasonably expect to be handed back thousands of dollars? And if housing continues "double-digit returns", who will be able to buy them?

Mortgage Corps Stock Hit: Bonds Unchanged

On a day that saw a Fed rate hike and a disappointing earnings report from Countrywide Financial, the big lenders saw their stocks move down. "With underlying inflation expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured" the FOMC statement assured.

Countrywide, off earlier lows, slipped 5.6% by the close, Fannie Mae was down 2.7% and Freddie Mac ended the session down 1.5%. January was not good to the shareholders of the GSE's and higher interest rates will have an unclear effect due to the massive derivatives positions common among lenders. The 10 Year US Treasury Bond was unchanged.

The FOMC statement is here.

CFC Rocked By $140 Million Derivatives Loss

Countrywide Financial provided some detail into the lackluster final quarter of 2004. "Countrywide, however, failed to foresee a situation in which the Federal Reserve raises short-term rates but long-term rates fall -- an event Wall Street terms a flattening of the yield curve. The company blamed $140 million of earnings reduction on a decline in the value of derivatives apparently pegged to short end of the yield curve", The Street.com reported.

This situation reveals a key weakness in the hedge strategy employed by CFC and Fannie Mae. Hedging for interest rate changes is a complicated, high risk tactic given the size of the portfolios. Despite five previous increases in the short term Fed funds rate, the Treasury bond market has not followed suit. The 10 year bond rate is largely what moves mortgage rates.

Cash-Out Refi's At 56%: Freddie Mac

Of those refinancing at Freddie Mac this past quarter, 56% took out 5% or more than the original loan. This rate was a slight dip from 59% in the third quarter of 2004.

"The Cash-Out Refinance Report also revealed that properties refinanced during the fourth quarter of 2004 experienced a median house-price appreciation of 15 percent during the time since the original loan was made". It is clear that homeowners continue the risky practice of borrowing against price appreciation. A complete chart representing the data can be found here.

Countrywide Stock Falls On Data

Countrywide Financial Corp. reported today net earnings of $343 million for the fourth quarter of 2004, a 39% drop compared to net earnings of $564 million in the same quarter of 2003. The stock is off its lows this morning, initially down more than 7%.

Quarterly earnings per share were 56 cents, down from last year’s fourth quarter earnings of 94 cents. Thomson First Call had predicted earnings of 81 cents. Gross loan production was $363 billion for the year, a 17 percent drop from 2003. The company blamed a 39 percent decrease in refinance volume for the decrease in earnings.

Fannie, Freddie Cut Bank Profits

Banks holding various Fannie Mae and Freddie Mac securities have been forced by accounting rules to book losses against their bottom line. In a Reuters piece: "(With) Fannie or Freddie you have to understand credit risks today that you would not have considered five years ago," said Charles Viater, chief executive officer of MFB Corp.

Astoria Financial Corp. recorded a $9.6 million charge, Sovereign Bancorp Inc. took a $21 million, and an impairment of Fannie and Freddie securities cost The Peoples Holding Co. 7 cents a share, according to Reuters.

The December sales to raise reserve cash at Fannie, forced as part of the accounting scandal, have also hurt those holding the GSEs' securities. "Looking back at the mammoth sale by Fannie that hurt his bank's holdings, Tupelo's Johnson said: "We felt like: 'why did they do this to our paper?"'