Fannie Mae-No Politics (FNMA)

[kthomp19]

Well - I know that if my mortgage company suddenly said my debt to them was zero, my net worth would go up half a million bucks. I don't see how forgiving a loan would decrease my net worth...

One more point about this. You're absolutely right: if the bank forgives your mortgage then your net worth goes up $500k. Your liabilities would go down $500k and your retained earnings would go up $500k. Since equity is basically your net worth, your net worth increases $500k.

But since the FnF senior preferreds are equity and not a liability, forgiving them would reduce equity (senior preferred balance) by the same amount it increases equity (retained earnings). The net effect is no change on net worth because total equity remains unchanged.


This is the key difference between (incorrectly) viewing the senior preferreds as liabilities. It absolutely matters that they are equity.