Apr-17-2008

Freddie Mac to Unveil Lenders' Pact

(topic overview)

CONTENTS:

SOURCES

FIND OUT MORE ON THIS SUBJECT



NEW YORK (Thomson Financial) - Government-sponsored enterprises Fannie Mae and Freddie Mac have made progress in improving their operations and bolstering mortgage markets, but they remain 'a significant supervisory concern' because of escalating credit risk, the Office of Federal Housing Enterprise Oversight, or OFHEO, said in its annual report to Congress Tuesday. OFHEO expects Fannie Mae (nyse: FNM - news - people )'s and Freddie Mac (nyse: FRE - news - people )'s major internal control issues to be remediated in 2008, but warned that 'the challenges of 2007 are still present this year. In order to mitigate the risk, OFHEO said it will need to raise additional capital, pointing to its decision in March to lower the 30% capital requirement to 20%. It also called for a stronger regulator, to ensure ability to restore confidence to the mortgage market. 'Significant progress was made in the remediation process, but OFHEO concludes that both companies remain classified as significant supervisory concerns,' OFHEO director James Lockhart wrote in the report. 'The extraordinary declines in the housing and mortgage markets have greatly increased their credit and interest rate risks, which have put additional pressure on their credit management, interest-rate risk management and financial modeling processes,' he added. [1] WASHINGTON (Thomson Financial) - The federal regulator of mortgage giants Fannie Mae and Freddie Mac said while the two companies have made strides in getting their financial reporting in order, they still need to be closely supervised in light of the risk they face given their exposure to trillions of dollars of mortgages. The Office of Federal Housing Enterprise Oversight (OFHEO) said both companies remain'significant supervisory concerns' in its annual report to Congress that was released on Tuesday. OFHEO has made that judgment in the past in light of the accounting overhaul that both companies needed to undertake. While that process is nearly complete, OFHEO said close supervision is still needed because the 'extraordinary declines in the housing and mortgage markets have greatly increased their credit and interest rate risks'. These risks have put 'additional pressure on their credit management, interest-rate risk management and financial modeling processes', OFHEO said in its report.[2] WASHINGTON (Reuters) - The unsettled U.S. mortgage and housing markets have left Fannie Mae (FNM.N: Quote, Profile, Research ) and Freddie Mac (FRE.N: Quote, Profile, Research ) exposed to serious risks, their federal regulator said on Tuesday. The two, the top U.S. housing finance companies, are under stress as they walk a line between curbing record losses and increasing their role in stabilizing the ailing U.S. housing market. As they try to boost the mortgage market, "both companies remain classified as significant supervisory concerns," the Office of Federal Housing Enterprise Oversight said in its annual report to Congress. "The extraordinary declines in the housing and mortgage markets have greatly increased their credit and interest rate risks," OFHEO director James Lockhart said in a letter to lawmakers.[3]

The Office of Federal Housing Enterprise Oversight has told Congress that Fannie Mae and Freddie Mac remain a significant supervisory concern because of increased mortgage market and credit risks. In its annual report to Congress, the OFHEO, which oversees both mortgage lenders, repeated its support for legislation that would mandate stronger regulation of Fannie Mae and Freddie Mac, but also praised the two for progress they have made. "Fannie Mae and Freddie Mac should be commended for the timely filing of their 2007 annual statements," OFHEO director James Lockhart said in a statement. "While they have made progress in fixing many of their systems, internal controls and risk management problems, they still have much work to do, especially with the continuing challenges of today's mortgage market."[4]

Fannie Mae and Freddie Mac helped provide stability and liquidity to the ailing U.S. mortgage market last year, but the two mortgage-finance giants remain a "significant supervisory concern," their regulator said. In its annual report to Congress on the two shareholder-owned but government-chartered companies, the Office of Federal Housing Enterprise Oversight cited "matters requiring attention," including Freddie Mac's internal controls and corporate governance.[5]

Freddie Mac still has some ineffective internal controls, has invested in poorly underwritten loans and lacks "sufficient executive management depth," the Office of Federal Housing Enterprise Oversight said in an annual report to Congress. The regulator also raised questions about accounting decisions Freddie Mac made last year, saying they need further review. Those issues include Freddie Mac's approach to calculating the amount of money it should hold in reserve and other accounting choices that enabled the company to report a one-time gain of about $1 billion.[6]

The two companies' share of new mortgages rose from 46 percent in the second quarter of 2007 to 80 percent in January, S&P; said. Encouraged by regulators and politicians intent on keeping more homeowners from defaulting, Fannie Mae and its smaller government-sponsored sibling Freddie Mac have expanded their roles in the stricken housing market. The companies together must provide as much as $200 billion in new funding for home loans in exchange for getting their risk cash cushions reduced. The government requires them to keep a certain amount on reserve to guard against risk.[7] Piper Jaffray (nyse: PJC - news - people ) analyst Robert P. Napoli believes the federal government is going to lean on Fannie and Freddie to help prop up the housing market in the latest downturn. This means buying more loans, which also means assuming more credit risk and raising more capital. "The U.S. government will go to great lengths to lessen the pain of this housing market downturn," Napoli wrote in a note to clients. "It is imperative for the housing and mortgage markets that the government-sponsored enterprises are well-capitalized throughout this housing downturn. Maintaining this imperative may come at the expense of shareholders." Napoli cut his price target on Freddie Mac to $25 from $34.[8] Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) were created by Congress decades ago to bolster liquidity in the housing market. These companies buy home loans from mortgage lenders, package the loans into bonds and sell the bonds to investors. This ensures mortgage lenders can find a buyer for their loans. With real estate prices slipping and the economy slowing, mortgage lenders are increasingly relying on loans they can sell to Fannie and Freddie. Stung by bad credit and illiquidity, lenders holding on to their own loans are susceptible to impatient financial backers and angry investors.[8]

The agreement is with Wells Fargo & Co., J.P. Morgan Chase & Co. and Citigroup Inc., Freddie officials said. For the past nine months or so, interest rates on jumbo loans -- those bigger than the normal $417,000 limit on mortgages that can be sold to government-sponsored investors Freddie Mac and Fannie Mae -- have been much higher than those on smaller ones. That's because other loan investors, spooked by surging defaults and dropping home prices, are reluctant to buy loans that aren't backed by Fannie, Freddie or the Federal Housing Administration.[9] Let me take you through it: The stimulus package raises the maximum size of a "conforming" mortgage to $729,750 from the previous cap of $417,000. A conforming mortgage is a mortgage that can be sold to Fannie Mae or Freddie Mac, and it carries a lower interest rate than "jumbo" loans that exceed those limits.[10]

The refinance index rose 5.2 percent. The index of conventional purchase, which are those applications for non-government-backed loans to buy homes, fell 2.1 percent. Good news on the refi and FHA front, and good news last week for loan rates, which for conforming loans (those under $417K) fell to an average 5.74 percent with 1.05 points paid upfront. The MBA group doesn't quote rates for the new "agency jumbos," those of more than $417K but which Fannie Mae and Freddie Mac will buy from now until the end of the year. Anybody gotten a quote on one of those lately? Still a point or more higher than rates for conforming loans? I would imagine so, but let us know what you know.[11]

Congress is reviewing proposals from U.S. lawmakers and presidential candidates that would increase the government's role in housing markets even further, through the Federal Housing Administration, which guarantees loans that are subsequently securities by the Government National Mortgage Association. Unlike Fannie Mae and Freddie Mac, this agency, known as Ginne Mae, has explicit government backing.[12] The Office of Federal Housing Enterprise Oversight said it has "significant supervisory concerns" about Fannie Mae and Freddie Mac. While both mortgage finance companies have been hurt by the problems in the housing market, Freddie's problems run deeper, OFHEO said.[13] Despite the turmoil, OFHEO concludes that the two government-sponsored enterprises have done good work to buttress internal controls and prepare themselves for the rocky market. The report "was more upbeat, as the GSEs have remedied nearly all of their accounting and control issues, and are both issuing financial statements on a timely basis," wrote Credit Suisse analyst Moshe Orenbuch in a research note. "However, OFHEO noted that each remains a significant supervisory concern, as a result of their poor performance and increased credit and other risks in the environment," he added. Credit Suisse maintained its "underperform" ratings on the companies. Fannie Mae and Freddie Mac "need to raise additional capital" in order to protect themselves against losses even though they have recently won some relief to expand their mortgage investments, OFHEO said.[3] The deferred losses involve what the companies regard as temporary declines in the value of mortgage-related investments, but determining whether the losses are permanent and therefore must be counted against earnings is a judgment call, OFHEO said. "This is raising a yellow flag," Lockhart said. "Obviously, if we had a major issue with any of these they would have made a change," he said. The regulator's assessment came several years after twin accounting scandals prompted Fannie Mae and Freddie Mac to replace their top managers and begin overhauling the systems they use to track finances. The government has been counting on Fannie Mae and Freddie Mac to help prop up the troubled mortgage market, and toward that end OFHEO last month agreed to let them operate with thinner financial cushions. In announcing the decision, OFHEO emphasized the progress both companies had made in recovering from the accounting scandals.[6] Under an accounting rule, Freddie Mac was able to book income from changes in the value of securities it held and was able to choose which securities to use that way, presenting the opportunity to cherry-pick. In an interview, OFHEO Director James B. Lockhart III said the agency was not challenging the accounting judgments Freddie Mac has already made but will be monitoring its approach going forward "to make sure there's a logical and ongoing methodology." The Securities and Exchange Commission may look at the accounting issues as Freddie Mac seeks to register with the SEC this year, Lockhart said. At the end of last year, Fannie Mae and Freddie Mac had $4.8 billion and $15 billion of paper losses, respectively, that they had not counted against earnings, OFHEO said.[6]

The potential cost to U.S. taxpayers of bailing out Wall Street firms stricken by the credit crisis could grow to as much as $400 billion in a deep and prolonged recession, Standard & Poor's estimated yesterday. That bill would soar by another $1.4 trillion if it included the cost of bailing out Fannie Mae, Freddie Mac and other government credit agencies, whose losses could be so massive that the U.S. government could lose its AAA rating in what would be a calamity for the U.S. Treasury and the dollar.[14] WASHINGTON (AP) — A deep recession could force mortgage-finance titans Fannie Mae and Freddie Mac to require a federal bailout large enough to hurt the U.S. government's top-grade credit rating, Standard & Poor's warned Monday.[7] The performance of government-sponsored enterprises such as Fannie Mae and Freddie Mac could have a direct impact on the national economy and, more importantly, U.S. credit standing, according to credit rating agency S&P;, reports the WSJ. So-called GSEs enjoy implicit government guarantees and could cause the U.S. to lose its sterling triple-A rating if the government were forced to come to their rescue, S&P; said in a report Monday.[15]

By lifting loan-size limits and easing capital rules, S&P; noted, the government will let Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) "replace some of the lost credit from private-label mortgage packagers," many of which disappeared along with the subprime mortgage market. The moves "increase both the likelihood of government support and the potential cost of providing such support."[12]

Fannie Mae and Freddie Mac, the U.S. government sponsored housing financiers, 'remain a significant supervisory concern' and still needed better internal controls, corporate governance and risk management, their regulator said yesterday.[16] A federal regulator said yesterday that it has "significant supervisory concerns" about the conditions of Fannie Mae and Freddie Mac, two government-sponsored housing finance companies that own or guarantee trillions of dollars of mortgages. Both companies have suffered financially from the meltdown in the housing market and remain vulnerable to further declines, but Freddie Mac's problems run deeper, the regulator said.[6]

A Piper Jaffray analyst said Monday the federal government is likely to do whatever it can to rescue the housing market - even at the expense of Fannie Mae and Freddie Mac.[8]

Treasury and Fed officials in the past have taken issue with the widespread view on Wall Street that Fannie Mae and Freddie Mac are backed by the government. They have repeatedly warned about the risks posed by their enormous holdings of more than $6 trillion, and have sought to rein in the agencies to reduce potential taxpayer liabilities.[14]

As Washington geeks realize, I'm making a big assumption here, and a somewhat cynical one. The higher limits for Fannie and Freddie (which are government-sponsored enterprises) are scheduled to expire at the end of this year, and there's talk of reducing the maximum size of the loans insured by the FHA, which is a government agency. I