FANNIE AND FREDDIE LOSSES HIT $226 BILLION / THE FINANCIAL TIMES ( HIGHLY RECOMMENDED READING )

Fannie and Freddie losses hit $226bn

By Suzanne Kapner in New York

Published: August 27 2010 01:40

Fannie Mae and Freddie Mac, the government-backed mortgage finance companies, have burnt through $226bn in capital since the middle of 2007, according to a government report published on Thursday.

The vast majority of those losses, or about $166bn, came from guaranteeing loans on single-family homes, according to the first in what will be a series of quarterly reports from the Federal Housing Finance Agency, which regulates Fannie and Freddie.

An additional $21bn was lost on their investment portfolios, which buy loans in the secondary market. Fannie and Freddie have also paid $13m in dividends to the US Treasury on senior preferred stock issued as part of their government bail-out.

The remainder of the losses include accounting adjustments and write downs on low income tax credits.

Ballooning losses at Fannie and Freddie, which have taken $148bn in government aid to stay afloat, have become a subject of intense debate in Washington as Democrats come under pressure to find a solution to the housing crisis ahead of the November elections.

Tim Geithner, the Treasury secretary, hosted a conference last week at which policymakers, academics and investors traded ideas about how to solve the problem.

Legislators have promised to make the issue a priority this autumn.

Most of the decision-makers agree that the government needs to continue to provide some kind of guarantee to backstop home loans, but what form that guarantee should take is still up for debate. One suggestion is to create a system similar to the Federal Deposit Insurance Corporation, in which mortgage originators pay into an insurance fund upfront to cover catastrophic losses later on.

Whether Fannie and Freddie were victims of the housing bubble or helped create the mess has also been up for discussion. The report found that from 2004 to 2007 Fannie and Freddie actually lost market share to banks that issued private label mortgage-backed securities as exotic home loans played a bigger role in the market.

By 2007, however, with the financial crisis in full swing and the private market frozen, Fannie and Freddie became the only game in town. The two government-backed agencies now guarantee or buy one out of nine loans issued on Friday.

Much of the damage was done in a relatively short period of time, from 2006 to 2007, when Fannie and Freddie started buying more high-risk loans.

By the fourth quarter of 2009, delinquency rates on those loans had more than doubled. Loans underwritten in California, Florida, Arizona and Nevada accounted for a disproportionate share of losses.

The report also found that since Fannie and Freddie were taken over by the government in 2008, the credit quality of the new mortgages they’ve acquired has “improved substantially”.
Copyright The Financial Times Limited 2010.