UPDATE:FHFA's Lockhart:Fannie,Freddie Unlikely To Fully Repay Government
July 30 2009 - 12:54PM
Dow Jones News
Fannie Mae (FNM) and Freddie Mac (FRE) are unlikely to repay the
government in full for all the capital it has pumped into the
companies, according to their regulator.
"My view is that some assets in the senior preferred will have
to be left behind as they come out of conservatorship," Federal
Housing Finance Agency Director James B. Lockhart said Thursday in
response to a question at a panel discussion in Washington. "That
will mean that some of the losses will never be repaid."
The Treasury has agreed to pump $200 billion into each company
in order to keep them solvent. In exchange, the government receives
senior preferred stock that pays a 10% dividend. So far, it has
injected $85 billion in total into the companies, but Lockhart said
that figure was likely to rise in the coming months.
Fannie and Freddie together own or guarantee $5.4 trillion in
mortgages. When the housing market soured in 2007, mortgage
defaults ate through the companies' thin cushions of capital,
prompting fears they would collapse. The government seized them in
September, putting them under the conservatorship of their
regulator.
FHFA on Thursday unveiled several new regulations concerning the
mortgage giants and the 12 Federal Home Loan Banks. The regulator
also announced conclusions from three studies it was required to
conduct by a 2008 housing law.
One of the studies found that Fannie and Freddie have been using
fees they collect for guaranteeing less risky single-family
mortgages to subsidize the fees for backing riskier loans.
As a result, borrowers with 15-year fixed-rate mortgages and
adjustable-rate mortgages were subsidizing borrowers with 30-year
fixed-rate mortgages, which are more risky for the mortgage giants
to guarantee.
"The riskiest loans were not fully charged for the additional
expected costs associated with them," Federal Housing Finance
Agency Chief Economist Patrick Lawler said at the panel
discussion.
In another study, FHFA concluded that it should consider
allowing the home loan banks to securitize the mortgages they
obtain from member banks as collateral for advances. However, the
banks should only undertake this new line of business after the
government has resolved what it will do with Fannie and
Freddie.
A final study concluded that the bulk of mortgage collateral
underpinning home loan bank advances conformed to guidance issued
by bank regulators on non-traditional mortgages.
FHFA issued a new rule to expand the home loan banks' ability to
funnel their affordable housing funds toward helping strapped
homeowners refinance under government programs.
The banks will now be able to plow the funds into refinancing
activities under targeted government refinance programs, including
the Obama administration's effort to help underwater homeowners
take advantage of lower mortgage rates. Currently, borrowers
qualified to refinance under the federal Hope for Homeowners
program are the only ones able to access such aid.
The funds, which come from assessments on the home loan banks,
may be used to assist homeowners to pay down principal or to offset
closing costs for the refinanced loan. The new rule takes effect
immediately.
FHFA also announced a proposed regulation to expand the board of
the Office of Finance, which issues and services debt for the home
loan banks. The regulator wants the board to consist of all 12 bank
presidents and three to five independent directors.
And it finalized previously announced affordable housing goals
for Fannie and Freddie for 2009. The regulator cited the turmoil in
the mortgage market to explain why it notched down the goals from
2008.
Lockhart said Fannie and Freddie would likely see their reserves
continue to decline next year, but could return to strong profits
in two to three years. But he cautioned that the companies' thin
capital and huge exposure to the mortgage market make it unlikely
they will be able to repay the government in full.
"The book is so large that it is hard to see that they could
actually repay all that," he said.
Lockhart said Fannie and Freddie aren't likely to burn through
all $400 billion of government capital available under their
agreement with the government. He cited stress tests that showed
the total draws would remain below that level.
-By Jessica Holzer, Dow Jones Newswires; 202-862-9228;
jessica.holzer@dowjones.com