Fannie And Freddie Still On Shaky Ground, FHFA Says

Posted by Patrick Barnard on June 13, 2013 No Comments
Categories : Required Reading

Although government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have returned to profitability, prompting many in the mortgage industry to question whether they need to remain in conservatorship, the Federal Housing Finance Agency (FHFA) said in its annual Report to Congress this week that they are still on shaky ground and it will take more time for them to return to financial stability.

‘The conservatorships of the enterprises, combined with Treasury's financial support, has stabilized the enterprises but not restored them to a sound financial condition,’ the FHFA wrote in its report, adding that the GSEs ‘remain exposed to credit, counterparty and operational risks.’

The GSEs' credit risk is a major concern, according to the FHFA, as each holds a large number of distressed assets. Counterparty risk is also ‘an area of concern, especially given the evolving changes in the mortgage industry and the greater prominence of new types of seller-servicers.’

‘Operational risk also remains a focus because of challenges related to legacy systems, record keeping and ongoing concerns about human capital and key person dependencies,’ the FHFA wrote in its report, adding that the management teams and boards of Fannie and Freddie ‘are taking appropriate steps to resolve identified issues.’

Despite the fact that they remain on shaky ground, the GSEs have largely succeeded in their mandate to assist distressed borrowers and mitigate the full impact of the financial crisis. Not only have they increased their presence in the secondary mortgage market since their conservatorships, helping to ensure credit remains available, each has played ‘an important role in efforts to limit preventable foreclosures â�¦ [and] enhance stability in housing markets and local communities.’

The report points out that the GSEs ‘have completed 2.7 million foreclosure alternative actions, including more than 1.3 million loan modifications,’ since being placed into conservatorship in 2008. What's more, they ‘completed 541,000 foreclosure alternative actions in 2012, including 233,000 loan modifications.’

In addition, there were nearly 1.1 million refinances under the Home Affordable Refinance Program – which is administrated by the FHFA – in 2012.

While the GSEs have benefited from the overall improvement in the housing market, the improved quality of new loans guaranteed and increased guarantee fee pricing, not to mention the income from their massive portfolios, they will ‘continue to realize credit losses from mortgages originated in the several years prior to conservatorship,’ the report states.

The ultimate question is whether the GSEs can be transitioned back into private companies or if Congress will decide to liquidate them.

‘The enterprises cannot remain in conservatorship permanently,’ the report states, adding that ‘expanding private sector participation is essential for the long-term health of the mortgage market.’

To view the full report, click here.

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