So far $148 billion have been paid by the taxpayers to bail out Fannie and Freddie for single family mortgages gone bad, and as much as $400 billion more could still be needed. That’s according to testimony by Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), which is the conservator for Fannie Mae and Freddie Mac. DeMarco gave this somber news in an update on Fannie and Freddie to the House Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises this week.
That $400-billion figure is a worst-case scenario, but with some analysts predicting weaker house prices, now that the tax credit has expired, the worst could become reality.
The losses are primarily from single-family mortgages purchased by Fannie and Freddie in 2006 and 2007 that originated in four states — Arizona, California, Florida and Nevada. Not surprising, since these are ground-zero states for foreclosures, as well. Many of these defaults come from Alt-A and interest only loans bought by Fannie and Freddie. Delinquency rates for Alt-A loans, which fall between prime and subprime home loans, are more than 12 percent and interest-only delinquencies are more than 18 percent.
The good news, if you can call it that, is that Fannie and Freddie have mostly eliminated their purchases of these exotic loans since 2008. In 2009, only 1 percent of the loans bought by Fannie were interest-only and 0 percent were Alt-A. Fannie did buy about 2 percent of its loan portfolio in interest-only loans so far in 2010. Back in 2006, 22 percent of Fannie’s loan purchases were Alt-A loans and 15 percent were interest-only loans. Freddie’s purchases in 2006 were similar with 18 percent Alt-A loans and 17 percent interest-only loans.
The lion’s share of what Fannie and Freddie are buying in 2010 are traditional mortgages with 10 percent or more down. About 70 percent of the borrowers involved had credit scores of 756 or higher in 2009 and 750 or higher in 2010 so far. Back in 2006, Fannie and Freddie were buying a majority of their loans with borrowers who had credit scores as low as 716. Both still will consider purchases of loans with less than 10 percent down, but only 8 percent of those bought by Fannie so far in 2010 involved loans with less than 10 percent down. Freddie bought 9 percent of its loans with down payments of less than 10 percent.
The conservator is trying to mitigate taxpayer loses by requiring lenders to repurchase bad loans, but one-third of these repurchase requests have been outstanding for 90 days.
In July the FHFA issued 64 subpoenas to determine if firms have legal responsibility for losses on private-label mortgage-backed securities (MBS). The FHFA wants to determine if “misrepresentations, breaches of warranties or other acts or omissions” could result in the requirement for repurchases of these securities as well. FHFA will seek to recover these losses if it determines that these firms acted inappropriately.
DeMarco testified that 1,013,669 homeowners have received assistance from Fannie and Freddie since October 2008 in the form of loan modifications, repayment plans, forbearance plans and other foreclosure alternatives. Also, nearly 6 million families have taken advantage of refinance opportunities.
The key question for the future is: What will happen to Fannie and Freddie? DeMarco thinks Congress must decide “whether all conventional mortgages warrant a government guarantee.” He seemed to be leaning toward supporting government guarantees for specific borrowers (low-income borrowers would go through the Federal Housing Administration and veterans through the Veterans Administration). But he didn’t think the government would be wise to back all mortgages, or taxpayers could be stuck footing an even larger bill in the future. He said, “explicit credit support for all but a small portion of mortgages, on top of the existing tax deductibility of mortgage interest, would further direct our nation’s investment dollars toward housing.”
That seems to jibe with the song many in the Obama administration have been singing. Whatever happens next for Fannie and Freddie, the explicit guarantee from the government for all mortgages will likely be dead under whatever plan is drawn up.