The chief regulator over Fannie Mae and Freddie Mac said the two enterprises under U.S. conservatorship have nearly eliminated the purchases of the poorest performing mortgage products that were responsible for more than a third of each entity’s first quarter losses.
Those losses to date have required draws from the U.S. Treasury’s credit program of about $145 billion in quarterly bailouts. The open-ended credit line is in place through 2012 – or until a yet-to be-determined overhaul of the mortgage financing system is completed.
“Although the Enterprises substantial market presence has been a key step to restoring market stability, neither company would be capable of serving the mortgage market today without the ongoing financial support provided by the U.S. Department of the Treasury,” said Edward J. DeMarco, acting director of the Federal Housing Finance Agency, in prepared testimony.
DeMarco’s testimony was provided ahead of his appearance before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.
The purchase and guarantee activity of Fannie and Freddie in 2009 represented more than 76 percent of total conforming, single-family mortgage originations.
Over the past year, both Fannie Mae and Freddie Mac have nearly eliminated their purchases of Alt-A and interest-only loans, “two of the poorest performing mortgage products in the market,” DeMarco said.
During the first quarter of 2010, less than 2 percent of Fannie Mae’s purchases were interest-only loans and Freddie Mac purchased none. Similarly, Alt-A loans were less than 1 percent of acquisitions for both Enterprises.
Alt-A mortgages are considered slightly less risky than subprime, but also associated with low credit score applicants or loans underwritten without full documentation. Fannie and Freddie are also close to ending purchases of interest-only mortgages, also tied frequently to subprime borrowers.
DeMarco said that he has instructed Fannie and Freddie to “devote full attention to loss mitigation activities and remediating internal weaknesses, and efforts to aid in the market recovery.” In doing so, they are virtually banned from developing any new products.
Alt-A and interest-only loans have dealt the two companies massive losses.
“This is significant because interest-only loans previously purchased by the Enterprises have serious delinquency rates of more than 18 percent and Alt-A loans have serious delinquency rates of more than 12 percent,” DeMarco said. “These products, which may be appropriate in limited circumstances, have produced substantial losses for the Enterprises.”
During the first quarter of 2010, Alt-A loans already on the books were responsible for 37 percent of Fannie Mae’s losses for the quarter and 42 percent of Freddie Mac’s.
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