Fannie, Freddie face reform of housing goals

Proposal to exclude sub-prime from mandated targets

Fannie Mae and Freddie Mac would no longer be able to rely on sub-prime mortgages to meet their government-mandated goals for helping lower-income Americans obtain home loans, according to proposed regulations.

The rules offered by the Federal Housing Finance Agency would restrict the companies from using private-label bonds backed by Alt-A and sub-prime mortgages, or commercial mortgage-backed securities, to meet affordable-housing targets.

Fannie Mae and Freddie Mac, the largest sources of money for US residential mortgages, had been relying on riskier private-label debt to satisfy goals of financing loans for low- and moderate-income homebuyers, according to FHFA.

Fannie Mae and Freddie Mac were seized in 2008 largely because of regulators’ concern that the companies wouldn’t have enough capital to cover losses on that type of debt.

‘The results of providing large-scale funding for such loans were adverse for borrowers who entered into mortgages that did not sustain homeownership and for the enterprises themselves,’ the agency said in the proposal.

Private-label, or non- agency, bonds are issued by banks and don’t carry guarantees by Fannie Mae, Freddie Mac or government-agency Ginnie Mae. Freddie Mac held about US$176 billion in non- agency debt in its US$755.3 billion portfolio as of December, according to its monthly volume summary. Fannie Mae had about US$90 billion in its US$772.5 billion portfolio.

The companies have been required to devote a certain amount of their annual business to low- and moderate-income borrowers, economically depressed neighbourhoods and other disadvantaged groups. Those goals were modified after the companies were seized by regulators in September 2008.

At least half the dwellings the companies helped finance with their more than US$500 billion in total mortgage purchases in 2008 were used to satisfy affordable housing goals, according to calculations from company filings.

The new affordable-housing rules would also forbid Fannie Mae and Freddie Mac from counting second-lien debt such as home-equity and ‘piggy-back’ loans and the financing of some rental units toward the goals. It would also change how the companies account for multi-family financing.

Much of the new structure is set out in the 2008 law that created FHFA and strengthened oversight of Fannie Mae and Freddie Mac. The rules would establish separate targets for multi-family and owner-occupied properties as well as set efforts to include poorer borrowers than before, the FHFA said.

Edward DeMarco, FHFA’s acting director, said in a letter to lawmakers earlier this month that he doesn’t expect Fannie Mae and Freddie Mac to take on as many risks to fulfil their affordable-housing missions in the future.

FHFA reiterated that statement in the proposal, saying it doesn’t intend for the companies ‘to undertake economic or high-risk activities in support of the goals’ it proposed.

Fannie Mae, which dates back to the 1930s, and Freddie Mac, started in 1970, were chartered by the government primarily to lower the cost of homeownership. Fannie Mae has posted US$120.5 billion in net losses in the nine quarters ended in September and requested US$59.9 billion in Treasury aid to remain solvent. Freddie Mac has lost US$67.9 billion and sought US$50.7 billion in taxpayer-funded aid.

Source : Business Times – 19 Feb 2010