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U.S. Regulator Says Taxpayers Still at Risk From Fannie, Freddie

Fannie Mae and Freddie Mac, the mortgage companies operating under U.S. control, are improving their financial condition but remain a risk to taxpayers, the companies’ regulator reported.

In its third annual report to Congress released today, the Federal Housing Finance Agency said improved underwriting on the loans that the companies package into mortgage-backed securities helped slow the agencies’ losses to $28 billion in 2010, from $93.6 billion a year earlier.

“Although past business decisions leading to these losses cannot be undone, each enterprise, under the oversight and guidance of FHFA as conservator and regulator, has improved underwriting standards for loan purchases in the past two years,” Edward DeMarco, acting director of the Federal Housing Finance Agency, said in the report.

Still, DeMarco said, the companies “remain critical supervisory concerns,” largely because of a backlog of bad loans originated from 2005 to 2007.

The government-run enterprises, which own or guarantee more than half of the $10 trillion U.S. mortgage market, operated as private companies before they were taken into government conservatorship in September 2008 after soaring losses linked to subprime home loans. Since then, Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, have survived on a promise of unlimited U.S. aid and drawn more than $160 billion in Treasury Department funding.

Freddie Mac in May posted a $676 million profit for the three months that ended March 31 before paying a $1.6 billion quarterly dividend to the Treasury. Fannie Mae reported a $6.5 billion loss in the first quarter and sought $8.5 billion in aid.

Preventing Foreclosures

While the management of both companies is focused on minimizing losses to taxpayers, the two GSEs are also under a mandate to help prevent home foreclosures. Together, Fannie Mae and Freddie Mac completed 950,000 loan modifications or other alternatives to foreclosure for homeowners delinquent on their mortgage payments, the report said.

The Treasury and Republicans in Congress have proposed ways to phase out the companies and the government guarantee of their bonds.

The two enterprises guaranteed 70 percent of the single- family mortgage-backed securities issued in 2010, an amount the report described as “not optimal.”

“The enterprises cannot remain in conservatorship permanently, and expanding private sector capital and participation is essential for the long-term health of the mortgage market,” the report said.

The FHFA, which also oversees the nation’s 12 Federal Home Loan Banks, said in the report that all of those banks reported positive earnings for 2010.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net. Clea Benson in Washington at cbenson20@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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