Sept. 13 (Bloomberg) -- Mortgage pools packaged by Wall Street as investments during the housing boom were more risky and performed worse than those guaranteed by Fannie Mae and Freddie Mac, the companies’ regulator said.
Loans with “higher-risk characteristics” were more common in private-label securities than in the mortgage portfolios bought or guaranteed by the government-sponsored enterprises, said Robert Collender, principal policy analyst for the Federal Housing Finance Agency, which released a report today.
“In almost every bucket of risk, the enterprise loan performed better than the private-label securitized loans,” Collender said in a telephone interview. “That might speak to a difference of quality control in the private-label market.”
Private-label securities, which Fannie Mae and Freddie Mac increasingly purchased before the U.S. mortgage market collapsed in 2008, had a greater share of mortgages with adjustable interest rates and borrowers with credit scores below 660, two indicators of loans more likely to default, the FHFA said.
Mortgages in the pools also were more likely to exceed 80 percent of a property’s value, which “contributed to the unusually poor performance of loans,” the report said. About 10 percent of them were more than 90 days delinquent by the end of 2009 compared with 5 percent of guaranteed mortgages, it said.
The FHFA examined loans for single-family homes in the period before the financial crisis that led to the federal government’s 2008 takeover of Fannie Mae and Freddie Mac to document differences between mortgages backed by the two firms and those financed without their support.
“Some people want to say it was a market failure or a government failure, choose your philosophy,” Collender said. “What we’re trying to do is provide raw factual information.”
Fannie Mae and Freddie Mac, which own or guarantee more than half of the $11 trillion U.S. mortgage market, hold about $255 billion in private-label securities. As home prices rose, the companies increased their investment in the pools as they aimed to regain market share, capitalize on profit potential and meet federal mandates for lending to low-income borrowers.
The U.S. government seized Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, in September 2008 amid mortgage-investment losses that pushed the firms to the brink of collapse. They have been sustained under FHFA conservatorship since then by almost $150 billion in U.S. Treasury Department aid delivered under a promise of unlimited support.
The FHFA in July issued 64 subpoenas to firms that sold mortgage-backed securities to Fannie Mae and Freddie Mac, trying to determine whether misrepresentations or omissions might require issuers to repurchase the loans.
Edward DeMarco, FHFA’s acting director, is scheduled to testify Sep. 15 at a House Financial Services subcommittee hearing on the progress the two companies have made since being placed under conservatorship.
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