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FHFA Says Private Investors Set to Fund GSEs

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In a letter to the Senate Banking Committee and the House Committee on Financial Services, Edward DeMarco, director of the Federal Housing Finance Agency (FHFA), says private investors look positioned to take the place of the federal sponsorship as it withdraws support from government-sponsored enterprises (GSEs). The FHFA regulates Fannie Mae (FNM) and Freddie Mac (FRE) and the 12 federal home loan banks. Together, the GSE’s provide more than $6.3trn in funding for financial institutions and the US mortgage market. In September 2008, FHFA placed Fannie and Freddie into conservatorship in an attempt to preserve the assets and bring each company into solvency. As part of the conservatorship framework, the Housing and Economic Recovery Act of 2008 (HERA) established three funding facilities for the GSEs. The liquidity facility and the mortgage-backed securities (MBS) purchase facility expired at the end of 2009. But the Senior Preferred Stock Purchase Agreements (PSPAs), the third facility, were put in place to provide continued support to the GSEs, ensuring the companies maintained a positive net worth. The US Treasury Department initially committed $100bn per company. In February 2009, the Obama Administration announced an increase to $200bn per company. And in December 2009, it was increased again, to include the $200bn plus deficits experienced through 2012. Since the conservatorship went into place, Fannie had $111bn in losses. Freddie had $63bn. According to DeMarco, Fannie drew $59.9bn and Freddie took $50.7bn from the PSPAs. “These calls on taxpayer funds are troubling to all of us,” DeMarco wrote. DeMarco added that minimizing credit losses from delinquent mortgages will remain the goal of the FHFA and the GSEs. According to the latest Treasury report, servicers of Fannie and Freddie loans provided 9,880 permanent modifications and have active trial modifications on 14% of the eligible loans in the GSEs portfolios under the Home Affordable Modification Program (HAMP). Under HAMP, the Treasury provides capped incentives to servicers for the modification of loans on the verge of foreclosure. HAMP falls under the Making Home Affordable (MHA) program. “Since the Enterprises own or guarantee about half the mortgages in the country, efforts like MHA that provide stability to borrowers also serve to restore stability to housing markets, which directly benefits the Enterprises by reducing credit exposure,” according to the letter. The changes in December also included a $810bn cap on the GSE portfolios by Dec. 31, 2010. According to DeMarco, each company is below that amount. “Consistent with the goals of conservatorship and in accord with the recent Treasury announcement, FHFA does not expect the Enterprises to be substantial buyers or sellers of mortgages, with an important exception,” DeMarco wrote. “As I stated in December, the increased flexibility provided with the retained portfolio amendment may be important for maintaining the Enterprises’ capacity to purchase delinquent mortgages out of guaranteed mortgage-backed security pools.” DeMarco expects any additions to the GSE portfolios to be purchases of delinquent loans out of MBS pools, as the companies near their portfolio caps and delinquency rates continue to grow. One in every 7.5 homeowners fell into delinquency or foreclosure as of Nov. 30, 2009, according to Lender Processing Services (LPS). Even the delinquency rate on prime jumbo loans in RMBS grew, rising to 9.2% in December 2009 from 3.2% at the end of 2008, according to Fitch Ratings. DeMarco added that when the Treasury begins its gradual withdraw from its purchase activity, private parties will begin to invest in new GSE MBS. “The Enterprises' operating in conservatorship cannot be a long-term solution,” DeMarco wrote. “When the conservatorships and Treasury's financial commitment were established in 2008, Secretary Paulson described the arrangement as a "time-out" to allow policymakers to further consider the role of the Federal government and the Enterprises in the future system of housing finance.” Write to Jon Prior.

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