Inspector General Warns of Fannie and Freddie Losses

Published August 22, 2013

Defenders of the government-sponsored mortgage behemoths Fannie Mae and Freddie Mac have been boasting of big profits. Now a federal inspector general is warning of big losses.

The inspector general for the Federal Housing Finance Agency, which oversees Fannie and Freddie, reports they have been avoiding billions of dollars of potential long-term losses by neglecting to write off appropriate amounts of delinquent mortgages they own or backstop. Fannie and Freddie are supposed to treat mortgages that are more than 180 days delinquent as private banks must do. Instead, Fannie and Freddie have delayed following that requirement.

The FHFA more than one year ago declared Fannie and Freddie must change their accounting practices to conform with the mortgage write-off requirement. Instead, they have announced their intention to hold off until 2015. This enables Fannie and Freddie to avoid write-off losses.

“Three years appears to be an inordinately long period to fully implement” the new rule, wrote Steve A. Linick, the FHFA’s independent inspector general, in a letter to acting FHFA Director Edward J. DeMarco on August 5. The letter was made public in mid-August.

‘Not So Rosy’

“It’s possible that the situation at Fannie and Freddie isn’t quite as rosy as some have come to believe over recent months,” Sen. Bob Corker (R-Tenn.) told Los Angeles Times reporters after the letter was revealed. “But either way, I think we should all remember that these two entities wouldn’t generate one penny without the government guaranteeing their transactions, a reality that underscores the need to move to a stronger system of housing finance.”

Corker is sponsoring legislation with Sen. Mark R. Warner (D-Va.) to replace Fannie and Freddie with a new government mortgage guarantee program. In a statement issued one day after the release of the Linick letter, Corker indicated the news gives impetus to their “Housing Finance Reform and Taxpayer Protection Act.”

“There is real momentum growing to finally move a structural housing finance reform bill that ends the Fannie and Freddie model of private gains and public losses, and I look forward to working with my colleagues in the Senate, the House and the White House to see it through,” Corker said.

Reform Bill Highlights

The Corker-Warner bill would:

  • Mandate 10 percent capital, up front, for the system to protect taxpayers against future bailouts.
  • Wind down Fannie Mae, Freddie Mac and the Federal Housing Finance Agency (FHFA) within five years of bill passage.
  • Transfer appropriate utility duties and functions to the Federal Mortgage Insurance Corporation (FMIC), modeled in part after the Federal Deposit Insurance Corporation.
  • Replace the failed “housing goals” of the past with a transparent and accountable market access fund that focuses on ensuring there is sufficient decent housing available. The fund would not be paid for with tax dollars. There instead would be a small FMIC user fee that only those who choose to use the system pay.
  • Ensure institutions of all sizes have direct access to the secondary market so local banks and credit unions aren’t gobbled up by the mega banks when Fannie and Freddie are dissolved.

“Senators Warner and Corker are to be commended for taking a thoughtful and comprehensive approach to drafting a bill to restructure the secondary mortgage market in a way that provides sufficient liquidity to the market so that lenders can offer a full range of sustainable mortgage credit to qualified borrowers through all market conditions,” said David H. Stevens, president and CEO of the Mortgage Bankers Association, in a statement.

‘Much to Do’

Frank Keating, president and CEO of the American Bankers Association, said in a statement the bill “follows principles long advocated by the ABA, and builds upon the framework detailed by the Bi-Partisan Policy Center’s Housing Commission on which I served. The mortgage market is a complex and intricate part of our nation’s economy and addressing the many concerns and interests of a wide range of participants will require much negotiation, compromise and cooperation.  There is much work yet to be done, but this bill is a strong foundation on which to begin the process.”

Fannie Mae on August 8 reported a $10.1 billion profit for the second quarter and said it would send a $10.2 billion payment to the U.S. Treasury for its federal aid. Freddie Mac also posted the second-largest quarterly profit in its history, reporting net income of $5 billion, and said it would make a $4.4 billion dividend payment toward the cost of its rescue aid.