Loan Guarantees Main Source Of GSE Losses

The government-sponsored enterprises' (GSEs) guarantees of single-family homes accounted for 73% of Fannie Mae and Freddie Mac's capital losses from the end of 2007 through the second quarter of this year, their regulator reported this week. The guarantees resulted in losses of about $166 billion during that period.

The findings were part of the Federal Housing Finance Agency's (FHFA) first conservator's report on the GSEs' financial condition, which was released Thursday. The report will be released on a quarterly basis following the filing of the GSEs' financial results with the Securities and Exchange Commission (SEC), the agency said.

The reports are designed to enhance public understanding of the GSEs' financial performance and condition leading up to and during their conservatorship, which began in fall 2008, FHFA Acting Director Edward J. DeMarco said in a statement.

The GSEs' investments and capital markets book of business, which includes the companies' retained portfolio and credit losses associated with private-label mortgage-backed securities, constituted 9% of the GSEs' capital reduction from late 2007 through the first half of this year.

‘Nontraditional and higher-risk mortgages concentrated in the 2006 and 2007 vintages account for a disproportionate share of credit losses,’ the report's executive summary reads. ‘However, house price declines and prolonged economic weakness have taken a toll on the credit performance of traditional mortgages.’

The report additionally notes that single-family loans acquired by the GSEs during conservatorship have generally been of higher quality, focusing on higher credit scores and lower loan-to-value ratios. The recent-vintage guarantees have resulted in lower early cumulative default rates, the FHFA said.

SOURCE: Federal Housing Finance Agency


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