Fannie Mae, Freddie Mac and the Federal Home Loan Banks face considerable risk of losing billions of dollars due to fluctuations in prevailing interest rates, according to a new report issued by the Federal Housing Finance Agency's Office of the Inspector General (FHFA OIG).
‘For example, an increase in interest rates of just one percentage point could expose Fannie Mae and Freddie Mac to an estimated loss of nearly $2 billion in the fair value of their assets, such as 30-year fixed-rate whole mortgages,’ says the report.
Since Fannie Mae and Freddie Mac were placed into federal conservatorship in September 2008, the U.S. Department of the Treasury and the FHFA required them to reduce their portfolios to $250 billion each. However, the FHFA OIG report cites new challenges based on their shrinking mortgage portfolios.
‘Specifically, they contain a relatively high percentage of distressed assets, including delinquent mortgages,’ the report says. ‘It is difficult to estimate how such assets may respond to interest rate fluctuations and, therefore, it is a challenge to discern how to use derivatives to limit potential losses.’
The report also notes that the Federal Home Loan Banks also face interest rate risks due to their large mortgage asset portfolios.
The full report is now available online. The FHFA leadership did not publicly comment on the report's findings.