Fannie, Freddie Portfolios Shrink

By David S. Hilzenrath
Washington Post Staff Writer
Saturday, October 27, 2007

Though Fannie Mae and Freddie Mac have been arguing that they should be granted authority to buy more mortgages to help ease a credit crunch, data released by the companies this week show that they haven't been using the authority they already possess.

Both companies reduced their mortgage-related investments in September, widening the gap between their holdings and the limits on those holdings.

Freddie Mac sold more mortgage-related assets last month than during any other month in the almost four years for which it has posted data on the Web.

In addition, Freddie Mac reduced its commitments for future purchases, indicating that it was slackening activities that might give the mortgage markets a lift.

The federally chartered companies buy mortgages from lenders and package them into securities for sale to investors, making money available for banks and other lenders to issue new loans.

In response to accounting scandals at the two companies, the government capped the amount of mortgages and mortgage-backed securities they can hold in their portfolios.

The companies and their allies in Congress have argued that they could provide relief to borrowers facing foreclosure if their regulator, the Office of Federal Housing Enterprise Oversight, loosens their shackles.

Historically, the investment portfolios have been major profit centers for the two companies. Limiting the growth of the portfolios has the potential to constrain the companies' future profits, but OFHEO has argued that the caps are necessary to prevent the companies from putting themselves and the financial system at risk.

Fannie Mae, of the District, said its portfolio of mortgage-related investments shrank by $5.1 billion last month. The company declined yesterday to explain.

Freddie Mac, of McLean, whose portfolio shrank by $19.1 billion, said the reduction in its holdings was partly an effort to ensure that it has the required capital to absorb potential losses.

"A lot of it is reflective of the value of the assets in the portfolio," said Michael Cosgrove, a Freddie Mac spokesman.

Noting that other investment firms have been reporting big losses on mortgage-backed securities, Karen Shaw Petrou, an analyst with Federal Financial Analytics, said it appeared that Freddie Mac was selling assets to prepare for write-downs in the value of mortgage investments.

Petrou, whose clients include adversaries of Fannie Mae and Freddie Mac, said Freddie Mac was more vulnerable to problems with subprime loans than Fannie Mae.

In addition to imposing caps on the companies' portfolios, OFHEO increased the level of capital the companies must maintain as a cushion against losses. Freddie's disclosure this week was a reminder that if the portfolio caps are loosened, the capital requirement could remain a constraint on the companies.

For the quarter ended Sept. 30, Fannie Mae and Freddie Mac were each allowed to hold $735 billion of mortgages and securities backed by mortgages. As of that date, Fannie Mae's holdings totaled $723.8 billion and Freddie Mac's totaled $713.2 billion.

Freddie Mac's commitments for future purchases declined to $11.5 billion in September from $20.4 billion in August. Fannie Mae's net commitments rose $13.6 billion in September over August.

The monthly snapshot does not reflect actions the companies might have taken since OFHEO adjusted the caps on Sept. 19, allowing the companies to expand their portfolios slightly.


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