Delinquencies Rise at Fannie Mae, Freddie Mac

By David S. Hilzenrath
Washington Post Staff Writer
Thursday, June 26, 2008

In a sign of continuing trouble in the housing market, mortgage delinquency rates doubled over a 12-month period at Fannie Mae and Freddie Mac, the two industry giants reported yesterday.

In April, 1.22 percent of the conventional home loans that Fannie Mae guarantees were past due by at least three months or were in foreclosure. That was up from 1.15 percent in March and about twice the rate recorded in April 2007.

Freddie Mac said its delinquency rate was 0.81 percent in April, up from 0.77 percent in March. The rate was 0.4 in April of last year.

Neither company's figures fully captured the problems borrowers have had making payments, because they excluded loans for which payment terms had been relaxed.

Chartered by the government to keep mortgage money flowing, Fannie Mae and Freddie Mac package mortgages into securities for sale to investors, guaranteeing that they will pay the investors if the borrowers default. The companies also invest in mortgages and securities backed by mortgages.

The collapse of the housing bubble has left them the dominant players in housing finance. Together, they bought the equivalent of 68 percent of the single-family mortgages that originated during the first three months of this year, according to the Office of Federal Housing Enterprise Oversight.

After years of hand-wringing about the risks that Fannie Mae and Freddie Mac's rapid growth might pose to the financial system, the government has loosened restraints on the companies in the stated hope that they will help prop up the housing market.

The monthly reports the companies issued yesterday showed that Freddie Mac has made much more use of its increased purchasing power than Fannie Mae has.

Freddie Mac increased its mortgage-related holdings in May at an annualized growth rate of 53.4 percent, to a total of $770.4 billion, its highest ever. Fannie Mae increased its holdings at an annualized rate of 15 percent, to $736.9 billion.

"Freddie has put its newly freed capital to work," while by comparison Fannie Mae has held back, analyst Jim Vogel of FTN Financial said.

Fannie Mae's report showed that it has substantial purchases in the pipeline.

The purchases have the potential to boost profits or reduce red ink at a time when the companies have been reporting heavy losses. But Freddie appears to have nearly tapped out its buying capacity until it raises more capital, Vogel said.

Both companies expanded their holdings largely by buying their own securities. Such purchases represented $20.2 billion of the $32.8 billion growth in Freddie Mac's investment portfolio in May and $8 billion of the $8.5 billion increase in Fannie Mae's portfolio.

In Freddie Mac's case, those purchases have produced a high concentration of risk, raising questions about the company's financial safety and soundness, analysts at the research firm Federal Financial Analytics said. Freddie Mac securities made up more than half of its mortgage portfolio in May; Fannie Mae securities made up just over a third of its portfolio.

"[W]e're pretty sure that any bank holding as much of its own obligations as Freddie would need to have a great deal more [reserves] in place to handle the resulting liquidity risk," the research firm said in a report yesterday titled "Doubling Down."

A Freddie Mac spokesman said the company is fulfilling its mission.

"The numbers tell that Freddie Mac is continuing to provide critically needed liquidity and stability to the housing finance system during this time of crisis," Freddie Mac spokesman Michael Cosgrove said.

"We're managing our portfolio in a safe and sound manner . . . and taking advantage of purchasing opportunities that make sense," Fannie Mae spokeswoman Janis Smith said.

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