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Loan Giants' Takeover Hasn't Paid Off

By Zachary A. Goldfarb
Washington Post Staff Writer
Wednesday, October 29, 2008

Almost two months ago, the government sought to revive the nation's ailing mortgage sector by seizing Fannie Mae and Freddie Mac and pumping money into the home-loan market. But so far, the measures have yet to achieve their intended effect.

Backed by taxpayers, the mortgage finance giants have spent billions in an attempt to push down loan rates and make it easier for people to borrow money to buy homes. But mortgage rates have gone up.

The Treasury Department has also started buying $10 billion in mortgage bonds issued by the companies, with the ultimate goal of ensuring that mortgage lenders have a ready stream of money to lend. But the effort has been offset by a global sell-off of these bonds.

And even though Fannie Mae, of the District, and Freddie Mac, of McLean, have taken steps to help thousands of people avoid foreclosure, some housing advocates say the companies are not doing enough to help others keep their homes.

Federal Deposit Insurance Corp. Chairman Sheila C. Bair has urged the companies and their regulator to be more aggressive in helping people avoid foreclosure, according to people familiar with the matter.

This shows how hard it is for the government, even with control of the companies, to overcome an adverse market and overhaul entrenched foreclosure practices.

The government has taken a number of steps to bring mortgage rates down through Fannie Mae and Freddie Mac. The companies, which together own about $1.5 trillion in mortgages, are expected by the government to grow their portfolios by about $100 billion each over the next year. By pumping so much money into funding mortgages, the thinking goes, rates will decline and stabilize.

The day before the companies were taken over, interest rates on 30-year, fixed-rate mortgages averaged 6.34 percent. Yesterday, they averaged 6.56 percent, according to HSH.com, which surveys lenders. The figures have swung wildly over the past two months.

"It makes it very hard for consumers to have any sense of what's happening to interest rates," said Keith Gumbinger, HSH vice president. "There's not enough time between the move in interest rates and the consumer's ability to react to that." Doubts are growing among financial analysts and investors about whether the companies will be able to meet the government goal despite their best efforts.

To increase their portfolios, the companies borrow money. The problem is that they have been able to borrow only at higher rates because of investor anxieties over the credit markets generally and the fate of the companies specifically. This in turn has constrained their ability to borrow. The companies will issue $16.3 billion in debt this month, compared with $32.7 billion last month, according to Jim Vogel, an analyst at FTN Financial Capital Markets. That's the lowest level in at least eight years.

With borrowing costs so high, Vogel said, the companies may no longer be earning enough from mortgage investments to cover their costs. That means Fannie Mae and Freddie Mac may find it more difficult to fund themselves.

"The market doesn't want to buy the debt of a gigantic financial institution that's funding its assets at a loss, regardless of how the U.S. government may or may not be standing behind them," he said.

Likewise, the government's plan to provide an additional source of money for mortgage bonds issued by Fannie Mae and Freddie Mac may be having negligible effects. Treasury has asked its investment managers, State Street and Barclays, to buy $10 billion of these bonds on its behalf.

One of the government's primary concerns before the takeover was that investors -- particularly in Asia, traditionally among the biggest buyers of U.S. mortgages -- were shedding the bonds out of fear that market demand for them would dry up.

But in the past two months, foreign investors have continued to dump the bonds. Foreign central banks' holdings of regular Fannie Mae and Freddie Mac debt and mortgage bonds have declined by about $60 billion, to $923.4 billion, as of last week, according to the Federal Reserve.

James B. Lockhart III, director of the Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, said the reason for the companies' heightened debt costs is that "people are trying to digest the changes that have been made worldwide over the last couple of weeks." He pointed out that the companies have taken other steps to prevent higher rates, such as canceling fees they charge to insure loans.

"The key thing to me is that Fannie and Freddie can and are continuing to fund themselves," he said. "I think there will be ups and downs. Over the long term, we're very hopeful that Fannie and Freddie can continue to supply the liquidity to the housing market." Lockhart has said one of the companies' objectives under government control is to help more people struggling to pay their loans hold on their homes. Usually, that happens by modifying the terms of loans to make them more affordable.

"We've been very active in encouraging loan modifications," Lockhart said. "We have told both enterprises they can do more."

But the companies have come under criticism for not doing more already. Fannie Mae has received the brunt. The Neighborhood Assistance Corporation of America, which represents low- and moderate-income borrowers, plans today to rally hundreds of people at Fannie Mae headquarters to protest its foreclosure policies.

In a letter yesterday to Lockhart, NACA wrote that Fannie Mae, which controls 30 percent of the mortgage market, "has become the major roadblock in providing long-term solutions for the vast majority of at-risk homeowners."

NACA said Fannie Mae is too slow to restructure mortgages for people who are at risk but have not yet gone delinquent, balks too often at lowering the interest rate on loans, and refuses to write down mortgages and lower the amount borrowers owe.

Those are the types of steps IndyMac has taken under FDIC control. FDIC Chairman Bair, who's been an outspoken proponent of modifying mortgage loans, has been encouraging Fannie Mae and Freddie Mac to take the same kind of steps, according to people familiar with her thinking.

Brian Faith, a Fannie Mae spokesman, said that in the past 10 weeks the company has launched reviews of 18,000 foreclosures. He said that, among other steps, the company has agreed to reduce the interest rate on certain loans for a time and provided other incentives to avoid foreclosures.

Bruce Marks, chief executive of NACA, said he met yesterday with Lockhart and came away encouraged. "They weren't going to commit, but they were receptive," Marks said.

In Connecticut, lawyers are taking steps to try to force Fannie Mae to be more generous to people at risk of losing their homes that could test the nature of the government's hold on the company.

Evelyn Colon, a single mother in Hartford, Conn., who has consistently paid her rental bills, was being evicted after Fannie Mae foreclosed on the owner. Fannie Mae said it would consider working with Colon to let her remain.

Greater Hartford Legal Aid sued, arguing that language in the recent economic rescue bill requires federal agencies to take steps to keep tenants in their homes.

"You have Fannie being controlled by the government trying to evict the same people," said Stephanie D'Ambrose, a Legal Aid lawyer.

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