Congressional watchdogs last week decried Fannie Mae’s and Freddie Mac’s “mixed record in meeting their housing objectives,” saying in a report that the government-sponsored mortgage giants would face major problems with investors if they were spun into private entities.

The Government Accountability Office study, titled “Fannie and Freddie Mac: Analysis of Options for Revising the Housing Enterprises’ Long-Term Structures,” complained of the companies that “capital and risk management deficiencies have compromised their safety and soundness.” The GAO also said the firms’ loan-modification programs would increase their difficulties in trying to depart the federal government’s conservatorship.

Under their current modification plans, the two mortgage sellers are tasked with providing as much as $25 billion in incentives for lenders and servicers, as well as patching up many loans – up to 40 percent – that investors expect to slide back into delinquency.

The result, the GAO said, was that “investors might be unwilling to invest capital in reconstituted enterprises unless the Treasury assumes responsibility for losses incurred during their conservatorship.”

Given Fannie’s and Freddie’s past problems and recent importance in the mortgage market, the future of the companies has been a hotly debated by politicians and analysts. The Mortgage Bankers Association, a finance trade group, recently published its own study calling for the government-sponsored entities to be unwound and replaced by smaller private mortgage corporations backed by a federal insurance fund.

But the GAO report insisted that Fannie and Freddie would need a “potentially lengthy transition” given their size and difficulties. “Any transition to a new structure would need to consider the enterprises’ still-dominant position in housing finance and be implemented carefully (perhaps in phases) to ensure its success,” the report said.

Fannie and Freddie own or guarantee about $5.4 trillion in U.S. residential debt and have accounted for about 70 percent of all new home loans this year, according to the Washington Post. Last fall, the Federal Housing Finance Authority placed the companies into federal conservatorship, an emergency measure taken to police their business practices and clean up their balance sheets, which had been loaded with defaulting loans and toxic mortgage-backed assets.

In the past two years, the companies have net losses of more than $165 billion; since last November, they have gotten or asked for nearly $100 billion in direct aid from the federal government.

The Obama administration plans to make its recommendations on Fannie’s and Freddie’s fates early next year.

 

 

09/14/2009 BY: ADAM WEINSTEIN http://www.dsnews.com/articles/fannie-and-freddie-to-go-private-good-luck-says-gao-2009-09-14