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Tuesday, June 24, 2008

Fannie, Freddie Fail to Relieve Housing by Shunning Jumbo Loans

June 24 (Bloomberg) -- Three months after Fannie Mae and Freddie Mac won the freedom to step up home-loan purchases, the government-chartered mortgage-finance companies are doing what critics in the Federal Reserve and Congress had predicted.
Instead of using powers granted by Congress to buy jumbo loans for the first time, Freddie Mac and Fannie Mae are purchasing their own mortgage-backed securities, helping reduce losses, company filings show. The large loans, above $417,000, made up almost a third of the U.S. market last year, according to the Mortgage Bankers Association.
Since the rule change took effect in March, Fannie Mae has packaged $24 million of jumbo loans into securities, while Freddie Mac added $220 million, according to the Inside Mortgage Finance newsletter. In April, the companies spent more than $32.4 billion to buy their own instruments, regulatory filings show.
``They were granted expanded opportunity to help recovery in a troubled housing market and yet have appeared to focus on their own recovery,'' said former U.S. Representative Richard Baker, a critic of the companies who left office earlier this year to run the Managed Funds Association in Washington.
Congress had kept Fannie Mae and Freddie Mac out of the jumbo market to force them to concentrate on low- and moderate- income borrowers.
The change places taxpayers at greater risk ``without facilitating the policy goals I believe the Congress had in mind when they eased these portfolio limits,'' said Baker, 60, a Louisiana Republican.
Worse Slump
The slowness of Fannie Mae and Freddie Mac in injecting cash for new jumbo loans may have exacerbated the housing slump in markets including California and Florida, where prices have already fallen more than the national average, said Jerry Howard, 53, president of the National Association of Home Builders.
``Had they been quicker into the marketplace, they could have helped slow the downward spiral in housing prices,'' Howard said.
Congress created Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, to promote home ownership by increasing financing and providing market stability. The companies own or guarantee almost half of the $12 trillion in U.S. residential mortgage debt. They profit by holding assets that yield more than their debt costs and from fees charged to guarantee bonds they create.
Fannie Mae and Freddie Mac posted record losses of $11.8 billion in the past three quarters as defaults on mortgages soared to the highest in 30 years.
Less Impact
The National Association of Realtors estimated last year that Fannie Mae and Freddie Mac would buy $150 billion of jumbo loans in 2008. UBS AG analysts now say the amount may be $74 billion; the companies' own projections indicate that they may not even reach that figure.
Freddie Mac said it would purchase $10 billion to $15 billion in jumbo loans and securities in 2008. Fannie Mae hasn't made any public commitments to buy a set amount of the assets this year.
``So far, we haven't seen as much impact as we anticipated,'' said Paul Bishop, managing director of research for the Realtors.
Fannie Mae added $4.05 billion in net purchases of its mortgage-backed securities in April, taking its portfolio to $728.4 billion, according to company filings. Freddie Mac net purchases were $28.4 billion, bringing holdings to $737.5 billion, filings show. Buying existing debt may help prop up prices for the companies' instruments.
The $168 billion fiscal-stimulus bill signed by President George W. Bush on Feb. 13 temporarily allowed Fannie Mae and Freddie Mac to buy jumbo loans in 91 of the most expensive U.S. housing markets.
Increased Limits
The increased lending power, combined with an agreement to reduce the companies' capital requirements, are part of congressional efforts to revive housing starts and the economy following restrictions placed on the companies two years ago.
Both ousted their chief executives after more than $11 billion in accounting errors were revealed. Fannie Mae restated earnings for 2002 through 2004. Freddie Mac did the same for 2000 through 2002.
Fannie Mae shares have fallen 29 percent and Freddie Mac has lost 31 percent in New York trading since Bush signed the bill.
House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said in February that Fannie Mae and Freddie Mac should buy bigger mortgages ``because we're in an economic crisis and need a short-term response.'' Frank has since said that the companies are moving too slowly and should get ``more bang for the buck'' from their spending power. Making the higher limits permanent may encourage purchases, he said.
`Some Liquidity'
Fannie Mae has moved to ``help provide some liquidity and impact on rates in this market segment,'' spokesman Brian Faith said in an e-mail. ``We're eligible to buy these loans and we want that business.''
The companies' entry into the jumbo market has increased financing and lowered rates where they are allowed to compete, Freddie Mac spokesman Brad German said. Fannie Mae and Freddie Mac can't buy multimillion mortgages so some data from high-cost markets such as Los Angeles may be skewed, he said.
``In the products where we are competing, the rates are a lot lower than for the products we can't buy,'' German said. ``We're doing what Congress intended us to do.''
Freddie Mac may do more jumbo business than it estimated this year, he said.
While jumbo loans accounted for about 29 percent of the $2.42 trillion of mortgages issued last year, they represented a fifth of applications in May, according to Inside Mortgage Finance and the Mortgage Bankers Association. About half of the market should be available for purchase by Fannie Mae and Freddie Mac. Stricter criteria set by the companies mean that less than 16 percent of loans eligible for the program actually can qualify, according to UBS and Mortgage Bankers Association data.
10 Percent
For a loan of more than $417,000, Fannie Mae and Freddie Mac require a minimum down payment of 10 percent and a credit score of 660. That compares with 3 percent and 580 for loans under $417,000 at Fannie Mae; and 5 percent, with no minimum score, at Freddie Mac. The rankings, which range from 300 to 850, are used by lenders to predict whether a borrower will repay.
``Fannie and Freddie are catering to low-risk homeowners with high credit scores and a lot of equity in their homes,'' said Dan Green, a loan broker at Mobium Mortgage Group Inc. in Cincinnati and Chicago. ``I'm sure there will be some high-cost areas in the country that will benefit. They just don't happen to be Florida, Michigan, California, Nevada.''
Jumbo loans bought by Fannie Mae and Freddie Mac carry an interest rate of 6.59 percent, more than a percentage point below regular jumbo rates of 7.68 percent, according to HSH Associates Inc.
Few Loans
Los Angeles borrowers are paying an average 7.87 percent, while Miami mortgage seekers are being charged 8.03 percent, indicating that few loans with low rates from Fannie Mae and Freddie Mac are being offered, according to HSH.
The companies' purchases of their own securities are making them riskier because they retain 100 percent of the credit and interest-rate exposure on those assets, said William Poole, president of the St. Louis Federal Reserve until March and now a senior fellow at the Cato Institute.
``Any legislation today that simply expands what they do is going in the wrong direction,'' Poole, 71, said. ``It's potentially digging the taxpayer in deeper.''
To contact the reporter on this story: Dawn Kopecki in Washington at

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