FannieMae and FreddieMac are chartered to ensure mortgage banks have enough money to lend home 
buyers at low interest rates. They are supposed to ensure affordable housing, by maintaining market place liquidity.
What they have been doing though is purchasing Alt A and subprime loans. This explains the recent mounting losses that both lenders have been experiencing. The losses were inexplicable to me because FannieMae and FreddieMac guarantee conventional loans, or so I thought. The lowest risk loans - fully documented, lower LTV's, full amortization loans, best credit, MI covered loans.
Why were these two companies suffering losses?
Well, they had begun to venture into the temptation of the higher yields found in subprime and Alt A lending.
I found a Q&A sheet from August 07. The information about their loan portfolio is from 2006.
The quotes in this discussion are quite ironic. The report is very readable, just sad.
"Accordingly, we believe that our guaranteed Alt-A loans have more favorable credit characteristics than the overall market of Alt-A loans, based on the following data for Alt- A loans in our single-family mortgage credit book of business (as of June 30, 2007)"
"We believe that the subprime loans in our single-family mortgage credit book of business have more favorable credit characteristics than the overall market of subprime loans based on the following data (based on subprime loans in our single-family mortgage credit book of business as of June 30, 2007):
• Our subprime loans are generally credit enhanced - 88 percent carry credit enhancement "
Does anyone know what a credit enhanced subprime loan is?
Here is an article from Inman dated from Aug 2007 around the same time as the above Q&A discussion. Also full of irony. The article may actually be referring to the Q&A discussion, or perhaps to the annual 10K report filed at that time.
"Fannie Mae officials said they believe the Alt-A loans they guarantee have "more favorable credit characteristics than the overall market of Alt-A loans," because the loans must comply with Fannie's guidelines, and are originated by lenders who specialize in prime loans."
At this point, credit risk mismanagement has placed FannieMae in real jeopardy of failing to meet its charter in maintaining market liquidity and ensuring affordable housing. They already are pulling back in conventional lending. It is evidently not the high LTV conventional loans. The problem is that they stepped outside their charter and began investing in higher risk loans.
Someone needs to be held accountable for this behavior.
FannieMae quotes:
"Since we guarantee our Fannie Mae MBS, we are required to maintain high credit standards
when acquiring and financing mortgages."
"Fannie Mae's disciplined approach to underwriting loans has resulted
in a high quality, regionally diverse book of business. Fannie Mae's standards impact the
overall loan management process, from determining borrower and property eligibility through loan acquisition and property disposition."
Wall Street Journal - FannieMae loss exceeds forecast
Bloomberg - FannieMae 4th straight quarter loss
FannieMae and FreddieMac have in my mind not followed their charter. Their managers and Congress have allowed these lenders to fall into the greed trap, pursuing higher returns and putting our conventional mortgage market at risk.
It is one thing for Bear Stearns, IndyMac and others to take on riskier mortgage loans. Fannie Mae and FreddieMac had no business doing so, with their charter and their privileged position and public trust.
Congress is being a little too quiet on this because they are themselves guilty in this.
Richard Smith
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.
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My friend it's like putting half your stack on one number instead of playing red or black. GREAT POST!
Credit Enhanced - I like that. Sounds like there was some doping going on in the FNMA world.
Alt A is Alt A and Subprime is Subprime.
Good post!
Richard,
Thanks for the post. You know this is all about greed. A never ending appetite to keep dipping in the cookie jar.
side note... FNMA and Freddie have special agreements with "larger" lenders accepting a percentage of loans with compensating factors that don't meet the agency guidelines as long as they were bundled with enough "non-crap" loans...this is in addition to the alt-a garbage they ingested. As I mentioned in a post a couple of months ago, both GSE's are done in their current form.
They certainly are facing mounting problems and the recent changes to cause further tightening will only hurt themselves in the long run.
Richard that is an interesting historical perspective on some of the ills the industry is facing. I think Fannie and Freddie delved into a market they were not prepared for, nor truly understood. However, I think they were in a "tight" spot several years ago, because they were losing market share to the international frenzy taking place in the MBS and CDO markets. I read a piece this weekend that made a lot of sense. Expecting short term gains on long term investments is not a good investment strategy...kind of like oil and water, they do not mix.
Thanks for the perspective
Bo
Richard, I remember that. I also remember when questioned on purchasing these loans they kept saying no risk. I am now of the belief that these companies, our banks, the Federal Reserve just lie. No one ever calls them on it. Unlike Martha Stewart no one gets jail time.
This explains a thing or two, now doesn't it? Thanks for the research Richard- this is good stuff.
Jason,
They did not get too lucky with their bets did they - neither did we.
Richard
Ken,
I cannot get over the phrase "credit enhanced." It is almost funny. Maybe someone will comment about what it means.
Richard
William,
I posted the picture of the Fannie Mae Taj offices. Look nice don't they.
Richard
Rich,
I went back and think I found your post. The sad thing for me is that the current structure worked for 70 and 40 years respectively.
The problem is not the structure but the bad choices of the management - whatever the motivation - and the blessing of Congress, motivated by lobbyist money.
Now Congress is going to change the structure. I think a better fix would be to change personnell in the GSE's and in Congress.
Richard
Mark,
You are right. They have cut back on conventional programs to compensate for losses in non conventional loans. The impact is to cut back on their charter as a result of negligent management.
Richard
Jim,
Thanks for commenting. I remember asking on some of your posts why FannieMae and FreddieMac were losing money. They did only conventional loans, full doc, low risk.
I was uninformed.
They have risked the existence of affordable housing, and have apparently done so with the full knowledge and blessing of Congress.
Jail sounds like an appropriate recourse to me.
Richard
Bo,
I would love to read that reference. I am sure there were pressures of lost market share. Probably similar to that experienced by FHA.
That agency did not then go invest in a bunch of Alt A and subprime loans. Fannie Mae and Freddie Mac evidently abandoned their standards to compensate the loss of market share.
Please send me the reference, or put it in another comment.
Thanks,
Richard
Richard - What exactly does 'credit enhanced' mean? Nothing? I read the article. Explain, please.
That is what Ken and I were wondering. I've not heard of credit enhanced and have no idea what it refers to. Can't imagine.
Apparently credit enhancement does not enhance much, although the office building looks nicely enhanced.
Everytime I see the FNMA building I get annoyed.
Richard