A new report details how private companies were able to overtake Fannie Mae and Freddie Mac in the secondary mortgage market in 2005, issuing more mortgage-backed securities than the government-sponsored enterprises for the first time ever.
While home sales, house prices and home-ownership rates were all setting new records in 2005, GSEs Fannie Mae and Freddie Mac saw their share of the secondary mortgage market continue to decline.
The reasons for the decline include the continuing popularity of nontraditional mortgages, such as interest-only and payment-option adjustable-rate mortgages, which don’t always conform to Fannie and Freddie’s underwriting standards, and continuing fallout over management and accounting scandals at the government-sponsored mortgage repurchasers.
That’s according to a new report from the Office of Federal Housing Enterprise Oversight, “Mortgage Markets and the Enterprises 2005.”
The report details how banks, Wall Street investment firms, insurance companies and home builders overtook Fannie and Freddie in the secondary mortgage market, issuing a record $1.2 billion in “private-label” mortgage-backed securities last year. Fannie and Freddie, by comparison, issued $908 billion in mortgage-backed securities, the lowest level in five years.
The growth in private-label mortgage-backed securities is tied to the continuing popularity of nonconforming loans that Fannie and Freddie must limit in their portfolios. Nonconforming loans include home equity, jumbo and subprime loans.
The percentage of non-jumbo home-purchase mortgages — those with balances small enough to be eligible for repurchase by Fannie and Freddie — fell to 73 percent of total dollar volume, down from 76 percent in 2004, the report noted.
About 38 percent of the $1.2 billion in private-label morgtgage-backed securities issued last year — $460 billion in total — relied on subprime loans for collateral, OFHEO reports.
Growth in the private-label mortgage-backed securities market reflects “an increase in the number of borrowers with blemished credit seeking housing financing and lenders willing to extend credit to those borrowers,” the report said. The greatest growth has been in securities backed by Alt-A loans, with volume in that sector increasing almost tenfold from 2000 to 2004 and doubling from 2004 to 2005 to more than $330 billion.
Although Fannie and Freddie scaled back their presence in the market for subprime and Alt-A mortgages (and securities backed by such loans) in 2005, the GSEs continued to be active, purchasing $169 billion in subprime mortgage-backed securities, the report said. That’s a 33 percent share of subprime MBS market, down from 44 percent in 2004.
Adjustable-rate mortgages (not all of which are subprime) comprised a slightly larger share of Freddie and Fannie’s single-family loan purchases last year than in 2004 — 22 percent of Fannie Mae’s and 17.8 percent of Freddie Mac’s, compared with 21.3 percent and 17.1 percent, respectively, in 2004.
OFHEO reported that the credit risk of single-family loans purchased by Freddie and Fannie remains low, with the weighted average loan-to-value ratio at Freddie Mac remaining steady at 71 percent and rising slightly at Fannie Mae to 72 percent.
Both Freddie and Fannie were adequately capitalized throughout 2005, the report found.
Fannie Mae intentionally shrunk its loan portfolio by 20 percent, to $728 billion at year’s end, to maintain capital at required regulatory levels.
Freddie Mac, on the other hand, aggressively grew its portfolio in the last two months of the year to an all-time high of $710 billion, up 8 percent for the year.
Freddie Mac’s reported net income declined for the third consecutive year in 2005, however, falling 27 percent to $2.1 billion. The decline was largely offset by a reduction in losses on derivative instruments that did not qualify for hedge accounting.
Fannie Mae’s estimated earnings declined because of its smaller loan portfolio. The company also reported administrative expenses were up 44 percent from 2004 to $2.2 billion because of costs associated with restating its earnings and regulatory examinations related to the accounting and management scandals.
