Industry News

OFHEO wants to change Fannie’s, Freddie’s risk formulas

Regulator says equation assumes profits on some foreclosures

Learn the New Luxury Playbook at Luxury Connect | October 18-19 at the Beverly Hills Hotel

Federal regulators say a formula used to calculate the amount of capital Fannie Mae and Freddie Mac must set aside to cover potential losses incorrectly assumes that the mortgage repurchasers will make a profit on some foreclosed loans. The Office of Federal Housing Enterprise Oversight wants to change the equation to reflect the fact that the government-sponsored entities (GSEs) are unlikely to actually realize any such profits. Although the change could restrict Fannie's and Freddie's future borrowing by forcing them to set aside more capital to cover potential losses, OFHEO said the GSEs were adequately capitalized in 2006 even when changes to the formula are applied retroactively. The equation is complex, because losses on loans may include unpaid principal balance, lost interest, foreclosure costs, and expenses related to real estate-owned properties. The equation must also take into account that losses may be offset by mortgage insurance, pool-level credit enhancements, and proce...