As promised, federal regulators said today they will lift caps limiting growth in the loan portfolios of government-chartered mortgage financiers Fannie Mae and Freddie Mac, but mounting losses at both companies could still constrain their growth.

As promised, federal regulators said today they will lift caps limiting growth in the loan portfolios of government-chartered mortgage financiers Fannie Mae and Freddie Mac, but mounting losses at both companies could still constrain their growth.

The Office of Federal Housing Enterprise Oversight (OFHEO) said that as of March 1, Fannie and Freddie will no longer be subject to the portfolio caps, instituted in the wake of management and accounting scandals that forced both companies to restate several years of earnings.

The caps — which limited the total value of mortgages and mortgage-backed securities the companies could buy and hold for investment to about $1.5 trillion — are being lifted in recognition that both companies are filing audited financial statements for 2007 in a timely fashion, and have made progress in implementing new practices and controls, OFHEO said.

For the time being, Fannie and Freddie will still be subject to 2004 consent orders, which require the companies to maintain capital levels at least 30 percent above statutory minimums established by Congress.

If the companies can’t maintain the required capital because of mounting losses on loans and other investments, they might have to reduce their loan portfolios or scale back guarantees and securitizations of mortgages at a time when lawmakers have given them the green light to buy up bigger loans (see Inman News story).

Regulators will discuss gradual decreases in the 30 percent capital requirements as the government-sponsored enterprises, or GSEs, make progress in meeting the requirements spelled out in the consent orders, OFHEO Director James Lockhart said today in a statement.

Fannie Mae today reported a $3.6 billion fourth-quarter loss, and analysts expect Freddie Mac will disclose similar problems when it files results for the quarter and year on Thursday. Both companies were forced to raise billions in capital through preferred stock offerings after reporting a combined $3.4 billion in third-quarter losses

“In retrospect, this OFHEO-directed capital requirement, coupled with (the GSEs) preferred stock offerings means that they are in a much better capital position to deal with today’s difficult and volatile market conditions and their significant losses,” Lockhart said in a statement.

Fannie Mae officials said that by filing the company’s 2007 annual report in a timely fashion today, they believe they have now met all 81 requirements spelled out in the consent order.

The report shows losses mounted in the second half of 2007, even as Fannie nearly doubled its share of single-family mortgage-backed securities (MBS) issuance. Losses for the quarter were driven primarily by $3.2 billion in losses on derivative investments used to hedge against changes in interest rates, and a $2 billion increase in loss reserves, the company reported.

Those and other losses more than offset 26.4 percent growth in income from MBS guarantees during the fourth quarter, to $1.6 billion. Fannie Mae’s market share of single-family MBS issuance grew to 48.5 percent, up from 24.6 percent a year ago, and MBS outstanding grew from $2 trillion at the end of 2006 to $2.3 trillion at the end of 2007.

Although OFHEO loosened the portfolio caps in September to allow 2 percent annual growth, Fannie said its average monthly mortgage portfolio balance at the end of the year was $17.1 billion below the new limit of $742.35 billion.

For the year, Fannie Mae posted a net loss of $2.1 billion, compared with a $4.1 billion profit in 2006, but said the company had a $3.9 billion in surplus capital above the OFHEO-directed requirement.

The outlook for 2008 remains rocky, with Fannie Mae now projecting home prices will decline by between 5 and 7 percent this year, with a total peak-to-trough decline of 13 to 17 percent. That compares to a previous estimate that prices would fall by no more than 12 percent.

Those projections have Fannie upping its loss projections, with an estimated credit loss ratio of 11 to 15 basis points, up from a previous estimate of no more than 10 basis points.

Although most of the loans Fannie Mae buys and guarantees are subject to strict underwriting standards, the company also holds $73.9 billion in “private-label” MBS and Fannie Mae-guaranteed securities backed by subprime or alt-A loans. Those investments generated $1.4 billion in losses in 2007 and another $3.3 billion in impairments the company believes are temporary.

Fannie Mae also has some exposure to the problems of private mortgage insurers and monoline bond insurers that guarantee risky investments like collateralized debt obligations (CDOs).

At year end, the company had $104.1 billion in private mortgage insurance coverage on single-family mortgage loans in its portfolio and backing Fannie Mae MBS issuances. That compares to $75.5 billion a year ago.

Rating agencies have downgraded the claims-paying ability or insurer financial strength ratings of four of the seven companies providing $93.7 billion in primary mortgage insurance to Fannie Mae. Although Fannie Mae executives said they do not believe the downgrades have affected the fair value of the insured assets, they warned investors that the company may have to increase loss reserves and guarantee obligations if “we determine it is probable that we would not collect all of our claims.”

Fannie Mae is also relying on $11.8 billion in financial guaranties on private-label mortgage-related securities and municipal bonds, and three of the nine companies providing the guaranties have been subjected to downgrades by rating agencies.


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