Fannie Mae and Freddie Mac largely rose to the challenges posed by the credit crunch, purchasing or guaranteeing three out of four mortgages in the fourth quarter of 2007, compared with about one in three loans the year before, federal regulators said in their annual report to Congress.
But "extraordinary declines" in housing and mortgage markets have "greatly increased" Fannie and Freddie’s credit and interest-rate risks, and there is increasing pressure for the government-chartered loan financers to do even more to support the mortgage market, said James Lockhart, director of the Office of Federal Housing Enterprise Oversight in his introduction to the report.
Although Fannie and Freddie have made strides in fixing management and accounting problems that forced both companies to restate several years of earnings, further expansion of their role in providing liquidity to mortgage markets is "problematic" in the absence of legislation from Congress to strengthen oversight of the companies, Lockhart said.
Fannie and Freddie reported $6 billion in combined fourth-quarter losses and $5.1 billion in losses for the year, forcing the companies to raise $15 billion in additional capital in the last four months of the year and cut their dividends.
Lockhart said that although problems in the housing markets continue, OFHEO expects to lift consent agreements that require Fannie and Freddie to have large capital reserves on hand, and urged Congress to act quickly to strengthen the regulator’s powers.
Analysts at Standard & Poor’s said in a report this week that under a "sever stress scenario," a bailout of Fannie and Freddie might create a "material fiscal burden" equal to 10 percent of gross domestic product, and lead to a downgrade of the U.S. government’s AAA debt rating.
Lockhart said that if the government-sponsored enterprises complete the changes to their management and accounting practices and add "significant additional capital" — and if Congress expands regulatory authority of the companies — it is his hope "we will end 2008 with the stakeholders in the nation’s housing finance system much stronger than today."
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