Much Ado About Fannie & Freddie

Earlier this week, Senate Democrats voted down a bill that would have essentially dissolved Fannie Mae and Freddie Mac after their conservatorship period was over. Introduced by Senate Republicans John McCain (AZ), Judd Gregg (NH) and Richard Shelby (AL), the amendment to the financial regulatory reform package would have taken the GSEs off of taxpayer support and mapped out a plan to wind down and dissolve them over 15 years. At the same time, both GSEs in the past few days have reported substantial first-quarter losses due to continued weakness in the market. Freddie Mac posted a $6.7-billion net loss, up $2 billion from the prior quarter and down from $10 billion the same period a year ago. Fannie Mae’s first-quarter loss came in at $11.5 billion, down from $15.2 billion in the final three months of 2009 and $23.2 billion in the first quarter. The losses were attributed to credit-related expenses and the impact of new accounting standards. These losses resulted in a net worth deficit of $10.5 billion for Freddie and $8.4 billion for Fannie, for which the companies requested a combined $19 billion in additional funding from the Treasury in order to continue operations. If accepted, that would bring the GSEs’ total federal bailout to some $140 billion. The good news for multifamily, though, is that the agencies’ losses were primarily on the single-family and guarantee segments of their business. On the multifamily end, Freddie earned $221 million in the first quarter and Fannie earned $99 million. Those figures are minuscule in comparison to the billion in losses, but they’re better than nothing. Another bright spot is that the delinquency rate for both firms. Freddie’s monthly delinquency rate fell for the first time in three years, to 4.13% in March (down from 4.2% in February) for single-family homes and 0.24% for multifamily, down one basis point from February. Meanwhile, Fannie’s serious delinquency rate (that is, loans that were more than 90 days late) rose from 5.38% in the final quarter of 2009 to 5.47% in Q1. Although it registered an increase, Fannie officials said the figures show a slowing growth rate of delinquencies. The improvement reflects the willingness of lenders to do workouts with borrowers, but with the continued weakness in the economy and the number of underwater mortgages out there growing, I don’t see how this could be a long-lasting trend. It’s safe to say Congress is stuck between a rock and a hard place. On one hand, the mortgage giants played a large role in the housing market’s downturn and the bailouts, which have been sharply criticized, seem to be growing. On the other hand, it’s no question that financial support from both Fannie and Freddie is also the primary-if not sole-reason the housing market hasn’t completely imploded.