Real Estate Lender Implosion

[up-down]

Charge: Freddie and Fannie taking on too much debt

The housing slump has compelled the two entities to buy up mortgages on the secondary market that banks are backing away from.

By Les Christie, CNNMoney.com staff writer
February 7 2008: 11:17 AM EST


NEW YORK (CNNMoney.com) -- The increased share of housing debt taken on by Freddie Mac and Fannie Mae during the housing slump has put the two government sponsored enterprises at risk, it was charged Thursday.

The two outfits are "reducing risks in the market, but concentrating mortgage risks on themselves. These risks are beginning to take their toll," said James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Fannie and Freddie. He was speaking Thursday at a Senate Banking committee on regulatory reform.

Freddie will report its first ever annual loss for 2007 at the end of February, while Fannie, is expected to report its first loss in 22 years for the year. As the sublime crisis has grown, banks have backed away from buying mortgages in the secondary market. This has left Fannie and Freddie, which do the same thing, to pick up the slack.

As a result the two government sponsored entities (GSEs) saw the housing debt they carry grow 16 percent, while Federal Home Loan Banks loans swelled to $6.3 trillion, more than the total public debt of the United States, according to Lockhart.

Some experts worry that if Fannie or Freddie take on too much debt and fail, that the government would have to bail them out using taxpayer money.

"The conforming market supported by Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM) is the only well-functioning segment of the mortgage market," said Richard Syron, CEO of Freddie Mac. "We're experiencing greater losses as house prices decline, but that is not surprising since this is the market we were created to support."

And Daniel Mudd, Fannie's CEO agreed. "Our business is meeting the increased demand for liquidity and our overall credit book has held up relatively well," he said. "Yes, these are tough times, but that is when you want a Fannie Mae."

But Lockhart argues that the GSEs require more regulatory oversight as their market share grows, in order to maintain the confidence of both the public and investors as the GSEs work to meet their important housing mission.

http://money.cnn.com/2008/02/07/real_estate/raise_GSE_cap_limits/index.htm?source=yahoo_quote