Fannie Mae & Freddie Mac — How Are They Really Doing?

How well are Fannie Mae and Freddie Mac doing?

Better than most news reports might suggest.

Testifying before the House Financial Services Committee, the chief regulator of Fannie Mae and Freddie Mac, James Lockhart, testified that the two companies own or guarantee 56% of the single family mortgages in this country or $5.4 trillion.

Lockhart also said for both companies that “first quarter net losses were $23.2 billion at Fannie Mae and $9.9 billion at Freddie Mac. The provision for credit losses — to build loan loss reserves — remains a primary driver of net losses at both Enterprises. Loan loss reserves at both Enterprises increased substantially in the first quarter to reflect higher expectations of credit losses from increasing mortgage delinquencies. Loan loss reserves increased by 70 percent at Fannie Mae to $42 billion and by 50 percent at Freddie Mac to $23 billion.”

Translation: The loss reserves were increased so, for accounting purposes, there was a “loss” at each company. However, loss reserves are a guess, they are NOT actual losses. Who decided how much the loss reserves should be? The federal government which took over the two companies last year.

The Fiction of Loss Reserves

In other words, by increasing loss reserves the government also creates accounting losses that are reported to the public.

But how are Fannie Mae and Freddie Mac actually doing? On page 22 of his 23 pages of testimony, Lockhart offered the delinquency chart below. Here’s how the delinquency picture actually looks:

Subprime ARMs Seriously Delinquent: 36.5%
Subprime Loans Seriously Delinquent: 24.9%
All Loans Seriously Delinquent: 7.2%
Prime Loans Seriously Delinquent: 4.7%
Fannie Mae Delinquencies: 3.2%
Freddie Mac Delinquencies: 2.3%

Anybody notice something curious here? Fannie Mae and Freddie Mac have far fewer delinquencies than lenders in general. Less than half the rate for all mortgages. Far less than even prime mortgages.

Unlike loss reserves, delinquency counts are real and objective. Hmmm. Makes you wonder why Fannie Mae and Freddie Mac were taken over by the Bush Administration….

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2 Comments on "Fannie Mae & Freddie Mac — How Are They Really Doing?"

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  1. Peter G. Miller says:

    If a lender was required to buy back loans it means they did not meet the underwriting standards of Fannie Mae and Freddie Mac. This does not mean that delinquencies were artificially or unfairly reduced, it means that Fannie Mae and Freddie Mac were doing the right thing in terms of policing their loans.

    Imagine if you bought a car and brought it back to the dealer because something was wrong. That’s not your “fault,” it only means the car was not as promised.

  2. Cheryl of KC says:

    Fannie Mae has fewer deliquencies because they made Bank of America repurchase the majority of the ALT-A or subprime loans back. Bank of America had a secondary market in Dallas TX and just closed it last year when they started getting lots of lawsuits and fraudulemt mortgage complaints.

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