The Untold Story Behind Fannie Mae & Freddie Mac

The government is out with new foreclosure prevention numbers from Fannie Mae and Freddie Mac.

According to the Federal Housing Finance Agency (FHFA), the headline is that “FANNIE MAE AND FREDDIE MAC LOAN MODIFICATIONS UP BY MORE THAN 50 PERCENT IN FIRST QUARTER, MONTHLY PAYMENTS REDUCED FOR HOMEOWNERS.”

We then learn that “Fannie Mae and Freddie Mac modified nearly 37,000 loans during the first quarter of 2009. It is an increase of 57 percent over the fourth quarter of 2008 and more than double the number of modifications in the first quarter of last year.”

Is 37,000 loans a lot? Is 37,000 loans a big number over a period of three months at a time when foreclosure filings are running at better than 300,000 per month nationwide? Is 37,000 loans impressive in the context of the 30.4 million loans held by Fannie Mae and Freddie Mac?

Notice that the headline discusses loan modifications, but modifications are not the only approach to help those facing foreclosure.

“Modifications represented 43 percent of all completed foreclosure prevention actions in the first quarter of 2009,” says FHFA. In other words, there were about 87,000 loan workouts in total for the quarter and most were not modifications.

Modifications Versus Workouts

“Modifications with more than 20 percent reduction in monthly payments rose from 2 percent in the first quarter of last year to 52 percent in the first quarter of this year.” Question: What about the other 68,000 distressed borrowers? How many of them saw no reduction in monthly costs? How many of them saw monthly costs actually rise, something which is entirely possible with repayment plans, a type of workout which differs from modifications.

The reason there are so few Fannie Mae and Freddie Mac foreclosure actions is very simple: The two companies are better run then anyone will admit, which means their takeover by the government is highly questionable. The average Fannie Mae or Freddie Mac borrower has a credit score of 725 and the typical loan has a loan-to-value ratio of 74 percent, meaning not a lot of loopy loans with toxic terms.

Few Bad Loans

As of March 31th, the percentage of Fannie Mae and Freddie Mac loans that were at least two payments past due (60 plus days delinquent) was 3.6 percent. This compares to 6.1 percent for VA loans, 10.2 percent for FHA loans and 9.2 percent for the industry average.

For all the yelling and screaming about Fannie Mae and Freddie Mac, the bottom-line reality is that their mortgage portfolios are sound and solid, a reality which contrasts with the quickie nationalization of the two companies in the summer of 2008.

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