WE’RE HEARING that Fannie Mae and Freddie Mac will be selling assets out of their mortgage investment portfolios this year.
Federal Housing Finance Agency acting director Edward DeMarco noted in a recent speech that the portfolios used to be dominated by their own MBS and performing loans.
“As those securities have paid down, and as the need to work through delinquent loans increased, the retained portfolios changed from being liquid to less liquid,” he said.
An Inspector General report shows Fannie’s investment portfolio has $386.8 billion in whole loans. And 60% of those whole loans are modified or delinquent. Freddie has $232 billion in whole loans and 50% are distressed loans.
“To address this issue and further ‘derisk’ the [GSEs’] portfolios in 2013, we are setting a target of selling 5% of the less liquid portion of the retained portfolios,” DeMarco said on March 4.
But it appears the FHFA hasn’t decided which illiquid assets to sell—nonperforming loans, modified loans or private-label securities.
“The 2013 Scorecard released on March 4 sets forth a goal for Fannie Mae and Freddie Mac to reduce their retained portfolios by selling 5% of their illiquid assets, which could include nonperforming loans, reperforming modified loans, or PLS,” according to Meg Burns, FHFA senior associate director for housing and regulatory policy.
Fannie and Freddie do not currently sell nonperforming loans.
The FHFA Office of Inspector General points out the modified and delinquent loans in portfolio are difficult to manage in terms of interest rate risk. “Although short-term interest rates are at historically low levels, the risk of a sharp increase in them cannot be discounted,” the IG warns.
The GSE regulator also recognizes that these distressed loans are likely to remain in the portfolios for an “extended period, perhaps until their maturity, unless they are sold at a reduction—perhaps a significant reduction—from their face amount,” the report says.
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Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.
