Fannie & Freddie Are Feeling the Credit Crunch

Even though Fannie Mae and Freddie Mac invest mostly in conventional "A" credit mortgages, they, too, are beginning to feel the heat of the subprime crisis, a fact not lost on their regulator.

In a recent interview, Office of Federal Housing Enterprise Oversight director James Lockhart III noted that the fair value measure of Fannie's capital is down by almost $9 billion this year, or 20%. (Fair value is determined by marking assets, liabilities and derivatives to current market values.) Both government-sponsored enterprises are facing rising mortgage delinquencies and are experiencing larger credit losses, said Mr. Lockhart. Fannie executives recently told investors and Wall Street analysts that its credit losses will double (at least) to eight basis points next year, from four basis points for the first nine months of 2007. That figure could go as high as 10 bps, Fannie executives explained in a recent conference call. (Anticipating trouble ahead, Fannie is increasing its loan loss provisions.)

"Obviously they are showing some strains in this market," said Mr. Lockhart. "The good news is that they can and are continuing to support the market through their securitizations." (His comments were made before Freddie issued its third-quarter results.)

The GSEs are issuing $100 billion in mortgage-backed securities a month. With the dramatic contraction in private-label MBS issuance, Fannie and Freddie have seen their market share jump dramatically this year.

"They almost are the mortgage market at his point," he said.

However, the OFHEO director is not receptive to proposals that would allow the two to enter the jumbo mortgage market or relax the dollar ceiling on their on-balance-sheet portfolios.

Federal Reserve Board chairman Ben Bernanke recently suggested to Congress that the two GSEs could play a role in securitizing jumbo mortgages.

Director Lockhart contends Fannie and Freddie should be focused on rescuing subprime borrowers as opposed to developing a new suite of products to serve the jumbo market (loans larger than $417,000).

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