Fannie and Freddie Face Upwards of $500 Million in Hurricane Losses

Combined, Fannie Mae and Freddie Mac stand to lose more than a half billion dollars from damage caused by hurricanes Katrina and Rita, and the total could be more than $800 million, demonstrating the importance of hazard and flood insurance in vulnerable areas.

Fannie Mae said in an SEC filing that the hurricanes would likely cost the company $250 million to $550 million on an after-tax basis.

Measured by on-balance sheet holdings, Fannie Mae is $91 billion larger than its chief GSE competitor, Freddie Mac.

Freddie Mac said its anticipated loss is up to $300 million. That loss is tied to its guarantee of principal and interest payments on participation certificates that are collateralized by mortgages in three of the hardest hit states: Alabama, Louisiana and Mississippi.

Less than 1% of Freddie's guaranteed portfolio was affected by hurricane-related damage. In the hardest hit areas of Louisiana just 0.25% of its guaranteed portfolio was affected.

The loss would be booked in the third quarter as a charge against earnings. "This represents most of the losses we anticipate from the hurricanes," said a company spokesman.

Freddie Mac recently loosened some of its underwriting guidelines to help lenders better serve homebuyers in disaster areas affected by Hurricanes Katrina and Rita.

Freddie told its seller/servicers that temporary income - including severance pay and unemployment assistance - can be used to qualify borrowers as long as their income "likely" will be restored to a level supporting "the long-term obligations" of a mortgage.

On a negotiated basis, Freddie also will allow for higher loan-to-value ratios. For Katrina victims, the changes only apply to mortgages with note rates on and after Aug. 30 through Oct. 3. For Rita victims, the eligible note dates are on and after Sept. 25 through Oct. 3.

SNAPSHOT: Current GSE Hurricane Exposure

Fannie's Estimated Loss $250-$550 MM

Freddie's Estimated Loss up to $300 MM

Source: Fannie Mae and Freddie Mac

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