Fannie Mae and Freddie Mac have been selling their marketable MBS out of their investment portfolios over the past three years while accumulating whole loans, including distressed loans, according to a new report by the Federal Housing Finance Agency Office of Inspector General.
The OIG report released Monday afternoon points out that these modified and delinquent loans are illiquid and more difficult to manage in terms of interest rate risk.
The GSEs have reduced the size of their
Fannie’s portfolio includes $386.8 billion in whole loans as of yearend 2012, up 38% from 2009. Freddie has $232.1 billion in whole loans, up 67% from three years ago.
The report notes that 60% of Fannie’s whole loans are modified or delinquent and 50% of Freddie’s loans are distressed as of June 30, 2012.
The GSE regulator 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.
As portfolio investments, these holdings are financed through short-term debt. “Although short-term interest rates are at historically low levels, the risk of a sharp increase in them cannot be discounted,” the IG warns.
Meanwhile, the GSE regulator is not satisfied with the models Fannie and Freddie are using to hedge prepayment speeds and interest rate risk on the distressed whole loans.
“Over the long term, FHFA says, the [GSEs] must develop improved models that better reflect the risks in mortgage portfolios that contain relatively higher levels of distressed assets,” the OIG report says.
