GAO Raises Concerns on GSE Modification Programs

A congressional watchdog agency says loan modification programs Fannie Mae and Freddie Mac are implementing involve "additional risks and costs" for the GSEs and could make it harder for the government to move them out of their conservatorships. "Investors might be unwilling to invest capital in reconstituted enterprises unless the Treasury assumes responsibility for losses incurred during their conservatorship," the General Accountability Office says in a report on the future of the government sponsored enterprises. Under the modification programs, Fannie and Freddie could provide up to $25 billion in incentives for borrowers and servicers. The GSEs also incur additional expenses and studies show 40% of modified loans could become delinquent again. The Federal Housing Finance Agency contends the modifications, refinancings and short sales will help stabilize the housing market and save the GSEs many billions of dollars. "While FFHA's positions are plausible, it is too early to reach any conclusion about the effects that the initiatives will have on the enterprises' financial condition," GAO says.