OHFEO Corrects Rules to Fix RBC Anomaly

The Office of Federal Housing Enterprise Oversight has corrected its risk-based capital rules so that Fannie Mae and Freddie Mac are no longer rewarded for loans that go into foreclosure. Under current rules, the loss-severity equations result in profits, not losses, for the government-sponsored enterprises on foreclosed properties. OFHEO identified this anomaly a few years ago and issued a proposed rule last December to fix it. Fannie presented evidence showing that the company has realized gains on 20% of mortgages with loan-to-value ratios of 60% or less and on 6% of loans with private mortgage insurance in certain markets with declining house prices. But OFHEO said it was unlikely that those gains would offset the losses on the 80% of the loans with low LTV ratios and the 94% with private MI. Freddie Mac and the Mortgage Insurance Companies of America "commented in favor" of the changes to the RBC rules, OFHEO said.