Fannie, Freddie may need $215 billion more in aid

U.S. taxpayers could be on the hook for up to another $215 billion in aid to housing finance giants Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) through 2013, their regulator said on Thursday.

The companies, which were seized by the federal government in September 2008 to save them from collapse, will likely have total capital needs of between $221 billion and $363 billion through 2013, the Federal Housing Finance Agency estimated.

The estimate includes the $148 billion that the two companies, the largest providers of U.S. home loan funding, have already received in the form of preferred stock purchases by the U.S. Treasury. FHFA projections exceed expectations of analysts at Keefe, Bruyette & Woods, who in August predicted the total would reach "roughly $200 billion" by the end of 2010 before stabilizing.

Fannie Mae and Freddie Mac are at the center of debate as Congress sets to overhaul a U.S. mortgage finance system that contributed to the worst housing crisis since the 1930s. The two companies, whose programs fund the lion's share of all new home loans, are chartered by Congress but have operated as private, profit-making companies.

Under the existing system, the shareholders of Fannie and Freddie were rewarded during boom times as the companies grew under implicit U.S. support. But weaning the nation from government support will be a daunting task given the heavy reliance of borrowers on funding funneled through the two companies and Ginnie Mae, the government agency that packages bonds backed by government agencies such as the Federal Housing Administration and the Veterans Administration.

Fannie Mae and Freddie Mac package loans into bonds with their guarantees.

The projected amounts of capital needed by Fannie Mae and Freddie Mac from Treasury vary depending on changes in home prices, which in recent years have been the major driver of credit losses for the two companies, the FHFA said. The regulator said it wanted to give policy makers "useful snapshots" of the potential need for future taxpayer support.

The scenarios do not account for the companies' attempts to cut losses by demanding banks repurchase faulty loans that did not meet stated underwriting guidelines, an administration official said. Fannie Mae and Freddie Mac have seen partial success in getting banks to repurchase loans backed by the two companies' guarantee programs, and they may also seek the same of loans in private Wall Street-issued bonds they own. For analysis, see [nN2197588].

Net of dividends Fannie and Freddie have paid to the Treasury on its preferred stock holdings, the two companies to date have drawn $135 billion in taxpayer aid, the official said. Considering the FHFA's projections, the net cost to taxpayers after dividend payments through 2013 would be between $141 billion and $259 billion, the official added.

Cumulative capital needs for Freddie Mac, after dividends have been paid, would range from $40 billion to $67 billion, the FHFA said. For Fannie Mae, those needs are likely between $102 billion and $192 billion, partly due to the larger size of its business.

The FHFA's lower projection assumes home prices bottomed in the first quarter of 2009 and will rise by 5 percent through 2013. The "current baseline" scenario of Moody's Investors Service depicts small house price declines, while a worse outcome reflects a deeper recession because of restricted access to credit and high unemployment, FHFA said.

Losses for the two companies continue to be focused on loans guaranteed through the latter years of the housing boom. New business "is as good as it has ever been," the administration official said, noting improvements in underwriting and risk controls.

The FHFA's capital need projections "show that, in the most likely economic scenario, nearly 90 percent of the losses at Fannie Mae and Freddie Mac are already behind us," Jeffrey Goldstein, the Treasury's under secretary for domestic finance, said in a statement.

"Almost all of those losses are attributable to mortgages that were already on those businesses' books prior to the conservatorship," he said. "But that news should not distract us from the pressing need for reform so that taxpayers aren't put on the hook in the future."

Dividend payments on the preferred stock are making up larger portions of the capital needs as time passes, the FHFA said. Of the $73 billion to $215 billion in additional capital that may be needed, $67 billion to $91 billion represent dividend payments to the Treasury, it said.

[Source: By Al Yoon, Reuters, New York, 21Oct10]

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