Thread: Freddie Will Ask For More U.S. Funds

Freddie Will Ask For More U.S. Funds


James B. Lockhart III regulates Fannie and Freddie. (Chris Kleponis - Bloomberg News)

By Zachary A. Goldfarb
Washington Post Staff Writer
Saturday, January 24, 2009; Page D01

Freddie Mac disclosed yesterday that it would ask for up to $35 billion in additional taxpayer dollars, eating up roughly half of the funds the government has pledged to keep the mortgage giant on firm financial footing.

The announcement was the latest sign that the takeover of Freddie Mac, and that of its sister company, Fannie Mae, were growing more costly than had been anticipated. Freddie Mac already has drawn on about $14 billion in taxpayer cash.

Also yesterday, District-based Fannie Mae, once a stalwart of the local business scene, started laying off several hundred employees in the area.

The layoffs reflect the shift in Fannie Mae's focus since it was taken over by the government in September. The firm, once geared toward mortgage bundling and trading activity -- which had been based in the District -- is moving toward foreclosure-prevention efforts, which are based in Dallas. Roughly as many employees are being hired there as are being laid off here.

McLean-based Freddie Mac also has started to transfer jobs into foreclosure-prevention areas, but that effort is having a minimal impact on the number of jobs available locally.

Mounting troubles in the financial and housing markets are causing increasing losses at Fannie Mae and Freddie Mac, just as they have for U.S. banks, and Fannie Mae has said it may also request taxpayer assistance.

Freddie Mac's disclosure comes after the original government outlays to bolster American International Group, Bank of America and Citigroup were deemed insufficient. The government has allocated more than $100 billion each for Fannie Mae and Freddie Mac, but some analysts have said they may need more.

Fannie Mae and Freddie Mac help provide liquidity to the mortgage markets by buying and guaranteeing loans and packaging them into securities that can be sold to investors. This activity helps free lenders to make more loans and keeps the mortgage machinery well-oiled.
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In recent months, their efforts have been supplanted by government plans to buy hundreds of billions of dollars in mortgages.

Default rates on the entire range of mortgages owned or backed by the companies -- from infamous subprime adjustable loans to old-fashioned 30-year fixed -- have been fast rising.

The rising default rates have already caused big losses at the companies.

Under the government's agreement with the companies, the Treasury Department is required to inject money in any quarter when the companies' liabilities exceed their assets. In November, Fannie Mae and Freddie Mac announced a combined $54 billion in losses for the months of July through September.

At Freddie Mac, those losses put the company's worth below zero, triggering the $14 billion government injection. Fannie Mae's financial cushion was reduced dramatically, though it didn't need any taxpayer dollars.

The economy only got worse the rest of the year, driving down the values of mortgages and mortgage securities owned by the firms. Both companies will announce earnings next month.

David R. Palombi, a Freddie Mac spokesman, said the company decided to announce that it would ask for more government money because "there has been considerable speculation about the potential size of the draw" on the government's fund.

"As we have been going through preliminary results we thought we would give an initial indication of the size of the draw," he said in a statement. He added that the figures were preliminary and may change.

When the Treasury seized Fannie Mae and Freddie Mac, it said it had pledged up to $100 billion to each, primarily to reassure investors who had been fleeing the companies.

"This number is unrelated to the Treasury's analysis of the current financial conditions," the Treasury said at the time, suggesting that there was no expectation that the government would spend this amount.

In a statement to The Post last year, James B. Lockhart III, the federal regulator in charge of Fannie Mae and Freddie Mac, said the backstop was "well above the worst-case stress test that was run" and three times as much as the amount of capital the companies have to hold by statute.

Yesterday, Lockhart, director of the Federal Housing Finance Agency, declined to elaborate. But people familiar with the matter said the worst case the government anticipated for Fannie Mae and Freddie Mac was tens of billions of dollars below the backstop of $100 billion per company.

People familiar with the matter said Freddie Mac's troubles were largely the result of the sharp economic downturn and also may have reflected the desire of top management to take losses as soon as possible.
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These people also said the company's troubles largely are not a result of government actions after its takeover.

Freddie Mac and Fannie Mae have both been told to modify thousands of mortgages to make them more affordable for borrowers who might lose their homes otherwise. The companies also said they would stop evicting or foreclosing on homeowners through the end of this month.

These efforts are not expected to cost the companies more than a few billion dollars.

Freddie Mac also is exploring whether to ask the government to consider whether to adjust the nature of its agreement with the government over capital infusions.

The agreement requires Freddie Mac to pay a 10 percent interest rate on money it receives from the government. If it draws $35 billion from the government, it will have received nearly $50 billion in taxpayer dollars, which would mean it would have to pay the government $5 billion annually.

Freddie Mac has only once made more than $5 billion in a year.

At Fannie Mae, the layoffs will be concentrated among employees working in technology, administration, communications and the company's single-family unit, which works to buy and bundle mortgages from lenders.

Fannie Mae is continuing to securitize mortgages, but its capacity to buy mortgage-related securities has largely been curbed. Various government agencies have become the main source of financing for home loans in recent months.

"Fannie Mae is taking steps to realign the company's organization, personnel and resources to focus on our most critical priorities, which include preventing foreclosures to help keep people in their homes and aiding in the recovery," company spokesman Brian Faith said in a statement.

"As part of this effort, the company is planning to increase staffing levels in some areas, such as in our Dallas operations where our foreclosure prevention and loss mitigation efforts are centralized, and reduce staffing levels in others to fully meet the company's primary objectives."

Overall, Faith said the total number of Fannie Mae employees should remain the same in 2009 as in 2008, at just over 5,500.


http://www.washingtonpost.com/wp-dyn/co ... c-business

We got an interesting letter from Fannie last week. We have a conventional mortgage (not FHA OR VA). We bought a fixer upper a little over a year ago and paid a whopping 27,000.00 for it. Today we got a letter saying our credit and mortgage have been evaluated and we qualify for a loan through FANNIE MAE for 270,000.00. Because the interest rate was about a full percentage less than our loan, and we thought with an extra 5k we could finish off our "A list" in renovations, we called them. They would NOT loan us money because we ONLY WANTED TO BORROW 30K. They said you had to borrow a minimum of 250k in order for them to use any of the federal bailout guarantees. In my neighborhood a 250k house is a bleeding mansion. It would be at least 4000sq ft with a swimming pool and horse barn. I thought these programs were for lower and middle class families.