Freddie, Fannie Take on Big Loans, Risk
Freddie Mac (FRE) has entered the market for jumbo loans, or loans of more than $417,000. That could be good news for some borrowers, but also means U.S. taxpayers are taking on additional risk.
Freddie announced last week that it expects to finance between $10 billion and $15 billion of jumbo loans this year. Some borrowers won't even need the 20% down payment -- the mortgages can be used to finance up to 90% of a property's value.
The same day, Fannie Mae (FNM) said it had been buying jumbo loans since the beginning of the month.
In January, the Economic Stimulus Act temporarily raised government sponsored enterprises (GSEs) loan limits from $417,000 to 125% of the area median home prices, allowing Fannie Mae and Freddie Mac to back loans of more than $700,000 in the most expensive areas.At first, the Office of Federal Housing Enterprise Oversight had balked. "It's going to lessen [Fannie and Freddie's] ability to meet their affordable housing goals," OFHEO Director James B. Lockhart told the Senate Banking, Housing and Urban Affairs Committee in a February hearing. "And, you know, a jumbo mortgage takes three times as much capital as their normal mortgage. So that's a concern to us." But just over a month later, OFHEO lowered the GSEs' capital reserve requirements from 3.25% to 3.0%, freeing up money for the GSEs to buy, among other things, jumbo loans. In exchange, the groups agreed to raise more capital to buy, among other things, jumbo loans. By all accounts, GSEs were already awash in risk. Fannie and Freddie both lost billions last year. Last week's OFHEO report to Congress is littered with references to the GSEs' high and increasing credit risk. The lowered capital reserve requirement also increased risk: It had originally been put in place in 2004 to reduce operational risk after accounting scandals and was lifted as credit risk exploded. Just how much more risk are the already risk-ridden GSEs -- and thus the taxpayers -- taking on? Apparently, no one's figured out how to measure it, but "a lot" is an excellent bet. In the first place, regulators may know Fannie and Freddie are in a risky business, but, even without jumbo loans, they don't seem to have much of an idea of how risky their portfolios are.
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