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Fannie and Freddie Take on Riskier Portfolios

Newer federal regulations in the wake of the financial crisis were designed to protect taxpayers from another trillion-dollar bailout. And while these regulations have so far kept the American economy from experiencing any serious aftershocks, things could get dodgy where Fannie Mae and Freddie Mac are concerned. According to a report issued Thursday by the Federal Housing Finance Agency Office of the Inspector General (FHFA), Fannie and Freddie are increasingly making riskier deals by buying more mortgages from smaller and non-bank lenders.

Traditionally, the enterprises bought most of their loans from the largest commercial banks and mortgage companies, but since 2011, FHFA has witnessed a shift away from large-client sales toward more sales from smaller lenders and nonbank mortgage companies. What makes this risky, the report stated, is that smaller lenders simply do not have the financial breadth of their larger counterparts, the latter of which can weather economic waves through a wider range of financial products.

In other words, smaller and nonbank lenders often have lower assets and fewer products making them money. Single-source financial companies in particular, such as dedicated mortgage lenders that only originate mortgage loans, are, therefore, at greater risk when inevitable upheavals occur in this sector of the market.

Another problem is that while large lenders are governed by strict and sweeping federal regulations, smaller lenders are not held to the same standards and not backed by federal financial support. The Federal Deposit Insurance Corporation, for example, insures deposits in commercial banks for at least $250,000. This is not true for non-commercial banks (such as credit unions) and non-bank lenders.

According to the FHFA, Fannie Mae recently reported that only five of the top 20 mortgage originators of 2006 remain active in the mortgage market today. Countrywide Financial, for example, was responsible for nearly a third of Fannie Mae’s mortgage purchases in the second quarter of 2007. When the crisis killed Countrywide, it was bought by Bank of America. An issue FHFA worries about is that during the past three years several large aggregators, including Bank of America, Wells Fargo, and CitiMortgage have stopped or drastically reduced purchasing mortgages originated by other lenders.

While Fannie and Freddie are taking steps to minimize the risks, FHFA is sounding the alarm with a suitable level of concern, particularly as it relates to regulations for smaller and non-bank lenders. “The enterprises could incur financial losses on mortgages purchased from such lenders if they do not comply with established underwriting guidelines,” the report concluded. FHFA did not offer an estimate of potential losses.

About Author: Scott Morgan

Scott Morgan is a multi-award-winning journalist and editor based out of Texas. During his 11 years as a newspaper journalist, he wrote more than 4,000 published pieces. He's been recognized for his work since 2001, and his creative writing continues to win acclaim from readers and fellow writers alike. He is also a creative writing teacher and the author of several books, from short fiction to written works about writing.
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