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No New Loan Products or Interest Rate Initiatives for GSEs: FHFA

The federal supervisor charged with overseeing ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com said Tuesday that the two mortgage financiers will not be allowed to introduce new loan products into the market or take on additional[IMAGE]

responsibilities to lower interest rates once the Federal Reserve's mortgage purchase program expires next month.

The ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA), created to oversee the GSEs since the government essentially nationalized the two companies a year and a half ago, also said it plans to reduce Fannie Mae and Freddie Mac’s mortgage portfolios. The companies will not be “substantial buyers or sellers of mortgages,” going forward, FHFA Acting Director Edward DeMarco said in a ""letter to lawmakers"":http://www.fhfa.gov/webfiles/15393/Conservatorhsip%20Letter%202%202%2010.pdf.

""In view of the critical and substantial resource requirements of conserving assets and restoring financial health, combined with a recognition that the enterprises operate today only with the support of taxpayers, I believe the enterprises should concentrate on their existing core business, including minimizing credit losses,"" DeMarco wrote.

Since the federal government took over, Fannie Mae has realized losses of $111 billion, and Freddie Mac has realized losses of $63 billion. These losses have exhausted the value of each company's shareholder equity and resulted in considerable draws from Treasury, DeMarco said.

To date, Fannie Mae has taken $59.9 billion from its credit line with the Treasury, and Freddie Mac has drawn $50.7 billion. DeMarco called “these calls on taxpayer funds…troubling to all of us.”

DeMarco added, “Conserving the assets of the enterprises requires, first and foremost, minimizing their credit losses from delinquent mortgages. This is and will remain the central goal of FHFA and the enterprises.”

FHFA says it will continue to ensure the GSEs look to foreclosure alternatives, starting with loan modifications, to minimize credit losses.


“I have communicated to each enterprise the need for rigorous analytics in considering different forms of loss mitigation to ensure credit losses are being minimized,” DeMarco wrote. “Such analysis will also guide the enterprises' participation in any potential new administration efforts regarding foreclosure prevention. And where there is no available, lower-cost alternative to foreclosure…my expectation is that the enterprises will move to foreclose expeditiously.”

As nearly all other non-governmental participants in housing finance abandoned the market, the GSEs have ensured that credit continues to flow to housing, DeMarco said. As evidence of this, the two companies' share in financing or guaranteeing new single-family mortgage production rose from 54 percent in 2006 to 73 percent in 2008 and 78 percent as of September 2009.

Although, the Treasury lifted the mandate for Fannie Mae and Freddie Mac to shrink their portfolios in December, DeMarco says the FHFA remains committed to reducing the companies’ holdings.

“Given the size of the enterprises' current outstanding retained portfolios, and the potential volume of delinquent mortgages to be purchased out of guaranteed mortgage-backed security pools, it is my expectation that any net additions to their retained mortgage portfolios would be related to this activity,” DeMarco explained.

He added that he expects private parties will begin to invest in new mortgage-backed securities from the GSEs as the Federal Reserve withdraws its purchase activity â€" a $1.25 trillion program initiated by the Fed early last year to drive down mortgage interest rates and keep them low to stimulate purchase and refinance activity.

DeMarco also defended his agency’s approval of multimillion-dollar compensation packages for top executives at the two companies â€" up to $6 million a year for each CEO. He stressed that the directors and senior executives tied to the financial collapse of Fannie Mae and Freddie Mac are no longer with the companies, and assured lawmakers that the staff currently in place is “essential to the enterprises fulfilling the important goals of the conservatorships.

""As conservator, I believe it is critical to protect the taxpayer interests in the enterprises by ensuring that each company has experienced, qualified people managing the day-to-day business operations,” DeMarco said.

DeMarco acknowledged in the letter that the “enterprises' operating in conservatorship cannot be a long-term solution,” and said they have “an uncertain future that will be the source of much public debate.”