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GSEs Work with More than 300 ‘High-Risk’ Counterparties: Report

As of the third quarter of 2011, more than 300 sellers and/or servicers (counterparties) were placed in the high-risk category by Fannie Mae and Freddie Mac, according to a ""report"":http://origin.www.fhfaoig.gov/Content/Files/AUD-2012-007.pdf from the ""FHFA Office of Inspector General (OIG)"":http://www.fhfaoig.gov/. In addition, the report stated the GSEs ended business relationships with more than 40 servicers/sellers on their high-risk watch lists since 2007.

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The counterparties placed in the ""high-risk"" category raised concern due to their financial health.

The report stated that the GSEs estimate a loss of up to $6.1 billion from failures involving only four servicers/lenders since 2008 and the remaining risk exposure is approximately $7.2 billion.

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Before deciding who to conduct business with, the GSEs assess the financial strength and operating capabilities of the lenders and servicers, such as minimum financial capacity standards, according to the report.

Even with the precautions, the report pointed out that there are always risks, such as worsening conditions due to changes in the market.

In order to decrease risks when working with a ""high-risk"" counterparty, the GSEs have taken certain corrective actions when they find certain deficiencies. One example the report gave involved an unnamed seller/servicer with an underperforming portfolio. The counterparty faced the risk of collapsing, and Fannie Mae responded by reducing its credit exposure to the counterparty and requiring additional collateral. The counterparty did not fail, and continues to work the GSE.

However, despite the number of risky counterparties identified, ""FHFA has not required the Enterprises to prepare contingency plans to avoid or mitigate the consequences of counterparty deterioration or failure,"" the report stated.

OIG made recommendations for FHFA to issue standards for comprehensive contingency plans.

""At a minimum, these standards should include quantitative assessment, event management (e.g. curtailing business with or transferring business from a seller/servicer or specifying reasonable timeframes for reducing risks), monitoring, and testing elements,"" OIG stated in the report.

About Author: Esther Cho

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