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Ed DeMarco, the former chief regulator of Fannie Mae and Freddie Mac, warned that efforts under the Obama administration to expand access to credit could risk repeating mistakes that led up to the crisis.
March 13 -
Fannie Mae selected a chief internal auditor with an "inherent conflict of interest" and the mortgage giant's process for filling the position was faulty, according to a watchdog report to be released Wednesday.
March 11 -
Banks and mortgage lenders may have received too much relief from loan buybacks, putting taxpayers at greater risk for losses, according to a Federal Housing Finance Agency inspector general's report.
September 17
Profits at Fannie Mae and Freddie Mac will continue to shrink in the years ahead, raising concern that the government-sponsored enterprises may have to tap the Treasury Department for a bailout if the economy sputters, according to a new government watchdog report.
Legal settlements and other one-time events propped up the GSEs' earnings in recent years, but with those issues largely resolved, guarantee fees will be the firms' primary source of income going forward. But that income is "subject to uncertainty" as Fannie and Freddie are forced to reduce the size of their portfolios and their regulator, Federal Housing Finance Agency, considers lowering guarantee fees to spur lending, particularly to first-time homebuyers.
"As policy perspectives change, the enterprises' fees could be reduced in the future," the FHFA's inspector general said in a report released early Wednesday.
While the report's conclusions are not necessarily new, they could add a sense of urgency to the ongoing debate over GSE reform. The underlying message to lawmakers seems to be that they need to take action on housing finance reform before Fannie and Freddie's profits dwindle further.
The report, titled "The Continued Profitability of Fannie Mae and Freddie Mac Is Not Assured," is unusual in that it does not identify any waste, fraud or abuse, (typically the job of the inspector general) or make any recommendation to the FHFA.
That may be because the FHFA has a new inspector general, Laura Wertheimer, who was confirmed by the Senate in September. Last month, Wertheimer released an audit and evaluation plan that described how she will focus specifically on risks that could lead to financial losses at Fannie and Freddie. Wertheimer had been a partner at the law firm Wilmer Cutler Pickering Hale and Dorr, where she led numerous independent internal investigations of public companies for board committees.
The report makes a stab at explaining to Congress and taxpayers the market conditions that could result in losses to Fannie and Freddie in the near future and why the GSEs would need further draws on the Treasury. Its release comes at a time GSEs' profits are slowing dramatically after surging in the past two years. Fannie reported earnings of $1.3 billion in the fourth quarter, down from $6.5 billion a year earlier; Freddie earned $277 million, down from $8.6 billion a year earlier.
In the past two years, Fannie and Freddie have benefitted from improvements in the housing market and declines in their delinquent loans. The GSEs got a spike in earnings in 2013 and 2014 from the release of valuation allowances against deferred tax assets, settlements of disputed representation and warranty claims, and settlements of legal claims for non-agency mortgage-backed securities.
The IG found that non-recurring events accounted for $79 billion, or 60% of the GSEs' combined $132.6 billion in net income in 2013. In 2014, one-time items made up $1 billion, or 3.6% of their $28 billion in combined net income.
A big reason profits are headed south is that Fannie and Freddie are required in conservatorship to reduce the size of their retained portfolios by 15% a year. The retained portfolios have been the largest source of their earnings in the past, the report said.
In addition, the GSEs pay most of their profits to the Treasury in a quarterly dividend, and are also prevented from accumulating any financial cushion against future losses. Compounding those problems is that they are relying more on income from loan guarantee fees even as the FHFA is considering reducing guarantee fees.
The report did not provide any new figures for a possible Treasury bailout.
Instead it relied on stress test results released by the FHFA early last year that said Fannie and Freddie could pay combined dividends of $54 billion in the best-case scenario or require an additional draw from Treasury of either $84.4 billion or $190 billion under a worst-case scenario, depending on the treatment of deferred tax assets through the end of the fourth quarter of 2015.
