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January 7th, 2010

We Suspect Principal Reductions Are Reason Behind F&F’s Unlimited Funding



We’ve been keeping a close eye on the whole “Fannie and Freddie receive unlimited funding” thing since we first found out about it. As soon as we heard the news we knew there was more to Washington’s motive of providing the GSEs with unlimited funding than merely a way to calm the markets.

On Monday we updated our original post on the subject, adding the opinion of one former Treasury official (which coincided with ours) that the reason Fannie and Freddie were given the unlimited credit line was because in the near future their losses would add up to more than the $200 billion each were previously given.

The latest issue of National Mortgage News (NMN) features an article written by Brian Collins titled “GSEs May Get Role In Increasing Mods,” that further delves into a theory we’ve had, but never fully fleshed out, until now.

First ask yourself this, “Why would Fannie and Freddie need unlimited support?”

The two were each given a credit line of $200 billion by the Treasury (aka taxpayers), and according to figures published in NMN, Fannie had so far only utilized $51 billion, and Freddie $60 billion. At this rate, you could argue that it would be a long while before the two would even need more capital, if at all, in order to calm the markets.

Now ask yourself, “Who’s the main force behind the Home Affordable Modification Program (HAMP), and how well has it worked?”

Fannie and Freddie are the two main components that drive the modification program that has been ineffective at best. According to MakingHomeAffordable.gov:

Participation [in HAMP] is mandatory for servicers of loans owned or guaranteed by Fannie Mae or Freddie Mac (Government Sponsored Enterprises or GSEs). Participation in HAMP is voluntary for servicers of non-GSE loans.

Putting these two pieces of information together leads us, as well as other analysts, to believe that some serious principal reductions are in the cards for loans modified and sold to/held by Fannie and Freddie.

According to the latest Mortgage Metrics Report, loan modifications which have featured principal reductions have increased from about 3% to about 13% from the first to the third quarter, and are rising.

As mods which include principal reductions seem to promote some of the most successful outcomes, “It stands to reason that Fannie and Freddie are going to absorb more principal writedowns on loans they allow to be modified,” said HSH VP Keith Gumbinger. “The Treasury has now provided the necessary means to make that happen.”

Stay tuned for more on this subject.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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