Fannie Mae and Freddie Mac, the government-sponsored entities that got more than $154 billion in U.S. aid, may return to profitability in 2011, according to Graham Fisher & Co. Managing Director Joshua H. Rosner.
“They’ll probably be profitable by the end of the year,” Rosner said today in New York during a Bloomberg Link conference on insurance portfolio strategies. That may reduce political pressure for a complete overhaul and lead lawmakers to “just tidy up the system,” said Rosner, who took part on a panel discussing the future of the U.S. housing system, with an emphasis on Fannie Mae and Freddie Mac.
Since the U.S. put the companies in conservatorship in 2008, they have drawn Treasury Department aid to remain solvent. Congress and the Obama administration are examining plans for winding down the firms and building a new system for financing housing debt.
Joseph J. Murin, chairman of Collingwood Group LLC, a Washington-based consultant, said the government-sponsored entities have value and shouldn’t be eliminated without careful thought.
“Why would we throw the baby out with the bathwater?” Murin said. “They have structure that can be used as an industry resource.”
Murin is former president and chief executive officer of Ginnie Mae, the company that securitizes home loans guaranteed by the Federal Housing Administration, U.S. Department of Agriculture, and Veterans Administration.
$759 Billion Industry
Fannie Mae and Freddie Mac were created to encourage homeownership by making it easier for people to get loans. The firms own or guarantee more than half of all U.S. mortgage debt, most of which they pool and sell on the secondary market.
The future of the $759 billion mortgage-insurance industry also is at stake as policy makers redesign the housing system. The industry has been nurtured in the past decade by Fannie Mae and Freddie Mac rules that require lenders to buy insurance for mortgages that have down payments of less than 20 percent.
The mortgage-insurance industry “obviously struggled immensely through the crisis,” said Thomas Abruzzo, managing director of the North American Financial Institutions Group at Fitch Ratings. The industry’s entire business model must be revisited, he said.
‘Risk of Default’
There’s no evidence that mortgage insurance makes low-down- payment loans any less risky, Rosner said, noting that insurers often refuse to pay claims.
“The mortgage insurers have demonstrated, in my mind, that they don’t reduce the risk of default,” Rosner said. “When pushed to make good on claims, they’re probably not insurance companies as much as they are rescission companies.”
Mortgage insurers, which pay lenders after sales of foreclosed homes fail to recover costs, reported losses during the past three years as unemployment rates higher than 9 percent depressed the housing market. PMI Group Inc., MGIC Investment Corp. and Radian Group Inc. all raised capital last year through bond or stock sales to cushion against losses.
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