Mortgage pools purchased as investments by Fannie Mae and Freddie Mac during the housing boom included more risky and poor-performing loans than those guaranteed by the government-backed firms, their regulator said.
So-called private-label securities bought by the two firms from 2001 through 2008 had a bigger share of mortgages with adjustable interest rates and more borrowers with credit scores below 660, two indicators of loans at higher risk of default, the Federal Housing Finance Agency said in a report today.
Mortgages in the pools also were more likely to exceed 80 percent a property’s value, which “contributed to the unusually poor performance of loans,” the FHFA said. About 10 percent of the loans were more than 90 days delinquent by the end of 2009 compared with 5 percent of guaranteed mortgages, it said.
The FHFA examined loans for single-family homes in the period leading to the collapse of the U.S. housing market and the government’s 2008 seizure of Fannie Mae and Freddie Mac to document differences between mortgages backed by the two firms and those financed without their support.
Fannie Mae and Freddie Mac, which own or guarantee more than half of the $11 trillion U.S. mortgage market, hold about $255 billion in private-label securities. The companies started investing in the pools in 2001, aiming to regain market share, capitalize on profit potential and meet federal mandates for lending to low-income borrowers.
The U.S. government seized Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, in September 2008 amid mortgage-investment losses that pushed the firms to the brink of collapse. They have been sustained under FHFA conservatorship since then by almost $150 billion in U.S. Treasury Department aid delivered under a promise of unlimited support.
The FHFA in July issued 64 subpoenas to firms that sold mortgage-backed securities to Fannie Mae and Freddie Mac, trying to determine whether misrepresentations or omissions might require issuers to repurchase the loans.
Edward DeMarco, FHFA’s acting director, is scheduled to testify Sep. 15 at a House Financial Services subcommittee hearing on the progress the two companies have made since being placed under conservatorship.
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