Friday, August 30, 2013

How Will Fannie Mae and Freddie Mac Account for Future Losses?

According to an article in the Chicago Tribune, a recent government report raises concerns about the ability for Fannie Mae and Freddie Mac to account for future losses.  The two large companies, which were seized by the government in 2008, have delayed write-offs of delinquent mortgages in order to save money in the short term.  However, experts worry that the two companies won’t be able to provide sufficient funds to the government down the road.
A lot of these details can seem confusing, but they could have a significant impact on housing market recovery.  In other words, if Fannie and Freddie don’t actually have the profits it looks like they have now, that could spell trouble for housing recovery across the country.  We’ll try to break down the important points about this report and explain how they could affect Illinois residents in the future.
Mortgage Write-Off Rules
According to the inspector general for the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, the companies have been “avoiding billions of dollars in potential long-term losses by delaying a requirement that they write off more of the delinquent mortgages they own or back.”
Over a year ago, Fannie and Freddie were supposed to change their accounting procedures to mirror those used by banks that write off delinquent mortgages.  However, they haven’t implemented that rule yet, and its implementation has actually been delayed until the beginning of 2015.  Experts say that three years is a shockingly long time to wait to implement this rule.
The new FHFA rule would require Fannie and Freddie to “write off losses on single-family home mortgages that are more than 180 days overdue.”  Right now, they don’t write off these mortgages until there’s a foreclosure.  Jon D. Greenlee, an FHFA official, indicated that “implementing the rule could potentially require them to charge off billions of additional dollars.”
Why does it matter?  In short, “an increase in write-offs could eat into the profits posted by the two companies as the housing market recovers.”  In turn, that profit shortage would “affect how much in dividends they could pay to the government on the bailout money.”  Recent news reports have shown Fannie Mae posting profits and paying billions to the U.S. government.  According to the FHFA, those kinds of profits and payments might be a result of limiting write-offs.
Senator Bob Corker, a Republican from Tennessee, indicated, “it’s possible that the situation at Fannie and Freddie isn’t quite as rosy as some have come to believe over recent months.”
Government Backing, and the Future of Fannie and Freddie
Commentators emphasize that, regardless of profits or losses, Fannie and Freddie are only able to generate profits because their work is backed by the government.  In other words, they make housing recovery tenuous no matter how they’re making money.  Indeed, Senator Corker explained that “we should all remember that these two entities wouldn’t generate one penny without the government guaranteeing their transactions, a reality that underscores the need to move to a stronger system of housing finance.”
Fannie Mae indicated that it has set aside $53.1 billion in loss reserves since the end of June, in anticipation of eventually implementing the new rule.  Regardless, President Obama and other lawmakers have questioned whether Fannie and Freddie should remain open for business or whether the housing finance system should undergo a complete overhaul, which would eliminate the companies.
In the meantime, it will be especially important for Fannie and Freddie to set aside enough funds to cover losses from mortgages that eventually will have to be written off.  If the companies can’t continue to use profits to pay the government, housing recovery could be threatened for families in Illinois and across the country.  If you have questions about how the housing market affects you and your family, or if you’re one of the many people who remain at risk of foreclosure, an experienced foreclosure defense lawyer can help.  Contact the attorneys at the Emerson Law Firm today.
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