Category: Freddie Mac

The New York Times

Freddie Mac used a flawed analysis when it accepted $1.35 billion from Bank of America to settle claims that the bank misled it about loans purchased during the mortgage boom, according to an oversight report scheduled for release on Tuesday.

The faulty methodology significantly increased the probable losses in Freddie Mac’s portfolio of loans, according to the report, prepared by the inspector general of the Federal Housing Finance Agency, which oversees the company. Freddie Mac and Fannie Mae were taken over by the government in 2008 so additional losses would be shouldered by taxpayers.

The report also noted that the settlement with Bank of America in December was completed over the objections of a senior examiner at the agency. Freddie Mac officials did not want to jeopardize the company’s relationship with Bank of America, from which it continues to buy loans, the report concluded.

The agency official who questioned the loan review methodology contended that Freddie Mac’s analysis greatly underestimated the number of dubious loans bought from the Countrywide unit of Bank of America from 2005 to 2007. The deal between Freddie Mac and the bank resolved claims associated with 787,000 loans, some of which were repurchased by the bank, and cannot be rescinded.

“An effective mortgage repurchase process is critical in limiting the enterprises’, and ultimately, the taxpayers’ exposure to credit losses resulting from the financial crisis,” said Steve A. Linick, the inspector general who oversaw the report. “F.H.F.A. and Freddie Mac must do more to ensure that high-dollar settlements of repurchase claims are accurately estimated and in the best interests of taxpayers.”

When selling loans to Freddie Mac and Fannie Mae, Countrywide and other originators vouched that the mortgages met certain quality standards or characteristics, like accurately representing a borrower’s income or the appraised value of a property. These promises require mortgage originators to buy back at full value those loans that do not meet the standards.

Companies often review loans for possible buybacks after experiencing large numbers of defaults. Not all defaults, of course, occur after misrepresentations.

The inspector general’s report does not specify how much additional money Freddie Mac could have received from Bank of America had it used a more effective analysis. But the senior examiner who questioned the deal told the inspector general’s staff that Freddie Mac’s faulty process could cost the company “billions of dollars of losses.”

A Freddie Mac spokesman, Douglas Duvall, declined to comment, but said that it continued to believe its deal with Bank of America was “commercially reasonable based upon our internal evaluation and judgments.”

Because of the faulty methodology, Freddie Mac failed to review 100,000 loans from 2006 for possible irregularities, the report said. As of June 2010, some 93 percent of foreclosed mortgages from 2005 and 2006 had not been analyzed, eliminating “any chance to put ineligible loans back to the lenders for those years.”

The report also noted that 300,000 foreclosed loans originated from 2004 to 2007 and owned by Freddie Mac were not reviewed for possible claims. These loans have a combined unpaid principal balance exceeding $50 billion, the report said.

Freddie Mac’s review process was faulty, according to the report, because it did not change its analysis to account for new types of mortgages issued during the housing boom. These included mortgages that had rock-bottom interest rates initially — known as teaser rates — lasting three years to five years before adjusting upward.

The loan review analysis used by Freddie Mac focused on mortgages that went bad within two years, because historically that had been the period during which defaults related to possible loan improprieties were most likely to occur. Reasoning that the new types of mortgages with artificially low initial rates would probably lengthen the period before large numbers of defaults occurred, the senior agency examiner urged Freddie Mac’s management in June 2010 to review loans that experienced problems well after two years, the report said.

The company declined to change its methodology. At a July 2010 meeting of Freddie Mac’s credit risk subcommittee, a company manager told housing finance agency staff that loan repurchase reviews were “not the highest and best use of his limited resources,” the report said. Freddie Mac officials also disagreed with the concerns expressed by the senior examiner at the agency, the report said, “partly because they believed a change to a more aggressive approach to repurchase claims would adversely affect Freddie Mac’s business relationships with Bank of America and other large loan sellers.”

A few months later, the deal was made with Bank of America. As they considered the merits of the deal, Freddie Mac’s directors were told that it would improve the company’s “ongoing relationship with Bank of America.”

The $1.35 billion buyback deal was done despite questions about its review process from the company’s internal auditors, the inspector general’s report said.

Randy Neugebauer, a Texas Republican who leads the oversight and investigations subcommittee of the House Financial Services Committee, said: “After reading the I.G.’s report, I am concerned that F.H.F.A. is not exercising independent judgment. The American taxpayers deserve better than business as usual, especially when they have already spent $160 billion to keep Freddie and Fannie afloat.”

The report also noted that superiors at the agency declined to help the senior examiner prod Freddie Mac to expand its review process. One of those superiors, a senior manager who was not identified, told the inspector general that he had not opened the attachment to an e-mail from the senior examiner outlining problems with the company’s methodology.

Responding to the inspector general’s report, the agency said it continued to believe that the Bank of America settlement was “appropriate and reasonable.” But the agency agreed that it lacked policies and procedures where “an examiner has a safety and soundness concern” but encountered resistance in pursuing it. The agency said it would soon issue such policies.

The Federal Housing Finance Agency has suspended all future mortgage repurchase settlements affected by the methodology underlying Freddie Mac’s loan review process.

Last June, Freddie Mac’s internal auditors advised the company that its controls regarding the loan review process were “unsatisfactory” and said that “opportunities for increasing the repurchase benefit justify an expansion of our sampling approach” after the second year of the loan, the report said. A company official told the Freddie Mac directors that a more in-depth loan review could generate as much as $1 billion in additional revenue.

Two months ago, Freddie Mac began a more rigorous review of foreclosed, interest-only loans. In late August, it told the housing finance agency staff that the study showed 15 percent of the sampled loans — a higher figure than that in the Bank of America settlement — contained defects that might result in buybacks among originators.

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Realty Biz News

Analysts believe that the government may need to charge higher fees to lenders and increase mortgage insurance from borrowers in order to guarantee loans when they go ahead and overhaul Fannie Mae and Freddie Mac – a move that could lead to increased borrowing costs.

The government is trying to boost competitiveness within mortgage markets, and at the same time reduce their expenses over the next ten years by $28 billion.

Currently, government-sponsored enterprises (GSEs) purchase mortgages before packaging them into securities which are sold on to investors. As part of the transaction, GSEs ask for a “guarantee fee”, and this is set to be increased next year.

Such an increase, says the Wall Street Journal, would result in borrowers seeing a modest increase in their monthly repayments. If guarantee fees are increased by just 0.1%, as has been proposed by the government, a $220,000 mortgage’s monthly payments would rise by about 15%.

In order to reduce the risk to taxpayers, Fannie Mae and Freddie Mac would likely ask borrowers to take out additional mortgage insurance, as GSEs have been federally-owned since 2008.

However, any changes would have to be introduced gradually, says Edward DeMarco of the Federal Housing Finance Agency, in order to avoid causing any more harm to fragile housing markets.

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U.S. residential mortgage lending volume will struggle to reach the mid-$800 billion range in 2012, according to market research, as the recent boom in refinancings dries up at Fannie Mae and Freddie Mac.

Furthermore, the report from iEmergent, paints a picture of a housing market floating in its own Twilight Zone — a reality where "the distribution and location of local lending opportunities will continue to re-shape and reset the long-term home financing prospects and projections for most U.S. communities."

This year, roughly 838,400 Fannie and Freddie loans received a refinancing, according to data released by the Federal Housing Finance Agency.

In 2012, this market share is likely to dry up, according to the forecasting and advisory firm (click chart below).

Even more unfortunate, the other side of the mortgage origination — new home sales, is unable to fill the gap in business.

"Home affordability indicators have never been better, yet total buyer demand shows no signs of life," the iEmergent report states.

The reason for this forecast, according to the analysis, is that housing is in its own dimension of economic recession.

The nation’s economy may be recovering, but in terms of housing, lack of jobs, lower income and continued high levels of negative equity, America’s property ladder is missing more than a few rungs.

"The middle-class buyers on whom future home buying demand depends will continue to struggle to re-build their cash reserves, pay down their debts, and grope their way out of the shadows," the report states. "Their recovery will be very slow."

But there is a silver lining to the forecast that Fannie Mae, Freddie Mac will see higher purchases, yet very low refinance volume in 2012 (click chart below).

In the total originations market, outside of the government sponsored enterprises, iEmergent projections indicate purchase home loan volume might actually rise 0.3%. However, through 2012, mortgage originations as a whole will see less business.

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Standard & Poor’s lowered the ratings on Fannie Mae and Freddie Mac Monday after downgrading the U.S. government’s sovereign debt rating to double-A-plus late last week.

Analysts also lowered the ratings on 10 of the 12 Federal Home Loan Banks and on senior debt held by FHLB banks as well. All went from triple-A to double-A-plus. The outlook on all affected institutions is negative.

"The downgrades of Fannie Mae and Freddie Mac reflect their direct reliance on the U.S. government," S&P said in a statement. "Fannie Mae and Freddie Mac were placed into conservatorship in September 2008 and their ability to fund operations relies heavily on the U.S. government. In addition to the implicit support we factor into our ratings, the U.S. Treasury has demonstrated explicit support by providing these entities with capital quarterly, as necessary."

S&P also lowered ratings on the senior debt issued by the Federal Farm Credit Banks to double-A-plus, although ratings on the individual farm member banks are not affected.

The Chicago and Seattle Federal Home Loan Banks weren’t downgraded because S&P already rated them at double-A due to lower stand-alone credit profiles.

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Freddie Mac reported $27 million in expenses for maintaining and reselling houses repossessed through foreclosure in the second quarter, a mere fraction of the $257 million the previous period.

REO expenses include maintaining a foreclosed property as it sits vacant and adjustments in the valuation of the property. Freddie was able to make a 90% reduction from the first quarter, because the actual value of the properties increased. In comparison, the peak REO expenses for Freddie came in the third quarter of last year when it reported $337 million in expenses.

"The decrease in REO operations expense was primarily driven by an improvement in both REO holding period write-downs and disposition losses as REO fair values stabilized during the second quarter," Freddie said in its second-quarter earnings report.

A Freddie Mac spokesman clarified what happened in an interview with HousingWire Tuesday.

"What’s behind it was a dramatic change driven by improvements in the fair market value of the properties," the spokesman said. "We didn’t have to write down as much and we saw better returns on the sale."

Home price fluctuation has tremendous effects on Fannie Mae and Freddie Mac portfolios. Recent home price indices showed gains in the recent spring and summer months, but analysts also warned of possible downturns ahead again. Freddie could not comment on the future outlook of its valuations.

Freddie reported a return to losses in the second quarter after squeezing out a profit earlier in the year. Since entering conservatorship in the fall of 2008, Freddie took $66.2 billion in bailout from the Treasury Department and paid back $13.2 billion.

But work is being done to pare down the REO inventory. At the end of the second quarter, Freddie held more than 60,600 previously foreclosed, or REO, properties, a 16% decline from Dec. 31. It repossessed nearly 25,000 properties during the three months ended June 30 and resold nearly 30,000 more.

However, Freddie Mac pointed out in the same financial filing a lingering delay in the housing recovery: foreclosure delays.

Recent issues in the mortgage servicing industry, which include forged affidavits and improper documentation, held up the foreclosure process late last year, but local regulations and rules are also hurting Freddie’s ability to rid itself of bad assets.

Roughly 33% of the houses repossessed by Freddie Mac through foreclosure are not marketable because of local rules and regulations.

Freddie said an increasing portion of its incoming REO is in areas where the borrower is given an extended period after repossession to reclaim the property. Also, Freddie kept a tenant in more REO properties recently under an existing lease or has only just started the eviction process.

Therefore, Freddie could not market roughly one-third of its REO properties – roughly 20,000 of the current inventory – because of these restrictions. That’s up from 28% at the end of 2010.

As a result, the amount of time Freddie has to hold onto these properties was extended.

It took a Freddie Mac servicer nearly 500 days on average to complete a foreclosure from the last scheduled payment made by the borrower, up from 451 days in 2010.

Freddie held the REO sold in the first six months of 2011 for a period of 193 days after repossession, excluding periods where the borrower could have reclaimed the house. That’s up from 151 days in the first half of 2010.

"We expect the pace of our REO acquisitions will continue to be affected by delays in the foreclosure process in the remainder of 2011," Freddie said.

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Freddie Mac posted details about its new Servicing Success Program Monday as the government-sponsored enterprise prepares for the Aug. 1 launch of the initiative.

Through the program, Freddie hopes to offer servicers a more "robust and balanced approach" to setting standards for what the GSE expects from its servicing clients in the field.

The program will not only set performance bars, but will provide a stream of feedback on servicer strengths and weaknesses. It also will allow for open dialogue to give servicers the information they need to improve the performance of their portfolios.

Freddie’s Servicing Success Program directly evaluates each servicer’s performance when it comes to investor reporting, remitting and default management.

Through the program, Freddie will rank servicers monthly based on points they earned when servicing loans the previous month. The August rankings will be available on each servicer’s performance profile Web page starting Oct. 7. This ranking system will replace Freddie’s traditional performance-tiered rankings.

"Today’s announcement marks the beginning of a significant advance in the scope and sophistication of servicer performance management," said Tracy Mooney, senior vice president of single-family servicing and REO at Freddie Mac. "The robust, balanced approach we are launching in 2011 underscores Freddie Mac’s commitment to invest in the future of U.S. homeownership by strengthening servicing practices and enabling servicers to more effectively preserve homeownership."

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RIS Media

The percentage of seriously delinquent mortgages—those that are 90 days past due or in foreclosure—held by Fannie Mae and Freddie Mac have fallen more than a point in the last year.

The decline in GSE delinquency rates is one more sign that delinquencies have been steadily abating over the past 12 to 18 months.

Fannie Mae reported that the serious delinquency rate decreased to 4.14% in May, down from 4.19% in April. This is down from 5.15% in May of 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Freddie Mac reported that the Single-Family serious delinquency rate decreased to 3.53% in May from 3.57%in April. This is down from 4.06% in May 2010. Freddie’s serious delinquency rate peaked in February 2010 at 4.20%.

The Mortgage Bankers Association and private data firms like CoreLogic and LPS also have reported a decline in delinquencies. LPS reported last week that the May delinquency rate had fallen to 7.9 percent, an 18.3 percent decline from May 2010.

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Freddie Mac settled with bankrupt mortgage lender Taylor, Bean & Whitaker but will see only a fraction of what it sought, according to a Securities and Exchange Commission filing this week.

TBW, once the 12th largest mortgage lender in the U.S., originated, serviced and sold pools of mortgages to Freddie Mac. It relied on financing vehicles from Colonial Bank and Ocala Funding.

But in 2002, then TBW Chairman Lee Farkas organized a scheme to defraud investors, regulators and Freddie by covering up holes in its financing for the loans.

To do this, Farkas and a group of six other co-conspirators at Colonial and Ocala sold phantom mortgages that were either packed into other securities, already foreclosed on or didn’t exist. TBW, Colonial and Ocala all eventually closed in 2009. Farkas faces a possible life sentence after being convicted in April.

According to the SEC filing, the proposed settlement amounts to roughly $1 billion but would only pay out $45 million to Freddie.

"This estimate is based on the plan of liquidation and disclosure statement filed with the court by TBW, which indicates that general unsecured creditors are likely to receive a distribution of 3.3 to 4.4 cents on the dollar," according to the filing.

Freddie did say it would be entitled to roughly $203 million on deposit in certain TBW bank accounts relating to its mortgages. It already received $150 million of it from the Federal Deposit Insurance Corp. as part of the Colonial Bank failure.

As part of the settlement, Freddie will also be able to sell TBW mortgage servicing rights, subject to a $185 million minimum net sales price. Some of the proceeds will go to other parties with interests in the MSRs.

But the settlement also requires Freddie to pay $61 million to TBW creditors to satisfy their "potential claims" against the government-sponsored enterprise.

Freddie estimates its uncompensated loss exposure to TBW to be roughly $690 million, and the ultimate losses could exceed this amount. Most of the exposure stems from outstanding repurchase claims, which Freddie already adjusted for in its financial statements.

"If the settlement is approved by the court, we will recognize the difference between amounts we would pay to TBW and other creditors and the liability recorded on our balance sheet as a gain," Freddie said.

Freddie expects this gain to come in at less than $250 million.

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Freddie Mac (OTC: FMCC) released the results of its first quarter refinance analysis showing homeowners who refinance continue to strengthen their fiscal house:

• In the first quarter of 2011, 3-out-of-4 homeowners who refinanced their first-lien home mortgage either maintained the same loan amount or lowered their principal balance by paying-in additional money at the closing table. Fifty-four percent maintained the same loan amount—the highest share since 1985, when Freddie Mac began keeping records on refinancing patterns. In addition, 21 percent of refinancing homeowners reduced their principal balance.

• “Cash-out” borrowers—those that increased their loan balance by at least five percent—represented 25 percent of all refinance loans; the average cash-out share over the past 25 years was 62 percent.

• The net dollars of home equity converted to cash as part of a refinance, adjusted for inflation, was at the lowest level in 15 years (third quarter of 1996). In the first quarter, an estimated $6.0 billion in net home equity was cashed out during the refinance of conventional prime-credit home mortgages, down from $9.1 billion in the fourth quarter and substantially less than during the peak cash-out refinance volume of $83.7 billion during the second quarter of 2006.

• Among the refinanced loans in Freddie Mac’s analysis, the median appreciation of the collateral property was a negative six percent over the median prior loan life of five years. In comparison, the Freddie Mac House Price Index shows a 21 percent decline in its U.S. series between the end of 2005 and end of 2010. Thus, borrowers who refinanced in the first quarter owned homes that had held their value better than the average home, or may reflect value-enhancing improvements that owners had made to their homes during the intervening years.

• The median interest rate reduction for a 30-year fixed-rate mortgage was about 1.2 percentage points, or a savings of about 20 percent in interest costs. Over the first year of the refinance loan life, these borrowers will save over $1,800 in interest payments on a $200,000 loan.

“Consumers continue to reduce their debt, either by paying down or paying off their mortgage loan, or reducing the interest cost. Homeowners’ aggregate financial-obligation ratio, which peaked during the third quarter of 2007, had dropped by the end of 2010 to a level last seen more than a decade ago, “ says Frank Nothaft, Freddie Mac vice president and chief economist.

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Yahoo! News

Mortgage finance giant Freddie Mac (FMCC.OB) on Wednesday said it lost just short of a billion dollars last quarter, though it did not ask taxpayers for more aid as the loss stemmed from interest payments to the government.

The second-largest U.S. residential mortgage funds provider reported net loss attributable to common shareholders of $929 million in the first quarter, including a $1.6 billion payment to the government. Without that interest payment, Freddie Mac earned about $676 million in the first three months of the year.

That’s the first three month period since the second quarter of 2009 that the firm reported positive net income, excluding the interest payment, and stems from higher quality loans made in recent years.

The first-quarter loss, including the interest payment, represents about $0.29 per share.

Freddie Mac and its sister firm Fannie Mae (FNMA.OB) have taken more than $150 billion in taxpayer aid since they were seized by the government in late 2008.

Interest repayments to Treasury from the two firms have reduced their net taxpayer assistance to slightly more than $134 billion.

Freddie Mac said those interest payments would increasingly drive any need for future taxpayer assistance.

Asked if the government should rethink its requirement that it should have to pay 10 percent interest on its government aid, Freddie Mac chief financial officer Ross Kari told Reuters it is the cost of doing business.

"What we think doesn’t matter," Kari said. The firms are effectively controlled by the Federal Housing Finance Agency.

Then-U.S. Treasury Secretary Henry Paulson took control of Freddie Mac and Fannie Mae at the height of the financial crisis in September 2008 as losses mounted from mortgages gone bad.

The plan to put them into conservatorship was meant to be temporary, although it is likely to be years before a long-term replacement structure takes shape.

The two firms and the Federal Housing Administration back close to nine of ten new home loans now as private mortgage funding dried up in the wake of the financial crisis.

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