Fannie, Freddie Warn on More Losses By Nick Timiraos The Wall Street Journal 11-12-2009

Fannie, Freddie Warn on More Losses
By Nick Timiraos
The Wall Street Journal
November 12, 2009

Fannie Mae and Freddie Mac, already reeling in red ink, are warning they could face additional losses from the weakening condition of mortgage-insurance companies.

Fannie and Freddie together have required capital injections from the Treasury of $112 billion since the government took them over through conservatorship last year. Their need for government support would have been greater without collecting on claims from mortgage-insurance companies. Fannie and Freddie have received payouts of $2.3 billion and $658 million, respectively, from mortgage insurers through September this year.

But as conditions for mortgage insurers deteriorate, Fannie and Freddie have warned that their claims against the insurers may not be paid in full. Fannie set aside $1 billion in loss reserves to cover the possibility that mortgage-insurance companies won't be able to pay full claims, the company said in a Securities and Exchange Commission filing.

Freddie hasn't set aside reserves but warned in an SEC filing that "several" of its insurers are "at risk of falling out of compliance with regulatory capital requirements, which may result in regulatory actions that could threaten our ability to receive future claims payments, and negatively impact our access to mortgage insurance for high [loan-to-value] loans."

Ever since the mortgage crisis erupted two years ago, there have been concerns about the ability of mortgage-insurance companies to pay claims on all policies. In recent weeks, the concerns have taken on added significance as mortgage defaults continue to accelerate far beyond the subprime market into the broader prime market.

Last month, Standard & Poor's Ratings Services downgraded Mortgage Guaranty Insurance Corp., a unit of MGIC Investment Corp., the largest mortgage insurer for both Fannie and Freddie, and placed seven other mortgage-insurance companies on watch for downgrade. S&P said its move reflects "our view that macroeconomic conditions may have become more difficult for the mortgage insurers." The credit rater said it initially expected losses for the insurers to begin to narrow later this year. Instead, recent financial results indicate "mortgage insurers are experiencing a sharper and more rapid transition of delinquencies."

Fannie Mae has about $109.5 billion of mortgage-insurance coverage in force, which represents 4% of all single-family home loans it owns or guarantees. Freddie Mac had $63.4 billion in mortgage insurance and $12.2 billion in bond insurance.

Private mortgage insurance is required for any home loan with less than a 20% down payment, and the policies typically cover 12% to 35% of losses in the event of a default, according to HSH Associates, a financial publisher. Mortgage insurers have been forced to pay up as loan defaults escalate.

As mortgage insurers scale back coverage, Fannie and Freddie have had to reduce the amount of loans they purchase or guarantee with loan-to-value ratios that exceed 80%. At Fannie, those loans accounted for 10% of loan-purchase volume for the first nine months of the year, down from 22% last year. Fannie last month announced a plan to partially self-insure high loan-to-value loans.

The reduction in private insurance coverage has contributed to the rise in the volume of loans backed by the Federal Housing Administration, a government mortgage insurer that backs loans with as little as 3.5% down payments. It could be required to ask for a federal subsidy for the first time in its 75-year history if the housing market deteriorates further.

Separately, Fannie and Freddie could be forced to post losses on loans if the sellers aren't in business anymore. Freddie Mac said last week that its potential exposure to loans from Taylor, Bean & Whitaker Mortgage Corp., a mortgage lender that filed for bankruptcy-court protection in August, stood at about $500 million.

Fannie and Freddie also said they have filed claims in bankruptcy court against Lehman Brothers Holdings Inc. of $8.9 billion and $2.1 billion, respectively.