Extra, Extra, Read All About It: GSEs Using Capital Wisely

A story at Bloomberg Tuesday takes a populist tack on a story we’ve covered pretty extensively here at Housing Wire for the past few months: that both Fannie Mae (FNM) and Freddie Mac (FRE) have yet to really make a huge dent in the new jumbo-conforming space that Congress let them into earlier this year. “Instead of using powers granted by Congress to buy jumbo loans for the first time, Freddie Mac and Fannie Mae are purchasing their own mortgage-backed securities, helping reduce losses, company filings show,” writes Bloomberg’s Dawn Kopecki, characterizing the GSEs as “slow” to prop up a housing market that needs a prop or two. Or three. This certainly isn’t the sort of outcome that the National Association of Home Builders, National Association of Realtors, or even Congress envisioned when the Economic Stimulus Act of 2008 was signed into law by President Bush in mid-February. The organizations had touted the program as critical to bringing back a housing market that has, if anything, sunk further into the abyss since that time as prices fall and borrowers continue to default in droves. Market insiders saw this coming, however, even if realtors and some members of the financial media didn’t. UBS analysts had surmised in mid-March that “severe” capital pressures at both GSEs would likely keep them out of the market for conforming jumbos, as they instead were expected by the analysts to deploy excess capital to shore up their own existing exposure to the foundering housing and mortgage markets. (See HW’s coverage here.) And that’s exactly what they’ve been doing, even with fresh capital, as both GSEs have seen their retained portfolios surge in recent months. Freddie Mac saw its retained portfolio soar to a record $737.54 billion in April — even making the rare run past sister GSE Fannie Mae, which saw its portfolio grow to $728.41 billion. Almost all purchase activity has been in the form of the company’s own securities. “As we have looked critically at these organizations, it is clear that there is a conflict between their mission — to guarantee as many mortgages as they can to keep the housing market from going into freefall — and the fact that they are thinly capitalized,” UBS said in its March report. The bottom line here is that all that new capital the GSEs raised never was likely to push Fannie or Freddie headlong into a risky mortgage market it doesn’t understand, and anyone who thought so was focused only on production, rather than understanding execution (see: realtors, home builders). Proof of that is pretty apparent in the underwriting standards used by Fannie and Freddie relative to their suddenly-goosed cousin at the FHA, which has been underwriting and securitizing jumbos at a pace that vastly dwarfs activity thus far at either GSE. “Apparently, Fannie and Freddie have power make benefit glorious Nation of Jumbo,” noted the blogger known only by the moniker Tanta on the well-read blog Calculated Risk, “and they’re blowing it all on people with downpayments in non-bubble markets instead of single-handedly throwing themselves on the grenade to Save the Housing Economy.” Surprised? You shouldn’t be. Disclosure: The author held no positions in FNM or FRE when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.