Fannie, Freddie Are Pressured as Homeowners Fall Behind

By PRABHA NATARAJAN The rapid rise in the number of borrowers skipping their mortgage payments is putting renewed pressure on the financial reserves of Fannie Mae and Freddie Mac. The mortgage-finance companies were taken over by the government in September, making this one more concern that the Obama administration needs to tackle before year's end when analysts expect the two companies to run out of the government aid already earmarked. Fannie and Freddie, which own or guarantee nearly $5 trillion, or half, of the nation's mortgages, have seen their serious delinquency rates -- mortgage payments 90 days or more past due -- shoot to records in the past few months. It isn't just the levels that are worrying but the speed at which homeowners are falling behind on their monthly payments. This week, Fannie reported that 2.77% of the single-family loans held in its $785 billion investment portfolio were delinquent in January. That's a 0.35 percentage point increase from the month before, the largest such increase since the company started tallying the data in 1998. This is more than double the 1.06% a year earlier. Freddie's level stands at 2.13%. CreditSights estimated last year that Freddie could face losses as high as $28 billion if the delinquency rate hits 4%, as the independent research firm expects over the next few years. The companies already have burned through billions of dollars and have together drawn nearly $60 billion of the U.S. government's $400 billion credit line. Mortgage analysts expect the companies to draw the rest by year end. "This is a reminder that the administration has some unfinished business," said Paul Jacob, research director at Bank of Manhattan Capital, a Los Angeles-based start-up broker-dealer. "The current ownership and capital structure [at Fannie and Freddie] aren't sustainable," he said. Fannie and Freddie officials weren't available for comment. While both companies offer a slew of programs to help these distressed homeowners, including the recent proposal on loan modifications, concerns still center on the extent of losses. "What we are seeing is that delinquency problems are catching up with prime borrowers," said John Sim, a mortgage strategist with J.P. Morgan Chase. "The overall decline in housing and unemployment is starting to affect everyone, and we are seeing the impact of it." The unemployment rate is at 8.1% and is expected to rise further. Meanwhile, a leading home-price index, the S&P/Case-Shiller posted a 19% year-over-year drop in values in January. The bulk of loans held by Fannie and Freddie are mortgages made to borrowers with good credit, but roughly 10% are loans that have a riskier profile. These loans are seeing even higher delinquency rates. For example, interest-only loans, which make up 5% of Freddie's $822 billion investment portfolio, saw a delinquency rate of 7.6% at the end of last year. This is a rise of 5.56 percentage points from the end of 2007. Mr. Sim of J.P. Morgan says the Obama administration's Making Home Affordable mortgage program, launched earlier this year, is targeted at helping borrowers with Fannie and Freddie loans. This is expected to help some borrowers avoid default. Further, Fannie and Freddie have suspended their foreclosure program for a couple of months to provide borrowers with more time to work through their loan modifications. This, however, also ends up increasing the delinquency rate as these loans tend to stay unpaid for longer than 90 days, the companies noted. Analysts, however, said this has only a small impact on the rising rate. What is certain is that as long as home prices continue to fall and the economy to worsen, delinquencies and defaults, even among borrowers with good credit, will increase.