Referring to the loss, Layton, calling it “accounting noise,” said the real economics going on is that lenders are not fully exploiting the three percent down payment mortgages that Freddie will now bundle and securitize. He said mortgage lenders are unduly afraid of representation and warrants claims, but in fact, that activity has declined, he noted.
He did describe the loss thusly: “This $0.5 billion loss was caused mainly by the accounting associated with our use of derivatives, whereby the derivatives are marked to market but many of the assets and liabilities being hedged are not.” He added, “We’re sampling performing loans earlier to test for defect in manufacturing. All this is designed to have lenders feel more comfortable.”
Freddie’s net worth is $1.3 billion, and it has repaid $96.5 billion to taxpayers and received $71.3 billion from the Treasury.
Federal Housing Finance Agency Director Mel Watt, noting the decrease was not a decline in credit quality or an increase in credit losses, said as the GSEs transfer credit risk away from the taxpayer to the private sector, their revenues will of necessity decline.
A U. S. Treasury official who says the loss is not indicative of a weakness, stated, “The prospect of any material losses by the GSEs is another reminder that comprehensive housing finance reform is necessary. Taxpayers remain on the hook for losses incurred by the GSEs, whether through the capital buffer or the ongoing, $258 billion backstop under the PSPAs.”
Suggesting this could be the first shot in a return to the housing crisis, Rep. Ed Royce (R-CA) has introduced legislation to limit the pay of GSE CEOs. He said, “Losses like this combined with multimillion dollar CEO salaries at the GSEs are the warning shots of a return to the pre-crisis model of private gains and public losses that wrecked the economy. We can’t simply put the blinders on and say that Fannie and Freddie are just like other companies when taxpayers are on the hook if they go in the red.”
His bill would limit compensation to $600,000 instead of the $3 million proffered by the FHFA earlier this year.
Meanwhile, Freddie’s comprehensive loss for Q3 2015 was $501 million, as compared to comprehensive income of $3.9 billion for Q2 2015. Freddie’s single-family rental business’ purchase climbed to $90 billion, a 50 percent increase compared to the same period 2014. ##
(Photo credit: housingwire–Freddie Mac CEO Donald Layton)
