Fannie Mae, Freddie Mac delaying billions in write-offs: watchdog

WASHINGTON -- Resurgent bailout recipients Fannie Mae and Freddie Mac have been avoiding billions of dollars in potential long-term losses by delaying the use of new accounting measures that would require them to write off more delinquent mortgages, a government watchdog agency said in a letter released Monday.

Despite a 2012 determination by their regulator, the Federal Housing Finance Agency, that the new accounting rules should be adopted, the agency has allowed Fannie and Freddie to delay implementation until Jan. 1, 2015, according to a letter from Steve A. Linick, the regulator’s inspector general.

“Three years appears to be an inordinately long period to fully implement” the new rules, Linick wrote to acting FHFA director Edward J. DeMarco on Aug. 5.

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The write-offs would eat into recent record profits by the two mortgage finance giants as the housing market has recovered.

Fannie and Freddie were on the brink of bankruptcy after the subprime housing bubble burst. The government seized them in 2008 and have pumped in about $187 billion in taxpayer aid.

The firms have paid the government $132 billion in dividends on the bailout money and plan to make another payment of $14.6 billion next month.

Those payments -- more than half of which have come this year -- have helped the federal government significantly reduce its budget deficit and delay the need to raise the nation’s debt limit until this fall.

The accounting rules, which federal banking regulators apply to other financial institutions, require Fannie and Freddie to set aside money to cover losses on any single-family home mortgage that is more than 180 days delinquent.

Linick did not provide a specific estimate of how much in mortgages Fannie and Freddie would have to charge off under the accounting rules.

But his letter said a top FHFA official, Jon D. Greenlee, told the inspector general’s office in May that implementing the rules “could potentially require them to charge off billions of additional dollars related to loans classified as ‘loss.’”

The FHFA should require Fannie and Freddie “to promptly report” to the agency and the inspector general’s office the estimated effect of the rules on the companies’ financial statements, Linick wrote.

In response to Linick’s letter, Greenlee, the deputy director of the FHFA’s Division of Enterprise Regulation, wrote on Aug. 9 that agency officials believed the delay in implementing the accounting rules was appropriate.

The rules “require considerable changes to systems and operations that could take time to complete in a safe, sound and well-controlled manner,” Greenlee said.

Fannie and Freddie have said in regulatory filings this year that they were assessing the effect of the rules.

The FHFA issued a bulletin in April 2012 directing Fannie and Freddie to write off an outstanding loan balance above a property’s fair value of mortgages that were more than 180 days delinquent. The FHFA said at the time that “the likelihood of full repayment is remote” for such mortgages.

Although the bulletin was supposed to be effective when it was issued, the FHFA gave Fannie and Freddie executives time to submit plans for implementing the rules. In December 2012, the FHFA found that the plans were inadequate, and Fannie and Freddie executives were told to resubmit plans with a target of implementing the rules on Jan. 1, 2014, Linick wrote.

The deadline for full implementation has since been delayed to Jan. 1, 2015, Linick said. It’s important to the safety and soundness of Fannie and Freddie for them to appropriately classify the risk of the mortgages it owns or backs, and to set aside the appropriate reserves to cover losses, he said.

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