The government took over Fannie Mae along with Freddie Mac in September and both companies blame the huge losses on rampant loan defaults. Fannie Mae reported loans written off, or loans which cannot be collected totaled 7 billion in 2008, an increase of 219% over 2007. The total estimate of non-performing loans sat at almost 120 billion at the end of the year. That figure was just over 63 billion in September and only 27.2 billion at the beginning of the year.
Freddie Mac has yet to report its loss totals, but has already requested 14 billion in aid and indicates it may require as much as 35 billion more. The companies must request assistance because their assets are less than their debt. The declining net worth of the companies can be partially attributed to their mortgage guaranty cost rising as the real estate market drops. In addition, investors in the companies have insisted on higher rates due to the perception of risk created by so many defaults. This has caused a rise in the cost of funding mortgages.
The report follows by a week the unveiling of Pres. Barak Obama’s foreclosure prevention plan which aims to allow homeowners to refinance even with little or no equity. It also call for $20 billion toward subsidizing interest rates so that homeowners in jeopardy of loan default can lower monthly payments.
In November, the two companies announced a plan for loan modifications. The companies are integral to the mortgage industry as they provide relief to smaller lenders by buying out their loans. They have become increasingly more important recently as private investors shy away from the home loan market. Originally private companies with debt protection guaranteed by the government, the Treasury Dept. has stepped in and relegated them to a status akin to bankruptcy.
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