Fannie and Freddie: Saving Taxpayer Dollars?

By Peter Barnes, Senior Washington Correspondent


While mortgage giants Fannie Mae and Freddie Mac reported last week they are still drowning in red ink and dependant on taxpayer assistance to keep operating, a little-noticed change in their business practices could give taxpayers a break from the bailouts, perhaps saving about $10 billion annually, some analysts now estimate. “It’s not chump change,” said Thomas Lawler, a housing consultant and former Fannie Mae executive. In early February, Fannie and Freddie announced they will start purchasing hefty amounts of seriously delinquent mortgages, starting with $200 billion worth — more than a million souring loans, representing about a fifth of all past-due loans in the U.S. today. The announcements were responses to new accounting rules that allow the companies, effective Jan. 1, to avoid recording immediate losses on such buy backs. By buying the loans, the companies will no longer have to make large payments on them to investors who control them through securities backed by the loans. Because Fannie and Freddie guaranteed the mortgages against default, they’ve been making regular payments on them to investors–even though homeowners stopped making their monthly payments to Fannie and Freddie. “Fannie and Freddie were paying out more than they should have been to investors,” said Karen Shaw Petrou, managing director of Federal Financial Analytics, a Washington, D.C. research firm. “It’s a very sweet deal to the investors, to get Fannie and Freddie to pay them interest that isn’t actually there because the borrowers aren’t paying it.” Analysts said the buy-backs could also boost the Obama administration’s foreclosure prevention efforts to help struggling families stay in their homes through loan modifications.