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HUD Finalizes Review Of Fannie And Freddie’s Year-end Mortgage Transactions

October 14, 2004

The Department of Housing and Urban Development released its assessment of the large year-end transactions of Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. These transactions had elicited some public concern about whether they should count toward the annual housing goals in 2003.

2003 Transactions

In the review process, the Department noted that these 2003 transactions contained dissolution options exercisable by the seller. Freddie Mac's Washington Mutual (WaMu) and Citibank transactions and Fannie Mae's WaMu transactions have raised questions as to whether these transactions provide liquidity. For example, when a seller can exercise its option to reverse or unwind a transaction and take back the mortgages within a short time period, the deal may be temporary in nature, and the liquidity that results may also be transitory.

After careful review, the Department has concluded that the mortgages associated with these transactions are, in fact, “mortgage purchases” as defined in current regulations. Accordingly, the Department has included housing units associated with these transactions in the calculation of its official performance for both GSEs in 2003. HUD is reviewing the issue as it finalizes its rule that establishes the GSEs' housing goals for 2005-2008.

2002 Transactions

In reviewing Freddie Mac's 2002 WaMu transactions, the Department discovered that Freddie Mac had counted some units towards its Low- and Moderate-Income and Underserved Areas goal in 2002 even though it had previously counted these same units under these goals in 2001. HUD's regulations prohibit double counting. The units counted in 2002 were not eligible for goals credit and, as a result, Freddie Mac overstated its goals performance under these two goals in 2002.

HUD's review also concluded that, when the double-counted units are deducted from Freddie Mac's 2002 performance under the Underserved Areas goal, their performance fell short of the goal by 90 housing units, or 0.002%. HUD is providing Freddie Mac with an opportunity to respond to this determination by submitting any relevant information no later than October 28, 2004. The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (FHEFSSA) and HUD's regulations provide that a GSE must submit a Housing Plan when it has failed to achieve a feasible goal. However, because this shortfall occurred in 2002, and Freddie Mac exceeded this goal in 2003 by approximately 95,000 units, or 1.7%, the Department will not require a Housing Plan for the Underserved Areas goal in 2002.

Also, to correct for some coding errors that were discovered in the recent review, HUD has adjusted Freddie Mac's 2002 performance under the Special Affordable Housing goal.

The following table shows the results of the Department's adjustments to Freddie Mac's 2002 performance:

Goal 2002 Goal Target Performance Reported
by Freddie Mac
HUD Adjusted
2002 Performance

Low- and Moderate-Income

50%

51.27%

50.450%

Underserved Areas

31%

31.81%

30.998%

Special Affordable

20%

20.64%

20.432%

Background

Fannie Mae and Freddie Mac were created by Congress to provide a secondary market for targeted mortgages. Their affordable housing goals require the GSEs to target a percentage of their business toward low- and moderate-income families, very low-income families, low-income families in low-income areas, and residents of communities underserved by mortgage credit. Families are considered as having low or moderate incomes if they make no more than the median income in their local area.

Fannie Mae and Freddie Mac buy mortgages on homes and apartment buildings from banks, thrift institutions and other mortgage lenders, and then either package and sell them to investors as mortgage-backed securities or hold them in their own mortgage portfolios. When Fannie Mae and Freddie Mac buy mortgages from lenders, they provide lenders with cash needed to make new mortgage loans.

As mandated by FHEFSSA, HUD is required to ensure that Fannie Mae and Freddie Mac operate in compliance with their charter purposes. FHEFSSA requires that the Department carry out specific responsibilities that include setting annual housing goals for the GSEs, monitoring and enforcing the GSEs' performance in meeting these housing goals, monitoring compliance with fair lending laws, collecting loan level data from the GSEs on their mortgage purchases, creating and distributing a public use database of non-proprietary GSE purchase data, and approving new GSE programs. The Department also has general regulatory authority over each GSE and is required to make such rules and regulations as are necessary to ensure that the purposes of FHEFSSA and the GSEs' charters are accomplished.

Source: HUD



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