This quarterly report provides an overview of key aspects of the financial condition of Fannie Mae and Freddie Mac during conservatorship.
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Executive Summary
Mortgage Markets and the Enterprises’ Market Presence
Originations of nontraditional and higher-risk mortgages grew dramatically between 2004 and 2007. Private-label issuers played a large role in securitizing these mortgages. While the Enterprises acquired primarily traditional mortgages, they also acquired an increased amount of nontraditional and higher-risk mortgages such as Alt-A, subprime, and interest-only loans, and invested in senior tranches of private-label mortgage-backed securities. The Enterprises lost market share of mortgage-backed securities issuance between 2004 and 2007. After private-label issuers exited the secondary mortgage market in 2007, the Enterprises’ market presence increased, and they have constituted the majority of secondary market issuance since.
Credit Quality of New Single-Family Business
Starting in 2008, the Enterprises tightened credit underwriting standards for new mortgage acquisitions and largely ceased acquiring nontraditional and higher-risk mortgages. Mortgages acquired since 2008 have, on average, higher credit scores and lower loan-to-value ratios and include few higher-risk products.
Capital
At the end of 2007, the Enterprises had $71 billion of combined capital. From the end of 2007 through the second quarter of 2010, capital was reduced by $226 billion. Of the three business segments (Investments and Capital Markets, Single-Family Credit Guarantee and Multifamily) the largest contributor to capital reduction to date has been the Single-Family Credit Guarantee segment, accounting for $166 billion, or 73 percent, of combined capital reduction over that period.
Single-Family Credit Guarantee Segment Results
Credit-related expenses have been the primary driver of losses in the Single-Family Credit Guarantee segment. Nontraditional and higher-risk mortgages concentrated in the 2006 and 2007 vintages account for a disproportionate share of credit losses. However, house price declines and prolonged economic weakness have taken a toll on the credit performance of traditional mortgages.
Investments and Capital Markets Segment Results
The Investments and Capital Markets segment accounts for $21 billion, or 9 percent, of capital reduction from the end of 2007 through the second quarter of 2010. Losses in the Investments and Capital Markets segment stemmed from impairments of private-label securities, fair-value losses on securities, and fair-value losses on derivatives (used for hedging interest rate risk).
Loss Mitigation Activity
Since 2008, the Enterprises have enhanced their standard loss mitigation programs to address the needs of delinquent borrowers in this credit cycle. Implementation of the Making Home Affordable program in 2009, together with the Enterprises’ enhanced loss mitigation programs, expanded the options available to delinquent borrowers to retain or give up their homes while avoiding foreclosure.