In its efforts to support the housing market's tenuous recovery, Fannie Mae took on slightly more risk with the new loans it bought or guaranteed in the first quarter.
The $116 billion of single-family mortgages the government-sponsored enterprise acquired during the period had a higher average loan-to-value ratio and a lower average FICO score than last year's crop of loans. Riskier features, such as interest-only periods, adjustable rates and investment properties as collateral, were also more prevalent than in 2009, albeit nowhere near as common as during the bubble years.
And 11.9% of the new loans were made under the government's Home Affordable Refinancing Program, which allows for loan-to-value ratios as high as 125%.
"Generally, their underwriting today is pretty strong, but they are taking on some additional risk on the margins," said longtime Fannie critic Ed Pinto, a consultant and former Fannie chief credit officer. "The additional risk is not huge, but it bears watching if it starts bleeding through to their core business."
Accordingly, Fannie charged lenders more to compensate for the added risk.
It said the average guarantee fee on new acquisitions increased 5.9 basis points from a year earlier, to 26.9 basis points in the first quarter. The rise was "primarily due to an increase in acquisitions of loans with characteristics that receive risk-based pricing adjustments," Fannie said.
To be fair, Fannie is not returning to the most egregiously risky loan types of the past decade. For example, the last time it touched a negatively amortizing loan was in 2007.
Also, 78.5% of the loans Fannie added to its book of business last quarter were refinancings, which are generally considered a safer bet than home purchase loans, since an existing homeowner already has a track record of making payments. That's well above the 48% refi share in 2006, the height of the boom.
Indeed, one-third of first-quarter refis were made under Fannie's Refi Plus program for borrowers who are already in the GSE's portfolio and are current on loan payments. But Fannie also said refis made under the administration's Harp program — whose share of its purchases more than doubled from 3.8% in 2009 — "may not ultimately perform as strongly as traditional refinance loans."
"If you're refinancing someone that is heavily underwater, it's likely they will redefault, so are we really helping the homeowner or subsidizing the banks?" asked Dean Baker, a co-director of the Center for Economic and Policy Research.
Fannie also said Monday it had asked the Treasury Department for another $8.4 billion of funding after losing $13 billion in the first quarter. With the housing market and economy still weak, loan losses remained high during the period, the GSE said.
"They are continuing to take losses on loans from the precrisis period, and they are going bad at higher rates than anticipated," Baker said.
Unlike Freddie Mac, which said last week that a new accounting rule was the primary reason its first-quarter net worth was negative, Fannie said the new standard actually increased its net worth by $3.3 billion.
But after its eleventh straight quarterly loss, Fannie's net worth remained in the red, at negative $8.4 billion, creating the need for an additional infusion on top of the $75 billion Fannie has already received from the government.
Fannie also reported that it made servicers buy back or reimburse it for losses on $1.8 billion of loans, 64% more than a year earlier. It was the first time the GSE disclosed the volume of its repurchase demands. Previously Fannie only acknowledged that such demands had been on the rise since 2008 as delinquencies worsened.
In February Fannie announced a "loan-quality initiative" designed to reduce loan-repurchase requests. The initiative will begin next month. Among other changes, lenders will have to pull a second credit report just before a loan closes to check if the borrower has taken on additional debts since submitting the mortgage application.
But Fannie in its Monday filing described the initiative as a "longer-term strategy" that will take time to bear fruit. It reiterated that it expects repurchases to remain high for the rest of this year.
