Fannie, Freddie Buying Fewer Risky Loans

From the New York Times:

Gaping losses at Fannie Mae and Freddie Mac are causing the two mortgage giants to slow their purchases of home loans at a time when the government is counting on them to help prop up the housing market.

This week, Freddie Mac reported a $821 million loss for the quarter. Fannie Mae will also begin charging more to guarantee loan repayments, a step that is likely to push mortgage rate higher.

Fannie Mae also announced measures intended to conserve capital, including cutting its dividend to 5 cents a share from 35 cents and reducing the company’s operating costs 10 percent by 2009. The company’s stock price closed on Friday at $9.05, down 9 percent.

Fannie Mae and Freddie Mac buy mortgages from banks and other lenders, providing those financial institutions with capital to make new loans. Fannie Mae’s poor results on Friday, in many ways, are a reflection of a declining housing market. As an extension, the government’s leverage over the housing market has also waned, since lawmakers have long relied on Fannie Mae and Freddie Mac.

Some analysts say that the types of loans Freddie Mac has bought, and the smaller amount of capital the company has on hand, puts it at greater risk.

“Freddie is at much greater risk than Fannie,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company.