WASHINGTON -- Fannie Mae and Freddie Mac are unlikely to repay the government in full for all the capital it has pumped into the companies, according to their regulator.
"My view is that some assets in the senior preferred will have to be left behind as they come out of conservatorship," Federal Housing Finance Agency Director James B. Lockhart said Thursday in response to a question at a panel discussion in Washington. "That will mean that some of the losses will never be repaid."
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One of the studies found that Fannie and Freddie have been using fees they collect for guaranteeing less risky single-family mortgages to subsidize the fees for backing riskier loans.
As a result, borrowers with 15-year fixed-rate mortgages and adjustable-rate mortgages were subsidizing borrowers with 30-year fixed-rate mortgages, which are more risky for the mortgage giants to guarantee.
"The riskiest loans were not fully charged for the additional expected costs associated with them," Federal Housing Finance Agency Chief Economist Patrick Lawler said at the panel discussion.
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Mr. Lockhart said Fannie and Freddie would likely see their reserves continue to decline next year, but could return to strong profits in two to three years. But he cautioned that the companies' thin capital and huge exposure to the mortgage market make it unlikely they will be able to repay the government in full.
"The book is so large that it is hard to see that they could actually repay all that," he said.
Just goes to show that government intervention perpetuates the flawed practices that caused the bailed out entity to need the bailout in the first place.
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