The preferred stock ratings of Freddie Mac and Fannie Mae have been downgraded from A1 to BAA3 by Moody’s Investors Service. Additionally, Fannie and Freddie’s Bank Financial Strength Ratings has been downgraded from B minus to D plus.

The downgraded ratings remain on review for possible further downgrade. Moody’s said the downgrades of the financial strength ratings reflect its view that the government sponsored enterprise’s flexibility to manage volatility in their mortgage risk exposures is “constricted” because they now have “limited access to common and preferred equity capital at economically attractive terms.”

The downgrades of the preferred stock ratings reflect a greater risk of dividend omission stemming from two issues.

First, the Government Sponsored Enterprises mortgage portfolio performance is “worse and more volatile than Moody’s expected”, which could lead them to breach the capital requirements governing their ability to pay a preferred dividend. Second, there is uncertainty about how the preferred stock would be treated if the Treasury provides either GSE with support, Moody’s said.

Moody’s also affirmed the GSE’s AAA senior long term debt and Prime-1 short term debt ratings with stable outlooks, while their AA2 subordinated debt ratings were affirmed, but the outlook was changed from stable to negative.

House and Senate negotiators have reached an agreement on loan limits, and it appears that the maximum amount for the Government Sponsored Enterprise (GSE)Fannie Mae, Freddie Mac, and Federal Housing Administration FHA loans will be $625,000.

Negotiations on a massive housing bill are getting serious, with the House of Representatives scheduled to vote on the legislation tomorrow.

In markets where housing prices exceed the $417,000 conforming loan limit, the maximum loan amount of Fannie Mae and Freddie Mac loans would be determined by multiplying the median home price by 115%, up to a maximum of $625,000, sources say.

The same holds true for FHA loans, except that the multiplier kicks in at $271,050, or 65% of the conforming loan limit. If the median home price is $300,000, the maximum FHA loan amount in that area would be $345,000 ($300,000 x 115%).

House Financial Services Committee Chairman Barney Fran, D-Mass., told The Washington Post that the House has agreed to accept Senate provisions that ban seller funded downpayment assistance on FHA loans and impose a 12-month moratorium on the charging of risk-based premiums by the FHA.

Proposed changes in accounting rules that could force Fannie Mae and Freddie Mac to move certain Mortgage Backed Securities (MBS) onto their balance sheets should not have a major impact on their capital requirements, according to the Government Sponsored Enterprise (GSE) regulator.

The Office of Federal Housing Enterprise Oversight is working with the Financial Accounting Standards Board on changes to FAS 140, OFHEO Director James Lockhart indicated.

The two government-sponsored enterprises already have a 45-basis-point capital charge on their guaranteed MBS, he noted. Investor concerns that an accounting change would trigger a dramatic rise in their capital requirements "makes no sense," Mr. Lockhart said.

Wall Street stock investors dumped Fannie and Freddie shares on Monday on fears that the GSE might have to raise $75 billion in new capital due to accounting changes.

In an interview on CNBC-TV, Mr. Lockhart stressed that Fannie and Freddie are adequately capitalized and have raised $20 billion in new capital over the past seven months.

Fannie Mae and Freddie Mac See Sell-Off

WASHINGTON - Faith-based organizations are making a huge difference in the Bush Administration’s efforts to reduce homelessness, U.S. Department of Housing and Urban Development Secretary Steve Preston said today. Addressing the White House National Faith-Based and Community Initiatives Conference, Preston highlighted the Administration’s partnership with faith-based and community organizations and steps being taken to reduce chronic homelessness, especially among veterans.

“The Faith-Based and Community Initiative combines the strengths of the public and private sectors to make our social programs work better,” said Preston. “There is a vast, network of partnerships between HUD, local communities and nonprofit organizations around the country. These partnerships are incredibly effective in helping to reduce the number of persons who are calling the streets their home.”

See the rest of the article…US Department of HUD

WASHINGTON, DC — James B. Lockhart, Director of the Office of Federal Housing Enterprise Oversight (OFHEO) today released OFHEO’s 2008 Report to Congress, detailing the agency’s annual examination conclusions and regulatory oversight of the
Government Sponsored Enterprise (GSE), Fannie Mae and Freddie Mac, for the year 2007. The report concludes that both Enterprises made very good progress in remediating their operational areas and providing stability and liquidity to the mortgage markets, but they remain “a significant supervisory concern” because of increased mortgage market and credit risk.

“Fannie Mae and Freddie Mac should be commended for the timely filing of their 2007 annual statements,” said Lockhart. “While they have made progress in fixing many of their systems, internal controls and risk management problems, they still have much work to do, especially with the continuing challenges of today’s mortgage market.”

“These challenges and the pressures on Fannie Mae and Freddie Mac to do even more to support the mortgage market require a stronger regulator,” Lockhart said. “As I noted in my transmittal letter, last month both GSEs agreed that a ‘world-class regulatory structure’ is needed and they ‘renewed a shared commitment to work for comprehensive GSE reform legislation. The time to act on the legislation is now.’”

In addition to the annual reports of examination for Fannie Mae and Freddie Mac, the report includes a review and summary of related topics, including:

The full report is available: Here. To request a printed copy, please send an e-mail to ofhe...@ofheo.gov or call (202) 414-6922.

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Congress should complete action on a Federal Housing Administration modernization bill and leave it to the Bush administration to find ways to help borrowers with “underwater” mortgages, Treasury Secretary Henry Paulson said Wednesday in a major policy speech.

“We do not need a system wide solution for the vast majority of loans where the homeowner has negative equity,” Secretary Paulson told the U.S. Chamber of Commerce. The secretary’s comments show that the Bush administration wants to head off passage of a Democratic proposal that would encourage lenders to write down the principal amount of underwater mortgages so borrowers could refinance into FHA-insured mortgages.

The legislation would authorize $300 billion in FHA loan guarantees. The Bush administration would prefer that the FHA take a more limited approach and use its existing authority to address the problem. “Secretary Alphonso Jackson is examining the potential for FHA to be a solution for those borrowers,” Mr. Paulson said.

The FHA modernization bill, which is stalled in conference, would allow the agency to insure 40-year mortgages, which would stretch out the payments and make them more affordable.

Washington, DC– OFHEO Director James B. Lockhart announced agreements with OFHEO, New York State Attorney General Andrew Cuomo, Fannie Mae and Freddie Mac (Government Sponsored Enterprise (GSE)) to strengthen the independence of the appraisal process. For mortgages the Enterprises buy or guarantee, the agreements seek to enhance appraisal and evaluation services that are critical to the residential mortgage process. Flawed appraisals artificially inflate home prices and are often a sign of mortgage fraud and undue influence on appraisers.

“Accurate, independent appraisals are very important to ensuring the safety and soundness of Fannie Mae, Freddie Mac and the mortgage market,” said Director Lockhart. “These agreements build upon existing federal and state laws and regulations to further strengthen the single-family home appraisal process. The agreements should help restore confidence in the mortgage market by enhancing underwriting practices, reducing mortgage fraud and making home valuations more reliable. I thank the Attorney General, Fannie Mae and Freddie Mac for their strong roles in this important effort.”

There are many significant provisions in the agreements that are designed to strengthen the independence of appraisers, including eliminating broker-ordered appraisals, prohibiting appraiser coercion, and reducing the use of appraisals prepared in-house or through captive appraisal management companies in underwriting mortgages. The agreements also enhance quality control in the appraisal process and establish a complaint hotline for consumers. The agreements include a Home Valuation Code of Conduct that the Enterprises will apply to lenders selling mortgages to Fannie Mae or Freddie Mac. The Code becomes effective on January 1, 2009.

The parties also agreed to establish and the Enterprises fund an Independent Valuation Protection Institute designed to supplement current efforts to provide an appraisal complaint process, mediation of appraisal disputes, and mortgage fraud reporting. The agreement seeks the comments and concurrence of the federal banking agencies and solicits the comments of market participants that will be considered in making amendments to the Code during the implementation process.

“Attorney General Cuomo and I understand these are strong steps which will improve our mortgage finance system,” said Lockhart. “This Code is one way of ensuring that homebuyers and secondary mortgage market investors get the fair and independent property valuations that they expect and deserve. At the same time, I will be closely monitoring the nine-month period prior to implementation. OFHEO is committed to working closely with fellow regulators, the New York Attorney General, Fannie Mae, Freddie Mac, appraisers, lenders and other market participants to assure that the roll-out of the new code builds upon best practices, recognizes constructive comments to identify further refinements, and avoids unintended consequences.”

“In addition, OFHEO will continue its work to combat mortgage fraud, including its joint efforts with state and federal regulators. It is imperative that state appraisal licensing bodies be active in policing appraisal practices at the state level and that federal agencies share information on a timely basis in order to assist law enforcement and regulatory efforts to fight mortgage fraud,” Lockhart said.

Fannie Mae Agreement
Freddie Mac Agreement
Home Valuation Code of Conduct

Congress was rumored last week to increase conforming loan limits, what is the chance that we will see an increased somewhat?

The president and Secretary Paulson have made it very clear that really want that to happen with various Government Sponsored Enterprise reform in place.

Would that be good for the credit market? Some people think it would be good on the margin. The critical thing about Fannie Mae and Freddie Mac has been that over the last six months, they have kept the conforming loan market going. The mortgagor has grown dramatically, as the rest of the providers have withdrawn.

If you look at their market share now, it is probably approaching 70% of all mortgages made in this country. This is the main reason everyone believes there should be much stronger regulation in the future.

Fannie Mae and Freddie Mac should be focused on rescuing subprime borrowers as opposed to developing a new line of products to serve the jumbo market, according to the regulator of the two government sponsored enterprises.

The chairman of the Federal Reserve Board recently suggested to Congress that the two GSEs could play a role in securitizing jumbo mortgage loans. But James Lockhart, director of the Office of Federal Housing Enterprise Oversight indicated that the GSEs have no expertise in the jumbo market. “Our view is that at the moment, Fannie and Freddie have their hands full in the conforming loan market and in particular the lower credit quality portion of the conforming loan market,” Mr. Lockhart said. “That is where they should be concentrating their firepower.”

The OFHEO director said Fannie and Freddie are doing a reasonably good job in refinancing subprime borrowers that are current on their payments. However, they need to make more of an effort to help borrowers that need loan modifications or partial writedowns. “We will be discussing this with the Fed,” he said.

OFHEO Blasts Cuomo on GSE Subpoenas

The federal regulator of Fannie Mae and Freddie Mac has blasted New York Attorney General Andrew Cuomo for subpoenaing the two Government Sponsored Enterprises in connection with an appraisal fraud probe, arguing that “they have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals.”

Other than the initial premium they may have received or false appreciation of the stock value tied to their volume of mortgages.

“I am disappointed that your office did not contact OFHEO before or even after subpoenaing the GSEs and issuing certain threats regarding their future business activities,” writes OFHEO Director James Lockhart in a Nov. 8 letter to AG Cuomo.

Mr. Lockhart wants an explanation from Mr. Cuomo in regard to his demand that the government-sponsored enterprises cease doing business with {tag-cat]Washington Mutual[/tag-cat], a large seller of mortgages to the GSEs.

Earlier this week the New York AG said his office would subpoena the GSEs as part of a wider probe into mortgage industry practices.

OFHEO is suppose to be the safety and soundness regulator of Fannie and Freddie.