Government Sponsored Enterprises May Experience More Losses

According to the FHFA’s annual Report to Congress, Fannie Mae and Freddie Mac may continue to experience losses in the coming years due to mortgages originated during the housing bubble despite recent improvements. Since going into FHFA conservatorship, both GSEs have successfully prevented 2.1 million foreclosures and consistently guaranteed more low risk loans.

New single-family guarantees in 2011 were reported to have high credit quality, while higher-risk mortgages have, for the most part, been eliminated.

Mortgages guaranteed in 2011 had average FICO credit scores in the mid-700s, which was roughly 35 to 45 points higher than pre-conservatorship days. Also, the average loan-to-value ratio was at or below 70 percent, which was about 5 percentage points below the levels during pre-conservatorship times.

And since these GSEs guarantee an estimated 3 of every 4 mortgages nationwide, this could mean significant improvement in the delinquency rate once pre-2008 mortgages are cleared from the books or at least outnumbered by lower risk loans.

One concern remains, will the trend towards guaranteeing loans for borrowers with high credit scores lock out newer homeowners who have less established credit histories?  If so, what does this mean for the real estate market that depends on new homeowners to absorb new housing, foreclosures and pre-existing properties on the market? We could possibly see a long term trend towards higher credit score requirements for borrowers that could delay homeownership for new buyers.