Magazine article American Banker

Depository Institutions Bear More of the Risk Than Fannie, Freddie

Magazine article American Banker

Depository Institutions Bear More of the Risk Than Fannie, Freddie

Article excerpt

When they push mortgage loans, commercial banks and thrifts put themselves on the line to a greater extent than government- sponsored enterprises such as Fannie Mae and Freddie Mac.

Depository institutions bear the credit risk on 28% of the mortgage volume they originated in 1994, compared with the 17% of risk for Fannie Mae and Freddie Mac, a Federal Reserve Board study says.

Private insurance companies also carry roughly 17% of the risk for loans that carry their endorsement, the study indicates. Mortgage banks, including those owned by commercial banks, typically pass almost all of their risk to Freddie or Fannie by selling the loans for securitization. Commercial banks directly use Fannie and Freddie less frequently but, like other lenders, often partially reduce their risk by requiring that borrowers obtain private insurance.

The study, released in the Fed's November bulletin to banks, also looked at how banks and agencies are meeting the needs of minority neighborhoods. The report said that Fannie and Freddie, formally the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., did not meet the Fed's "expectations." The Fed expected the agencies would promote homeownership among lower income people to a greater extent than other, purely private, enterprises.

Fannie and Freddie "did not outperform private sector entities such as depositories," the Fed study said.

The reason: "Fannie and Freddie generally have no interactions with borrowers and are not located in the neighborhoods where the mortgages are originated; thus they lack the opportunity to look beyond traditional measures of risk," the study said. …

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