Private label MBS — in particular subprime and alt-A loans — continue to be a "significant issue" for all the housing GSEs and have caused $26 billion of losses and impairments at these firms, according to a new report issued by the Federal Housing Finance Agency (FHFA).

In its first ever annual report to Congress, FHFA blames the previous managements of Fannie Mae and Freddie Mac for not requiring originators "to fully assess borrower capacity."

It added that, "Certain decisions, including the underestimation of risk associated with these products, coupled with changes in the economy, led to escalating increases in delinquencies, foreclosures, credit-related expenses and losses."

FHFA's assessment also includes the Federal Home Loan Bank system. The government placed Fannie and Freddie into separate conservatorships in September and replaced their CEOs.

The regulator says all housing GSEs face significant challenges including buying and guaranteeing mortgages with LTVs north of 80% due to declining home values and "constraints on the availability of private mortgage insurance."

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