Freddie Mac said the Obama administration's housing plan may cost it $30 billion.

Such a hit to the government-sponsored enterprise — which lost $50 billion last year and is not expected to return to profitability soon — could take a significant bite out of its federal backstop. Last month the administration doubled the backstops for Freddie and Fannie Mae, to $200 billion each.

Part of the Obama plan calls for Fannie and Freddie to encourage servicers to modify mortgages that are in default or at risk of becoming so. When Freddie modifies a loan it guarantees that is current, the GSE must repurchase the loan from the securitized pool. Doing so on a large scale may entail accounting for its entire portfolio of guarantees — $1.8 trillion of mortgages — as derivatives at fair value, minus credit reserves, Freddie said Wednesday in its annual report.
Such a change in the accounting treatment could take effect as early as next quarter and result in a $30 billion charge, the GSE said.

That may have been a pro forma, worst-case scenario.

Paul Miller, an analyst of Friedman, Billings, Ramsey, said the $30 billion estimate "is probably overstated," though the GSE will take a hit on the housing plan.

"We knew when the government came out with their proposal that it was going to have a negative impact on the portfolio," Miller said. "They have to estimate the true hit, and either way it's going to cost them money to do this and have a negative impact on capital."

To avoid such a change, Freddie said, its management "is working internally and with regulatory agencies to consider potential changes to our modification practices or current accounting policy."

But Miller said both the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) have been "very reluctant" to give waivers on derivative accounting rules.

"So just because they're owned by the government doesn't mean they're going to get a waiver," he said.

Freddie also said in the annual report that it had settled a dispute with JPMorgan Chase & over loans that Washington Mutual (Wamu) had sold to the GSE.

JPMorgan Chase bought Wamu's banking operations in September. Two months later Freddie disclosed that JPMorgan Chase was resisting requests to buy back the loans.

In response, the GSE said then, it had threatened to forbid JPMorgan Chase to service a portfolio of Freddie-guaranteed loans the New York company had inherited from Wamu.

On Wednesday, Freddie said JPMorgan Chase had agreed to make a one-time payment to cover obligations related to any loans "inconsistent" with representations and warranties Wamu had made to the GSE.

JPMorgan Chase also agreed to remain on the hook for loans that Wamu had sold to Freddie with recourse — meaning it must buy them back if they default, whether or not they live up to representations Wamu made.

In return, Freddie said, it allowed JPMorgan Chase to remain the servicer on the Wamu portfolio.
Freddie did not disclose the size of the payment or the amount of loans where it has recourse to JPMorgan Chase. Neither company would discuss the matter Thursday.

Though Freddie could have terminated servicing rights or seized Wamu's portfolio and given it to another servicer, it risked alienating JPMorgan Chase, which, counting Washington Mutual's volume, accounted for 15% of Freddie's securitization volume last year.


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