Fannie Mae and Freddie Mac will not become large buyers of MBS this year and will maintain plans to reduce their total asset size, according to a new letter from their regulator.

Federal Housing Finance Agency (FHFA) director Ed DeMarco told banking committee leaders on Capitol Hill that the Obama administration wants Fannie and Freddie to concentrate on conserving assets while minimizing credit losses and stressing foreclosure prevention.

"This is and will remain the central goal of FHFA and the enterprises," the government-sponsored enterprise regulator says in the letter. FHFA acting director DeMarco also noted in the letter that the GSEs have the flexibility to expand the size of their investment portfolios but notes that such moves will center around purchases of delinquent mortgages out of guaranteed MBS for modification and loss mitigation.

The Federal Reserve is expected to end its purchases of GSE MBS at the end of this quarter. Many market observers assumed Fannie and Freddie would step in to fill the void — if necessary — to keep mortgage rates stable.

"I expect that other private parties will begin to invest in Enterprise MBS as the Federal Reserve gradually withdraws its purchase activity," DeMarco says.

In other news about the agencies, Fannie Mae and Freddie Mac have $2 billion at stake in the Stuyvesant Town and Peter Cooper Village debacle in Manhattan — but their former regulator believes they won't be big losers.

"They have the most senior piece and they are well positioned," said former FHFA director James Lockhart, speaking at the American Securitization Forum conference in Washington.

The GSEs are investors in commercial mortgage-backed securities that were issued in 2006 when Tishman Speyer Properties and BlackRock Realty acquired the 11,000-unit apartment complex for $5.4 billion. (At the time of purchase, Lockhart was the FHFA chief and the GSEs were not wards of the government.)

On Jan. 25, Tishman and BlackRock defaulted on $4.4 billion in loans, including $3 billion in senior mortgages. The properties are now valued at $2 billion. "

Obviously, that was a bubble transaction. It will have to be unscrambled and it is going to be very messy," said Lockhart, who is now vice-chairman of WL Ross & Co., a New York vulture fund that specializes in distressed mortgage-related investments.

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