The GSEs Benefit From Trends in Lending.(government-sponsored enterprises)(Statistical Data Included)

This viewpoint is an excerpt from a recent OFHEO report on the safety and soundness of the government-sponsored enterprises. The OFHEO report, "Mortgage Markets and the Enterprises in 2001," concludes that Fannie Mae and Freddie Mac were able to increase their profitability without damaging their credit risk profiles.

Trends in the primary market in 2001 changed the characteristics of single-family originations in ways that tend to decrease slightly the credit risk of mortgages purchased by the Enterprises. In particular:

1. The refinance share of single-family mortgages purchased by the Enterprises rose sharply in 2001. Of the loans purchased by each Enterprise, more than 60% were refinance loans, compared with less than one-third the previous year. Refinance mortgages tend to be of higher credit quality than purchase loans.

2. The average LTV ratio of single-family mortgages purchased by each Enterprise decreased. That change reflects the high volume of refinance mortgages purchased by the Enterprises in 2001. Also, loans with high LTV ratios made up a smaller share of each Enterprise's single-family purchases in 2001.

3. Adjustable-rate loans comprised a smaller share of each Enterprise's single-family purchases in 2001. The ARM share of Fannie Mae's purchases dropped from 16% in 2000 to 5%, while the ARM share of Freddie Mac's purchases fell from about 13% to less than 6%. ARMs generally have a higher default rate than fixed-rate loans because the rates on ARMs, while originally low, may change over time. As payments rise, the risk of default also rises.

The Enterprises continued to be active in the markets for subprime and alternative-A mortgages in 2001. (Alternative-A loans are made to low-risk borrowers who choose to provide limited documentation and generally are not considered to be subprime mortgages.) Freddie Mac purchased $9 billion of subprime mortgages, down from $18.6 billion in 2000. Fannie Mae does not release comparable data. However, the Enterprises purchased approximately $15 billion of low-documentation loans - mortgages to borrowers with good credit who were able to avoid the normal paperwork documentation burdens associated with getting a mortgage. In addition, Fannie Mae purchased $9.7 billion of Expanded Approval/Timely Payment Reward mortgages. Under the Timely Payment Reward program, introduced in 2000, the interest rate on an A-minus loan is initially higher, but is reduced if the borrower makes ...