U.S. mortgage finance enterprises Fannie Mae and Freddie Mac , seized by the government during the financial crisis, will continue to sustain losses on mortgages as house prices drop, their regulator said in testimony made public on Tuesday.
Losses will be especially severe in four states where home values have tumbled sharply: California, Florida, Arizona, and Nevada, said Edward DeMarco, acting director of the Federal Housing Finance Agency, in remarks prepared for delivery to a House of Representatives Financial Services panel.
He said Fannie Mae and Freddie Mac have been building loan loss reserves to cover future anticipated losses.
DeMarco also said he has serious concerns with the quality of Federal Home Loan Banks' investments in mortgage-backed securities issued by financial firms other than the government-sponsored mortgage finance enterprises.
The Federal Home Loan Banks are 12 institutions around the country that make advances to banks so they can make housing loans.
The Federal Housing Finance Agency on Tuesday released a report to Congress that said the two mortgage giants each remain critical supervisory concerns.
The report said that throughout 2009 Fannie Mae and Freddie Mac remained active in supporting the secondary mortgage market, but that they would have been unable to do so without the ongoing financial support of the Treasury Department.
The report emphasized that losses will continue over the next several years from mortgages originated before the government took control of Fannie Mae and Freddie Mac in 2008.
Most of the losses are associated with mortgages originated in 2005, 2006, and 2007 during the height of the home mortgage boom, the report said.
DeMarco in a letter accompanying the report said that while those business decisions cannot be undone, overseers were taking action to minimize losses.
Operational challenges remain a critical concern at each enterprise, DeMarco concluded in the letter.
The Enterprises operating in a conservatorship cannot be a long-term solution, he added.
(Reporting by Mark Felsenthal and Donna Smith; Editing by Kenneth Barry, Dan Grebler, Andrew Hay)