The FHFA said more than a year ago that Fannie Mae and and Freddie Mac needed… (Pablo Martinez Monsivais…)
WASHINGTON — Record profits from bailed-out Fannie Mae and Freddie Mac have helped reduce the federal budget deficit and put off an increase in the nation's debt limit, but a new government report raises questions about how the mortgage finance giants are accounting for future losses.
The two companies, which were seized by the government in 2008, have been avoiding billions of dollars in potential long-term losses by delaying a requirement that they write off more of the delinquent mortgages they own or back, according to the inspector general for the Federal Housing Finance Agency, which oversees the firms.
The FHFA said more than a year ago that Fannie and Freddie needed to change their accounting procedures to conform with the way banks write off mortgages that are more than 180 days delinquent.
But implementation of the rule has been delayed until Jan. 1, 2015, said Steve A. Linick, the agency's independent inspector general.
"Three years appears to be an inordinately long period to fully implement" the new rule, Linick wrote to acting FHFA Director Edward J. DeMarco on Aug. 5. The letter was made public Monday.
An increase in the write-offs could eat into the profits posted by the two companies as the housing market recovers, particularly for the three-month period when the accounting changes are first made.
And that would affect how much in dividends they could pay to the government on the bailout money.
"It's possible that the situation at Fannie and Freddie isn't quite as rosy as some have come to believe over recent months," said Sen. Bob Corker (R-Tenn.), who is sponsoring bipartisan legislation with Sen. Mark R. Warner (D-Va.) to replace Fannie and Freddie with a new government approach to mortgage guarantees.
"But either way, I think we should all remember that these two entities wouldn't generate one penny without the government guaranteeing their transactions, a reality that underscores the need to move to a stronger system of housing finance," Corker said.
Fannie and Freddie were on the brink of bankruptcy after the subprime housing bubble burst. The government has pumped in about $187 billion in taxpayer aid since they were seized.
But a rise in housing prices has fueled a turnaround at the companies. Fannie posted a record $17.2-billion profit for the January-March period after Freddie posted a record $11-billion profit for last year.
Those profits have allowed Fannie and Freddie to pay the government $132 billion in dividends on the bailout money and to announce plans to make additional payments totaling $14.6 billion next month.
More than half the dividend payments — $81 billion as of June — have come in the fiscal year ended Sept. 30, helping lower the federal budget deficit to about $642 billion from $1.1 trillion the previous year, according to the Congressional Budget Office.
The dividends also have delayed the need to raise the $16.7-trillion debt limit until the fall.
Still, President Obama and many lawmakers have called for Fannie and Freddie to be shut down as part of an overhaul of the housing finance system.
The FHFA wants Fannie and Freddie to write off losses on single-family home mortgages that are more than 180 days overdue. The firms now do not write off such mortgages until there is a foreclosure, with modifications and short sales enabling some people to avoid financial disaster and the companies to avoid losses.
Linick did not provide a specific estimate of how much more in mortgages Fannie and Freddie would have to charge off under the accounting rule.
But his letter said a top FHFA official, Jon D. Greenlee, told the inspector general's office in May that implementing the rule "could potentially require them to charge off billions of additional dollars."
The FHFA should require Fannie and Freddie "to promptly report" to the agency and the inspector general's office the estimated effect of the rule on the companies' financial statements, Linick said.
In response to Linick's letter, Greenlee, the deputy director of the FHFA's Division of Enterprise Regulation, wrote Aug. 9 that agency officials believed the delay in implementing the rule was appropriate given its complexity.
The new policy requires "considerable changes to systems and operations that could take time to complete in a safe, sound and well-controlled manner," Greenlee said.
Fannie and Freddie have said in regulatory filings this year that they were assessing the effect and working with the FHFA on implementing the rule.
Fannie said Monday that it already sets aside reserves for losses on mortgages more than 180 days past due. The company had $53.1 billion in loss reserves as of June 30.
"The guidance FHFA has issued would change our methodology for charging off loans, but would not materially change our results," Fannie said.
The agency issued a bulletin in April 2012 directing Fannie and Freddie to write off an outstanding loan balance above a property's fair value of mortgages that were more than 180 days delinquent. The FHFA said "the likelihood of full repayment is remote" for such mortgages.
The bulletin was supposed to be effective when issued, but the agency gave Fannie and Freddie executives time to submit implementation plans.
Last December, the FHFA found that the plans were inadequate, and Fannie and Freddie executives were told to resubmit plans with a target of implementing the rule Jan. 1, 2014, Linick wrote. The deadline for full implementation, he said, has since been delayed to Jan. 1, 2015.
Linick said it was important to the safety and soundness of Fannie and Freddie for them to classify the risk of the mortgages they own or back appropriately and to set aside the enough reserves to cover losses.