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Fannie, Freddie Improving But Still Face Big Losses: Official

The chief regulator overseeing Fannie Mae and Freddie Mac says recent efforts to limit the mortgage giants' risk exposure have been successful but the enterprises will continue to sustain significant losses on loans made before the federal government’s takeover in mid 2008.

CNBC

Federal Housing Finance Agency Acting Director Edward J. DeMarco will share that assessment with a Congressional subcommittee Wednesday afternoon, according to a copy of his testimony obtained by CNBC.com.

“Due to the focus on improved purchase quality and underwriting standards, the loans that the Enterprises have purchased since conservatorship in late 2008 have had much lower rates of serious delinquency,” DeMarco states in testimony submitted to Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.

DeMarco says that Alt-A loans—those requiring little income documentation--were less than 1 percent of recent acquisitions for both Fannie and Fannie. Meanwhile, interest-only loans represent less than 2 percent of such Fannie Mae purchases and none of Freddie Mac’s.

"This is significant because interest-only loans previously purchased by the Enterprises have serious delinquency rates of more than 18 percent and Alt-A loans have serious delinquency rates of more than 12 percent,” according to DeMarco.

Those two loan groups, along with the subprime one, were at the heart of the mortgage meltdown that begin in late 2007 and is still causing havoc in the housing market today through near record-high home foreclosures.

Losses on 2006 and 2007 loans accounted for 65 percent of the combined credit losses for the two mortgage companies in the first quarter of 2010,. according to the testimony

DeMarco says improved purchase quality and underwriting standards adopted since 2008 conservatorship will mean “much lower rates of serious delinquency.” Fannie and Freddie are also continuing to build their loan-loss reserves to cover expected future losses, he said.

Demaro’s testimony also details Fannie and Freddie’s role in the Obama administration’s controversial and somewhat disappointing foreclosure prevention program, the Home Affordable Modification Program, HAMP.

From the program’s inception in the spring of 2009 through March 2010, the firms have handled 584,000 loan modifications. More than 136,000 were permanent modifications. Such a success rate--roughly 25 percent--is considered poor.

DeMarco's appearance comes at a time of growing frustration with the Obama administration's delay in taking up comprehensive reform of the the mortgage finance market, as well as Washington's role in the system through its government sponsored enterprises, Fannie and Freddie.

Since their September 2008 takeover, Fannie and Freddie have received a combined $145 billion in rescue funding. Together, the two control some $5 trillion in mortgage debt.

"While new legislation is needed to produce larger-scale restructuring of the housing finance system, FHFA is looking at possible changes in the way the Enterprises do business that may be desirable in the interim period."

Slideshow: Million-Dollar Foreclosures

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.