GSEs Allowing Less Risky Loans To Subsidize Riskier Ones

Fannie Mae (FNM) and Freddie Mac (FRE) have been using fees they collect for guaranteeing less risky single-family mortgages to subsidize the fees for backing riskier loans, their regulator said Thursday.

As a result, borrowers with 15-year fixed-rate mortgages and adjustable-rate mortgages were subsidizing borrowers with 30-year fixed-rate mortgages, which are more risky for the mortgage giants to guarantee.

"The riskiest loans were not fully charged for the additional expected costs associated with them," Federal Housing Finance Agency Chief Economist Patrick Lawler said at a panel discussion.

The findings are a result of a study by FHFA of the fees the mortgage giants charge for guaranteeing loans. Mandated by a housing law passed last year, the study was furnished to Congress.

Lawler, in response to a question from the audience, said FHFA should consider whether such a fee structure was desirable.

"I think it should be part of the debate about the future of Fannie and Freddie," FHFA Director James Lockart said.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; [e-mail]