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Fannie Mae and Freddie Mac, already reeling in red ink, are warning they could face additional losses from the weakening condition of mortgage-insurance companies.

Fannie and Freddie together have required capital injections from the Treasury of $112 billion since the government took them over through conservatorship last year. Their need for government support would have been greater without collecting on claims from mortgage-insurance companies. Fannie and Freddie have received payouts of $2.3 billion and $658 million, respectively, from mortgage insurers through September this year.  But as conditions for mortgage insurers deteriorate, Fannie and Freddie have warned that their claims against the insurers may not be paid in full.

Ever since the mortgage crisis erupted two years ago, there have been concerns about the ability of mortgage-insurance companies to pay claims on all policies. In recent weeks, the concerns have taken on added significance as mortgage defaults continue to accelerate far beyond the subprime market into the broader prime market.

Standard & Poor's Ratings Services downgraded Mortgage Guaranty Insurance Corp., a unit of MGIC Investment Corp., the largest mortgage insurer for both Fannie and Freddie, and placed seven other mortgage-insurance companies on watch for downgrade and said it initially expected losses for the insurers to begin to narrow later this year. Instead, recent financial results indicate mortgage insurers are experiencing a sharper and more rapid transition of delinquencies.  Private mortgage insurance is required for any home loan with less than a 20% down payment, and the policies typically cover 12% to 35% of losses in the event of a default, according to HSH Associates, a financial publisher. Mortgage insurers have been forced to pay up as loan defaults escalate.  As mortgage insurers scale back coverage, Fannie and Freddie have had to reduce the amount of loans they purchase or guarantee with loan-to-value ratios that exceed 80%. At Fannie, those loans accounted for 10% of loan-purchase volume for the first nine months of the year, down from 22% last year.

The reduction in private insurance coverage has contributed to the rise in the volume of loans backed by the Federal Housing Administration, a government mortgage insurer that backs loans with as little as 3.5% down payments. It could be required to ask for a federal subsidy for the first time in its 75-year history if the housing market deteriorates further.

What this all boils down to for the consumer is Government backed loans will be more stringent in adhering to the letter of the law when it comes to qualifying borrowers making the process more black and white than ever.

Eric Torres

Congress passed legislation expanding an $8,000 tax credit for first-time homebuyers, extending unemployment benefits and providing tax refunds to money-losing companies.

The House approved the measure today on a 403-12 vote, sending it to President Barack Obama, who will sign it tomorrow, according to spokeswoman Jen Psaki. All 12 House members voting against the bill were Republicans. The Senate passed the bill 98-0 yesterday after weeks of delays. The bill would extend until April 30 the tax credit for first-time homebuyers that would otherwise expire at the end of this month.

The legislation approved today would allow the credit for couples earning up to $225,000 a year and individuals earning up to $125,000. That’s up from the current $75,000 limit for individuals and $150,000 for couples.

It would allow homebuyers who have owned their residence for at least five years to receive a $6,500 credit. Those who sell their new home or no longer use it as their main residence within three years would have to repay the credit. Homes worth more than $800,000 wouldn’t be eligible.

Eric Torres

The new program is meant for troubled borrowers who don't qualify for or haven't been able to get a loan work-out, such as a modification.

Under the Deed for Lease program, the borrower would transfer title to the property to the lender by completing a deed in lieu of foreclosure and then rent back the house at market rates -- which in many markets have fallen over the last year and probably would be cheaper than a mortgage payment on a loan made during the boom years.

The overall condition of this decision is that to be considered for the Deed for Lease program Fannie Mae has to be the note holder of the property.  It seems in the Las Vegas area that Bank of America, (Countrywide), Wells Fargo and other banks are the Note Holders not Fannie Mae, but at least this is a step in the right direction.

Eric Torres