Estimates Are Key at Financial Firms

Washington Post (04/28/08) P. D1; Hilzenrath, David S.
Experts say it is difficult to gauge the financial health of Fannie Mae and Freddie Mac, as subjective estimates and differing accounting methods are used to calculate the level of reserves necessary to cover anticipated losses. Freddie Mac said in its 2007 annual report that calculating reserves "is a complex process that is subject to numerous estimates and assumptions requiring significant judgment." These calculations have been pushed to the forefront in recent months because the government-sponsored enterprises (GSEs) back at least three-quarters of new mortgage-backed securities, and substantial losses could make it more difficult for borrowers to obtain mortgages and further depress home prices. Both Fannie Mae and Freddie Mac wait up to 24 months to take problem loans off their books, delaying the negative mark on their earnings in the hopes that delinquencies are remedied without foreclosure. The underlying value of the properties serving as loan collateral was once viewed as a cushion against losses, but inflated appraisals have many experts concerned that borrowers do not have as much equity as originally thought and are more willing to abandon their mortgages--a scenario that would dramatically bolster losses for the GSEs.