Turns out that all of those record profits that Fannie Mae and Freddie Mac are turning over to the Treasury don't so much account for a few billion dollars in losses on delinquent mortgages.
Fannie Mae and Freddie Mac are possibly masking billions of dollars in losses because of the level of delinquent home loans they carry, a federal watchdog said on Monday, adding that the companies should immediately be required to recognize the costs of some bad mortgages.
In 2012, the Federal Housing Finance Agency began work on accounting changes to require the two housing finance firms to set aside loan loss reserves for mortgages delinquent at least 180 days. The new standard is set to go into effect in 2015….
The change in the accounting treatment of these delinquent loans potentially could require Fannie and Freddie, which have rebounded to enormous profitability in the past two years as the housing market recovered, to "charge off billions of additional dollars related to loans," the report stated….
The inspector general's report, dated August 2, called on the FHFA to require the firms to implement the changes at a faster pace and expressed concern that Fannie Mae and Freddie Mac were not recognizing the potential losses in their public financial statements….
Both companies have noted the upcoming accounting changes in public filings with the Securities and Exchange Commission, although they have not yet estimated the size of possible losses.