The federal government has stepped up a crackdown on risky mortgages, taking aim at banks that made risky investments in the housing market.
Fannie and Freddie are the government’s two largest mortgage originators, responsible for servicing the mortgage market, and the two biggest mortgage guarantors for the country.
Federal regulators said Wednesday that Fannie’s and Freddie’s assets rose by $3.6 billion and $1.6 million, respectively, during the first quarter.
A new regulatory directive, announced Wednesday by the Treasury Department’s Financial Stability Oversight Council, targets banks that make risky investments.
It also takes aim at two other major players: Bank of America and JPMorgan Chase.
The new directive directs the agencies to review and approve all mortgages that originate in a particular market.
Fannie Mae, which is one of the nation’s largest mortgage companies, reported an $8.4 billion increase in its net income, to $2.6 trillion, in the first nine months of the year.
Freddie Mac reported a $2 billion increase, to a net income of $1 trillion.
JPMorgan said its assets rose $1 billion.
“The bank has a responsibility to hold its customers and investors accountable for their investments, and that includes ensuring that their investments are in a safe and sound environment,” the JPMorgan spokeswoman said in an email.
“JPM and Fannie are committed to ensuring that borrowers and their families have access to quality mortgages and financial products that are backed by a sound credit history.”
Fellow mortgage companies have also reported a sharp rise in profits.
Home Equity Mortgage Holdings, a unit of the Bank of New York Mellon Corp., reported a profit of $7.6 a share, a 7.5 percent increase from the year-earlier period.
And Wells Fargo said its earnings rose 4.2 percent to $3 billion.
Home Depot, which was spun off into the bank that became Fannie, reported a gain of $2 million.
While the financial industry is reeling from the subprime meltdown, the Federal Reserve is struggling to contain the economic pain caused by the sub-prime mortgage crisis.
The Federal Reserve Board has been grappling with the impact of the mortgage meltdown on the economy and the economy’s ability to recover.
During the first three months of this year, the economy grew by just 0.3 percent.
Analysts say the impact on the financial system will be even more difficult to forecast as the Fed is trying to get the economy out of a prolonged recession, and with the housing bubble now at record levels, there is little confidence the economy will rebound.
Banks have been increasingly relying on risky investments that allowed them to grow their capital, said Mark Shulman, a professor at the University of Chicago Booth School of Business.
“It’s a little bit like taking on a house with no title, and you can put in a loan and it’s a home equity line of credit, and now you can do whatever you want,” he said.
If Fannie or Freddie were to default on their loans, the government would likely step in, said Shulmans chief financial analyst, Chris Wirthlin.
According to data from the Federal Deposit Insurance Corporation, the agency that insures mortgages, the Fannie/Freddie deal made up more than 20 percent of the total loans that went into the market last year.
The agency said Fannie made $4.4 trillion in loans in the second quarter of this season.
As of Wednesday, Fannie was the largest bank holding company, with $2 trillion in assets, and Freddie the second largest, with a little more than $2-billion in assets.