Posts Tagged ‘Fannie Mae’

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One Solution to Rundown Foreclosed Houses? Bulldoze Them

Wednesday, August 17th, 2011

Several banks have found a new solution to the glut of foreclosed houses – many of them in poor condition.  It’s the bulldozer. Bank of America (BoA) owns a glut of abandoned houses that no one wants to purchase.  As a result, the nation’s largest mortgage servicer is bulldozing some of its most uninhabitable inventory.  Additionally, Wells Fargo, CitiCorp, JP Morgan Chase and Fannie Mae have been demolishing a few of their repossessed houses.  BoA is donating 100 foreclosed houses in the Cleveland area and in some cases will contribute to the cost of their demolition in partnership with a local agency that manages blighted property.  The bank has similar plans impacting houses in Detroit and Chicago, and more cities tare expected to be added.

“There is way too much supply,” said Gus Frangos, president of the Cleveland-based Cuyahoga County Land Reutilization Corporation, which works with lenders, government officials and homeowners to salvage abandoned homes.  “The best thing we can do to stabilize the market is to get the garbage off.”  Detroit mayor Dave Bing is in the process of ” right-sizing” the motor city by razing entire neighborhoods.

BoA plans to donate and bulldoze 100 houses in Cleveland, 100 in Detroit, and 150 in Chicago.  The lender will pay up to $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program.  Uses for the land include development, open space and urban farming.  “No one needs these homes, no one is going to buy them,” said Christopher Thornberg, founding partner at the Los Angeles office of Beacon Economics LLC.  “Bank of America is not going to be able to cover its losses, so it might as well give them away and get a little write-off and some nice public relations.”

Some foreclosed properties are so uninhabitable that the bank is willing pay to have them destroyed.  A bank spokesman said some in this category are worth less than $10,000.

Writing in The Atlantic, Daniel Indiviglio says that “The motivation here is pretty straightforward.  They get out of ongoing maintenance costs and taxes that they would have to pay as long as the property remains on the market.  But the even better news is that the banks can often write-off these properties as a result.  In some cases, banks can deduct as much as the homes’ fair market value from their income taxes.  From the real estate market’s standpoint this strategy is also positive.  With less supply, prices will stabilize more quickly.  Disposing of these foreclosures will make the market clear sooner.  And yet, the idea of bulldozing homes does seem rather unsavory, does it not?  Perhaps some of these homes are condemned and/or beyond repair.  In those cases, it might turn out to be more expensive to try to get them back up to code than it would be to knock them down and start over.  But does this really describe all of the cases?  This is reportedly happening to thousands of homes across the U.S.  My concern is that banks are using this as an easy out to minimize their loss with little concern about what’s best for the U.S. economy.  If some of these homes could be converted to perfectly adequate rental properties at minimal additional cost at some point in the future, for example, then this would make a lot more sense than knocking them down and building new homes from scratch.”

According to a Time magazine article,  “After multi-billion dollar legislative efforts in the form of the Stimulus, Dodd-Frank and stand-alone legislation, President Obama declared failure earlier this month and said he’s going back to the drawing board on a housing fix.  Negotiations between the 50 state attorneys general and the big mortgage lenders, rather than clearing the air for banks and borrowers, has become an enormous wet blanket as negotiations drag out and banks refuse to make any move without knowing how much of the reported $20 billion settlement will fall on them.  Economists argue that the failure to clear the housing market is a primary cause of the stunted recovery: continued household debt weighs on consumer spending, home ownership and excessive debt puts a drag on labor mobility, and banks fear the consequences of increased lending.”

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Fannie and Freddie to Marry?

Tuesday, August 2nd, 2011

Mortgage finance giants Fannie Mae and Freddie Mac might find themselves merged into a single government-run entity.  Representative Gary Miller (R-CA) is set to unveil a bill that would create a utility-like entity and phase out government-controlled Fannie Mae and Freddie Mac.  The new company would buy mortgages and repackage them as government-backed securities.  The major difference from Fannie and Freddie lies in the fact that it would not have shareholder investors.  The National Association of Homebuilders and the National Association of Realtors are expected to support the proposal, which reflects concerns by the industry, consumer groups and some policymakers that a complete withdrawal of government support for home lending could make the housing recession go further downhill.

A competing proposal by Representatives Gary Peters (D-MI) and John Campbell (R-CA) would create a minimum of five private companies to replace the two co-called government-sponsored enterprises, or GSEs.  The point of contention for many lawmakers is whether to provide a government backstop for mortgages and on what terms to provide the guarantee.  House Financial Services Committee Chairman Spencer Bachus (R-AL) is trying to forge a consensus among Republican members.  Any bill that is generated by Bachus’ committee and is passed by the Republican-led House would likely still be in jeopardy once it reaches the Democratic-controlled Senate.

“There was the idea that people were so tired of taxpayer losses related to housing that the traditional housing lobby would not be able to retaliate effectively,” said Jim Vogel, chief of agency debt research at Memphis-based FTN Financial. “It’s time to start waving the housing flag again.”

That would represent a sea change from February, when the Treasury Department recommended selling off Fannie Mae and Freddie Mac holdings within 10 years; Jeb Hensarling (R-TX) wanted to do it in half that time.  Since then, homebuilders, real estate agents, investment banks, civil rights leaders and consumer advocates have lobbied to retain a government role — including the unspoken federal guarantee behind Fannie Mae and Freddie Mac.  Congress created the programs as private companies to expand home ownership.

Already, the government is slowing its efforts to prop up the housing market.  Beginning this fall, the cap on Fannie and Freddie-backed mortgages — loans where taxpayers are on the hook if borrowers don’t pay — will decline in some regions.  At the height of the housing crisis, Congress raised the cap to $729,750 in areas where homes are most expensive.  After October, that will fall to $625,500.  The limit varies by county.  Mortgages that are too expensive to get backing from Fannie and Freddie are called jumbo loans and usually have higher interest rates and require larger downpayments.  That maximum was set by Congress in 2008 in an attempt to ensure that borrowers could continue to obtain loans in particularly expensive housing markets during the credit crunch, especially in prime real estate locations, such as New York, Los Angeles and Washington, D.C.

The Deal Book column in the New York Times thinks that the idea of merging Fannie and Freddie is not as outrageous as it may at first seem.  “Consider the math: For the first six months of this year, both companies spent $1.825 billion in overhead costs combined; on an annualized basis, that means the companies are spending about $3.65 billion.  Given that the companies do pretty much the same thing – buying mortgages from banks, insuring them and creating mortgage-backed securities – there might be opportunities for savings if many of their managers and staff are, to put it politely, redundant.  Conservatively, a combined Fannie and Freddie could probably cut a third of its overhead and staff, saving some $1.2 billion annually.  The way Wall Street values companies, that means – presto – billions more in value, perhaps as much as $18 billion or $19 billion, could be created overnight.”

“It would instill a huge amount of confidence. The market will know that both entities combined will have much more consistent, stable margins,” John Lekas, chief executive of Leader Capital, an investment firm, said on CNBC last week. He added that it “doesn’t cost taxpayers one nickel.”

Additionally, Fannie and Freddie are on track in 2011 to spend about $1.8 billion on what is known as “foreclosure costs,” which means maintaining and selling thousands of homes that became part of their ownership portfolios after the owners were unable to pay the mortgage.  The costs are staggering, given that Fannie and Freddie together own approximately 153,000 foreclosed homes. “This is just one of the costs that Fannie and the rest of us will pay to dig out of a very big hole,” says Karen Petrou, of Federal Financial Analytics.  When she says “the rest of us,” she is telling the truth.  Fannie Mae’s tab to American taxpayers is up to $86 billion since September 2008 when it was taken into government conservatorship.  During the 1st quarter of 2011, Fannie racked up $488 million in foreclosure-related expenses, including holding costs (insurance, taxes and maintenance); valuation adjustments for changes in market value; gains/loss when the property is sold; legal fees; eviction costs; weatherization costs to prevent pipes from bursting; costs to secure the property; and repair costs.

“We want to make sure that we’re comparable with the market or with the neighborhood,” said Elonda Crocket, a Fannie Mae executives who is part of the management team of its massive portfolio of foreclosed properties.  The goal is to stabilize the neighborhoods where there are foreclosed homes and get the properties to a condition where first-time homebuyers want to purchase them.  “We want to make sure that we can maximize our return on the investment,” she said.  In 2010, Fannie Mae repaired 87,000 foreclosed homes.

“It makes them — I think — indisputably the largest purchaser of paint and general appliances for these homes they’re fixing up,” said Guy Cecala, publisher of Inside Mortgage Finance.  “If they don’t maintain the houses, then the neighborhoods go downhill, other people are put at risk and the housing crisis gets worse because you have still more downward pressure on overall house prices,” Petrou said.

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Reinventing Fannie and Freddie

Thursday, June 2nd, 2011

The initial steps to dismantle Fannie Mae and Freddie Mac are underway with the introduction of a bipartisan bill in the House of Representatives that would replace the mortgage giants with a minimum of five companies that would issue mortgage-backed securities with significant federal regulation.  The compromise legislation proposed by Representative John Campbell (R-CA) and Representative Gary Peters (D-MI) is likely to be the only plan that will attract sufficient support from both parties on a politically volatile subject, especially at a time when gridlock looms over issues such as how to curb federal spending.  The bailout of the two companies has cost taxpayers upwards of $100 billion.

According to Representative Campbell, “Rather than putting out a political marker, we can move a piece of legislation that is significant…and can actually become law.  The only other approach that’s out there in a bill is one that replaces Fannie and Freddie with nothing.”  Other policymakers, such as Treasury Secretary Timothy Geithner, have discussed the merits of a limited but unambiguous government guarantee of securities backed by certain types of mortgages.  The new entities – similar to Fannie and Freddie — would be limited to purchasing loans that meet certain standards, including size caps.  The difference would be that the firms would be required to hold much more capital than Fannie and Freddie.  Only the mortgage-backed securities that they issue –not the companies themselves — would enjoy federal guarantees.  The companies would operate similarly to public utilities and likely will not have exchange-listed shares.

Critics say the proposal risks recreating the same dynamics that led Fannie and Freddie to use their government ties to take risks that harmed taxpayers.  “In reality, this is almost surely going to be terrible,” said Dwight Jaffee, finance professor at the University of California, Berkeley.   Government insurance programs, he says, inevitably lead to “a catastrophe.”  Advocates argue that taxpayers will be less exposed to losses because borrowers will have to make significant downpayments.  Additionally, the new firms will have to hold more capital.  Additionally, the firms will be required pay a fee for government backing to finance a catastrophic insurance fund, much as the Federal Deposit Insurance Corporation levies fees and handles bank failures.

The mortgage and housing industry support a continued government role in supporting mortgage lending, including the Mortgage Bankers Association, National Association of Realtors and National Association of Home Builders.

The agencies are still hemorrhaging money.  For example, Fannie Mae reported a loss of $8.7 billion for the 1st quarter of 2011, which included a $2.2 billion dividend payment to the Treasury Department.  The loss was significantly less than the $13 billion reported one year ago.  “We need to manage our credit book — our old legacy book very vigorously,” said Fannie Mae President and CEO Michael Williams.  But that is not in conflict with helping distressed homeowners.  “Helping people to avoid foreclosure is a good thing,” Williams said.

Action must be taken to keep the mortgage market afloat and provide securitization for investments.  According to a Washington Post editorial,  “The housing market is still in deep trouble.  Prices nationwide have fallen by about a third since the peak in 2006 — and they appear to be trending down again.  The resulting hit to household wealth may hinder the recovery, which is already sluggish.  Small wonder that various advocates for housing are once again asking Washington for help.  But in at least one area, the prescription would be worse than the disease.  We refer to calls for extending the current elevated limit on the size of loans eligible for securitization by Fannie Mae and Freddie Mac, the mortgage-finance giants operating under government control.  Congress ‘temporarily’ raised the limit to a maximum of $729,759 in certain markets in response to the sudden evaporation of private liquidity during the 2008 crisis, but that measure is set to lapse at the end of September.  At that point, the limit will not revert to the pre-crisis maximum of $417,000 in most of the country but to a level set in relation to local medians — and capped at $625,000.  But the Obama administration has supported a reversion to lower loan limits as the first step in gradually reforming the mortgage security market and reducing taxpayer exposure to Fannie and Freddie.  The administration’s goal is to lure cash-rich would-be mortgage securitizers back into the market, starting with the high end.  Treasury Secretary Timothy F. Geithner has described this as “crowding in” private capital, and it is the rare housing policy proposal that has enjoyed a measure of bipartisan support.”

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Many Americans Spend Half of Their Income on Housing

Wednesday, May 25th, 2011

American renters who pay more than 50 percent of their income on housing has peaked at the highest level in 50 years, according to a report from the Harvard Joint Center for Housing Studies. Approximately 26 percent of renters – that’s more than 10 million people – are spending more than 50 percent of their pre-tax income on rent and utilities because salaries have fallen significantly amid rising rents.  An analysis conducted by the Washington Post found that rents in the nation’s capital, for example, had risen 22 percent in 2009 over the past 10 years.

“It’s a real squeeze for the lower-income and moderate-income families, and we’re even starting to see it affecting middle-income families, too,” according to Erick Belsky, managing director of Harvard’s Joint Center for Housing Studies.  “The prospects for improvement any time soon are dim.”  In other words, finding an affordable house or apartment to rent can be difficult.

When the economy went south in 2008, developers stopped building new apartments at a time when foreclosures were pushing many Americans into the rental market.  Because supply and demand were at odds with each other, rental rates climbed and are expected to remain high for the foreseeable future.  “In real terms, it means more people have less money to spend on household necessities such as food, healthcare, or savings,” Belsky, said.  Households that spend half or more of their income on rent also spend almost 40 percent less on food and more than 50 percent less on healthcare than households with more affordable rent.  “In the last decade, rental housing affordability problems went through the roof,” Belsky said.  “And these affordability problems are marching up the income scale.”

The report notes that – in a perfect world – renters should not have to pay more than 30 percent of their income on housing.  Over the last 10 years, low-income renters have experienced difficulty staying within that limit.  In 2009, 7.5 percent of moderate-income renters had to spend more than 50 percent of their salaries on rent, double the number reported in 2001.

According to the report, 28.6 percent of metropolitan Chicago renters are severely burdened by their rental costs.  Ten years ago, only 20.4 percent of area renters paid that high a percentage of their incomes.

With the number of renters growing, the Low Income Housing Coalition says it’s time for policymakers to put more money into rental assistance and affordable housing.  Throughout the housing crisis and recession, lawmakers have placed resources primarily on helping troubled homeowners avoid foreclosure; but approximately 40 percent of foreclosures also displace renter households.  The coalition has asked Congress to fund the National Housing Trust Fund, which creates a permanent funding source to construct, renovate and preserve 1.5 million units of rental housing for low-income families over the next 10 years.  Although the trust fund legislation passed in 2008, Congress hasn’t funded it because of the economic downturn.  The fund will not increase government spending or taxes because it was designed to be funded through contributions from Fannie Mae, Freddie Mac and the Federal Housing Administration.

Sheila Crowley, the president of the coalition, said now was the time to act.  “Providing $1 billion for the National Housing Trust Fund will help address the growing shortage of affordable housing, which is one of the most serious economic problems facing the country,” she said.  Crowley expects the House of Representatives to begin debating the Section 8 Voucher Reform Act, which passed the House Financial Services Committee last summer.  “We are very much hoping that the Senate will take it up as well,” she said.  The bill would provide rent subsidies for 150,000 low-income families, , and the coalition is seeking another 2 million Section 8 housing vouchers over the next decade, doubling the current number.

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11 Percent Rise In New-Home Sales

Thursday, May 12th, 2011

New home sales rose in March, with the number of properties on the market at its lowest since the 1960s.  Additional gains will be stymied by competition from the market’s glut of previously owned houses.  Single-family home sales rose 11.1 percent to a seasonally adjusted 300,000 unit annual rate, according to the Department of Commerce, during a month when economists had expected a 280,000-unit pace.  Even with the March uptick, new home sales are just bouncing along the bottom.  Despite the good news, the number of houses sold still is 21.88 percent less than the level achieved one year ago.  The news was released by the U.S. Census in its monthly New Residential Home Sales Report for March.

“Investors continue to drive the market and were about 22 percent of the purchasers in March, up from 19 percent a year ago,” said economist Joel Naroff, of Naroff Economic Advisors, in Holland, PA.  Investors typically look for foreclosures or short sales.  “They love those cheap distressed homes, which now make up 40 percent of the market,” Naroff said.  “Given the tight lending standards cash buyers are more than welcome.  To get a Fannie or Freddie loan, which are the only games in town, a borrower has to have a credit score of about 760.  Before anyone gets excited and thinks housing is on the rebound, understand that we need to more than double the March sales pace to reach decent sales levels,” Naroff said.  “Prices remain soft and are down by about five percent over the year.”

According to Dirk van Dijk of the Wall Street Pit, “The March level was substantially better than the expected rate of 280,000.  The 11 lowest months on record (back to 1963) for new home sales have all been in the last 11 months.  We are down sharply from a year ago, and it is not like a year ago was a great time in the homebuilding industry either.  Relative to the peak of the housing bubble (July ’05, 1.389 million) new home sales are down 78.4 percent.  Inventories of new homes were down 1.1 percent on the month and are down 19.7 percent from a year ago.  Supply is at 7.3 months, down from 8.0 months in February, but up from 7.1 months a year ago.  While that is well off the peak of 12.0 months, it is still above normal.  A healthy market has about a six month supply of new houses and during the bubble, four months was the norm.”

The median price of new houses sold in March was $213,800, according to the Census Bureau.  “It’s a decent start to the spring selling season, but we’re coming off all-time lows here, so we’re not going to get too excited,” said Brett Ryan, economist with Deutsche Bank Securities.  “The overhang of foreclosures drags on new home sales.  Builders are waiting for a clearing process to take place.”

The housing market was either “little changed from low levels” or weaker across the country, the Federal Reserve said in its most recent Beige Book report.  The absence of a continued housing rebound is one of the reasons why policymakers will complete their $600 billion asset purchase plan and keep borrowing costs at nearly zero to encourage growth.

Last year was the fifth consecutive year of declining new-home sales. According to economists, it could take years before sales return to a healthy pace.  Slow new-home sales add up to fewer jobs in construction, which normally powers economic recoveries following recessions.  Each new home creates an average of three jobs for a year and adds $90,000 to the local tax base, according to the National Association of Home Builders.

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Want to Buy a Toxic Asset? The Treasury Department Is Selling Them

Monday, April 18th, 2011

The Treasury Department is planning to sell $142 billion worth of toxic assets that it acquired during the financial crisis.  According to Treasury, it wants to sell approximately $10 million worth of assets every month, depending on market conditions and hopes to end the program next year.  Treasury acquired the securities — primarily 30-year, fixed-rate mortgage-backed securities guaranteed by Fannie Mae or Freddie Mac –between October, 2008 and December, 2009 to stabilize the home loan market.

The Treasury has decided to sell the securities now because the market has “notably improved.”  According to Treasury officials, the sale could net $15 billion to $20 billion in profits for taxpayers.  The sale will have a negligible impact on the U.S. debt limit but could delay the ceiling’s arrival by a few days.  In early March, Treasury estimated the U.S. would hit the $14.294 trillion ceiling between April 15 and May 31.  The Treasury in 2008 retained State Street Global Advisors, a leading institutional asset manager, to acquire, manage and dispose of the mortgage-backed securities portfolio.

“We will exit this investment at a gradual and orderly pace to maximize the recovery of taxpayer dollars and help protect the process of repair of the housing finance market,“ Mary Miller, assistant secretary for financial markets, said.  “We’re continuing to wind down the emergency programs that were put in place in 2008 and 2009 to help restore market stability, and the sale of these securities is consistent with that effort.”

Congress gave Treasury the authority to buy securities guaranteed by Fannie Mae and Freddie Mac.  The value of these mortgage-backed securities declined significantly after the housing bubble burst, prompting fears that write-downs could drag down individual banks and further plunge the financial system into panic.  The Treasury said that three years after the worst point of the crisis, the market for asset-backed derivatives is now much more robust.

The government bought $221 billion of these bonds, as part of the Housing and Economic Recovery Act of 2008.  Treasury announced that it would buy the bonds on the day the government took over Fannie and Freddie.  “The primary objectives of this portfolio will be to promote market stability, ensure mortgage availability, and protect the taxpayer,” Treasury said at the time.  The portfolio is now just $142 billion.  The Congressional Oversight Panel, which supervised the Troubled Asset Relief Program, said that as of February of 2011, Treasury had received $84 billion in principal repayments and $16.7 billion in interest on the securities it holds.

“It was a bit of a surprise, though will likely be easy to digest,” said Tom Tucci, head of government bond trading at Capital Markets in New York.  “We spent a year and a half at levels that were unsustainable because they weren’t based on economic fundamentals, they were based on fear.  “Now some of the fundamentals are starting to come back into place.”

Republicans are asking for deeper cuts in government spending before they will agree to raise the debt limit.  Treasury Secretary Timothy Geithner has cautioned that failure to raise the borrowing limit would cause an unparalleled default by the government on the national debt.  Without question, this would drive up the government’s cost of borrowing money.

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Goodbye to Fannie and Freddie

Wednesday, February 23rd, 2011

The Obama administration and the Treasury Department have decided that Fannie Mae and Freddie Mac — the public-private housing finance model in place for the past four decades – will come to an end, although they pledged to continue backing the agencies’ existing obligations. “The GSE (government-sponsored enterprise) model is dead,” an Obama administration official said.  The Treasury Department is currently working on three broad options for overhauling the mortgage lending system, but will let Congress make the final decision.  The government bailouts of Fannie and Freddie have cost taxpayers nearly $150 billion.

Obama administration officials have emphasized areas of agreement with Republicans, stressing that they favor a system that is less dependent on government support.  Approximately 90 percent of new mortgages are currently backed by Fannie, Freddie or other federal agencies.  The move pleased Republicans, who have long criticized the mortgage companies. “I’m encouraged to see the administration included a number of reform ideas that track closely with my own,” Representative Scott Garrett (R — NJ) said.  Garrett heads the House Financial Services subcommittee, which oversees Fannie and Freddie.  Representative Randy Neugebauer (R – TX), said he was pleasantly surprised by the focus on restoring the mortgage-backed securities market issued without the government’s guarantee.  Debate over the future of the mortgage giants is often contentious on Capitol Hill.  Republicans consistently criticized last year’s Dodd-Frank financial-overhaul bill for not addressing the fate of Fannie and Freddie.  Treasury Secretary Timothy Geithner said that winding down Fannie and Freddie and creating an alternative won’t happen overnight.  “Realistically, this is going to take five to seven years,” he said.  “We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market.”

The Treasury Department report suggests that Fannie and Freddie purchase loans with smaller outstanding balances, reducing their risk.  The report also recommends phasing in a requirement that Fannie and Freddie borrowers make larger downpayments — at least 10 percent.  Lastly, the government wants Fannie and Freddie to wind down their own mortgage investment portfolios.  In their heyday, Fannie and Freddie were public companies that encouraged home ownership thanks to a Congressional mandate.  The companies buy home loans from lenders, which use the money to offer new loans to consumers.

The bad news is that mortgage costs could increase a bit once Fannie and Freddie are phased out. “Over the long run, the cost of a mortgage will rise modestly for the average American homeowner,” Geithner said.  “We think it’s very important for the government to continue to play a role, a targeted role” to make certain that “Americans who need help to find a home, to rent a home, or own a home get that help.”

Nor will the process of replacing Fannie and Freddie be easy.  Writing in the Wall Street Journal, David Reilly points out that “A return of private capital requires the revival of securitization markets for mortgages not backed by the government since bank balance sheets aren’t big enough to fill the gap”.  But 30-year loans in their current form aren’t attractive to investors without a government guarantee. The Treasury implicitly acknowledges the conflict, noting that the less government backing there is for housing finance, the less feasible the 30-year mortgage becomes.  It also admits the reward for losing that benefit, and largely removing government from mortgage markets, would be a reduced incentive to invest in housing so that ‘more capital will flow into other areas of the economy, potentially leading to more long-run economic growth and reducing the inflationary pressure on housing assets.’  That should be the clear goal of any housing-finance revamp.”

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Government Looking to Require CMBS Insurance

Tuesday, February 22nd, 2011

President Barack Obama is proposing an option to create an insurance fund for mortgage-backed securities, similar to the Federal Deposit Insurance Corporation that protects Americans savings accounts. The proposal consists of three legislative options for making long-term changes to the housing finance system, while taking short-term moves to gradually reduce the government’s role in the mortgage market now dominated by Fannie Mae and Freddie Mac.  The Obama administration is asking the private sector to play the leading role in the residential mortgage market and is expected to unveil several scenarios detailing how that might come about.

More than 85 percent of residential mortgages are now backed by the federal government.  Republicans want to slash that to zero, though they acknowledge that a transition so extreme cannot be achieved overnight.  At its core, the debate over what to do about Fannie and Freddie is an ideological one: How much should the government pay to sustain the housing market?  House Republicans, who want to abolish the government backing altogether, contend that the private market can more accurately price the risk of home mortgages.  By contrast, Democrats believe that government backing is necessary to assure that mortgages are accessible to middle-class Americans.  Mark Zandi, chief economist at Moody’s Analytics, said the impact would be approximately one percent.  “Regardless of what policymakers say, global investors will almost surely continue to believe the U.S. government would backstop a badly foundering mortgage finance system,” said Zandi, who has proposed a hybrid system that charges for the guarantee.

Meanwhile, Treasury Secretary Timothy Geithner has warned against acting too quickly or making rash changes.  “Given Fannie Mae and Freddie Mac’s current role in the mortgage market, we must proceed carefully with reform to ensure government support is withdrawn at a pace that does not undermine economic recovery,” he said.  “We believe there is sufficient funding to ensure the orderly and deliberate wind down of Fannie Mae and Freddie Mac, as described in our plan.

Geithner has proposed three options, all of which favor seeing the government eventually wind down Fannie and Freddie, whose survival has required more than $150 billion from the Treasury Department since the government seized them in September of 2008.  The first option would privatize mortgage finance and limit the government’s role to narrowly targeted subsidies, like Federal Housing Authority (FHA), USDA and Department of Veterans’ Affairs financing.  The second option adds a layer of government support that could be implemented to ensure access to credit during a housing crisis.  The third option, the one that bears the closest resemblance to the current system, would allow the government to guarantee mortgages but under stringent capital and oversight requirements, termed “catastrophic reinsurance behind significant private capital.”

The probable winners from replacing Fannie and Freddie are mortgage lenders and insurers, analysts at Goldman Sachs said. “While higher rates could decrease origination volumes, growth should still outpace balance-sheet availability,” the Goldman analysts said.  In addition to lenders, mortgage insurers are also potential beneficiaries.  “The stated goal of returning the (Federal Housing Authority) to its traditional role as a targeted lender of affordable mortgages supports the view for better-than-expected private market top-line growth.”

Despite the uncertainty about what entity will ultimately replace Fannie and Freddie, the Obama administration remains upbeat about the cost of winding down the embattled agencies. The administration expects its losses from Fannie and Freddie to ultimately be cut nearly in half.  However, the Treasury Department estimates that after receiving dividends from the GSEs (government-sponsored enterprises) for that assistance, the total losses could shrink to $73 billion by 2021 — 45 percent less than current levels.

An outspoken critic of the Obama plan is Mike Colpitts, who writes for The Housing Predictor.  According to Colpitts, “Like a solider standing alone in the battlefield, the Obama administration’s housing finance reform proposal offers the U.S. a way of ridding itself of the most troubled mortgage giants, Freddie Mac and Fannie Mae in the real estate collapse.  But it stops short of offering any concrete long term solutions with a housing plan for the nation like a lone soldier Missing In Action.  Realtors, mortgage professionals, new homebuilders and the lending industry compose many of the most fractured industries in the current U.S. economy as a result of the real estate collapse.  They deserve a plan on which they can rest their futures with the rest of America to benefit the entire nation, and for once provide concrete change towards a real economic recovery.”

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White House Pushes Fannie and Freddie to Make More Mortgage Modifications

Monday, December 20th, 2010

White House Pushes Fannie and Freddie to Make More Mortgage Modifications

The Obama administration is leaning on mortgage giants Fannie Mae and Freddie Mac to write down underwater loans and make life easier for homeowners who are at risk of default and may see their personal finances deteriorate.  The Federal Housing Finance Agency (FHFA) wants Fannie and Freddie to join a Federal Housing Authority (FHA) program that allows banks and other creditors, which agree to write down mortgages, to transfer the reduced loans to the FHA.

According to government estimates, between 500,000 and 1.5 million homeowners have the potential to benefit from the program.  This is a fraction of the 11 million homeowners who were underwater as of June 30, according to CoreLogic, Inc.  To put that number into perspective, approximately 23 percent of all American households with a mortgage are underwater.  According to the mortgage industry, the FHA program will be of minor benefit to the housing market unless Fannie and Freddie participate.  In its first three months, the program accepted 61 applications and modified three loans.

David Stevens, the FHA’s commissioner, said resistance by lenders has been frustrating.  Obama administration officials have given lenders “a responsible way to address borrowers with negative equity and if institutions are blatantly refusing” to participate, then that is “short-sighted.”  “Letting the status quo continue is going to be much more expensive than people think,” said Kenneth Rosen, a professor of economics and real estate at the University of California at Berkeley.  “We’ve got a downward spiral in housing here, and they’d better break the back of this with some shock and awe.”

Fannie and Freddie have been reluctant to reduce mortgage principal, primarily for the reason that it limits their opportunity to recover losses.  According to the Office of the Comptroller of the Currency, Fannie and Freddie have reduced only 10 of the 120,000 loans modified during the 2nd quarter of 2010.  “We have historically counted on the fact that the vast majority of borrowers – even borrowers who are underwater – continue making their payments,” said Don Bisenius, a Freddie Mac executive vice president.

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Covered Bonds Could Be a Viable Alternative to CMBS

Monday, November 15th, 2010

A financing vehicle invested in Prussia in 1769 could be the solution to failed #CMBS.A financing vehicle that has been used in Europe since it was invented in Prussia in 1769 is finding its way to American shores as a replacement for commercial mortgage-backed securities (CMBS).  The vehicle is known as covered bonds, which is a securitized debt instrument backed by a pool of top-quality assets, primarily mortgages. What is different about covered bonds is that the assets – known as a cover pool – are maintained on the issuer’s balance sheet.  This acts as a safety measure because the issuer is less likely to underwrite loans that carry significant risk.

Currently, the United States has no established market for covered bonds, although they are a $3 trillion business in Europe.  In July, the House Financial Services Committee approved a bill that would establish a regulatory framework for covered bonds.  Although the bill just missed being included in the Dodd-Frank financial reform overhaul, the consensus is that the legislation could win House and Senate approval in 2011.

“We have seen the difficulties wrought by the complexity of securitizations,” said Bert Ely, a financial and monetary policy consultant.  “Covered bonds, on the other hand, are a very clean and simple tool.  A bank makes a loan, keeps the loan on its books, and issues a covered bond.  There is no sale and resale of mortgages.”  With a covered bond, several elements protect the bondholder.  All assets in the covered pool are subject to monthly monitoring by an independent third party.  If one of the loans becomes non-performing, the issuer must remove it and replace it with a loan that is performing.  Thanks to the safety features, the majority of covered bonds enjoy a triple-A rating.

Despite the fact that many in the investment community support covered bonds, the Federal Deposit Insurance Company (FDIC) has some concerns about them.  Primary is the fact that the pools are over-collateralized – sometimes by as much as three times the bonds’ face value.  The FDIC wants access to these assets when a bankruptcy occurs.  The FDIC argues that if the cover pools protect the bulk of the banks’ assets from being claimed, the depositors are being asked to take on too much risk.  “We support covered bond legislation, but not at the expense of our obligation to protect the deposit insurance fund,” said the FDIC’s Michael H. Krimminger.

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