Posts Tagged ‘mortgages’

Generation Gap in Americans’ Net Worth

Wednesday, November 23rd, 2011

Households headed by older adults have made impressive gains when compared with those headed by younger adults in their economic well-being over the past 25 years, according to a Pew Research Center analysis. In 2009, households headed by adults aged 65 and older had 42 percent more net worth (assets minus debt) than households headed by their same-aged counterparts had in 1984.  During this same period, the wealth of households headed by younger adults declined.  In 2009, households headed by adults younger than 35 reported 68 percent less wealth than in 1984.

As a result of these trends, in 2009 the typical household headed by someone in the older age group had 47 times as much net wealth as the average household headed by someone younger – $170,494 versus $3,662 in 2010 dollars.  In 1984, this had been a less asymmetrical ten-to-one ratio.  This means that the oldest households in 1984 had median net wealth $108,936 higher than that of the youngest households.  By 2009, the disparity had grown to $166,832.

Writing for CNN Money, Annalyn Censky notes that “So why the growing chasm?  Housing trends have played a major role, the Pew Center said.  While rising home equity helped drive wealth gains for the older generation over a long timeframe, the younger generation has had less time to ride out the housing market’s volatility — especially its most recent boom and bust.  Meanwhile, the younger generation is also taking longer to enter the labor force and get married.  And surging college costs are also leaving them burdened by more student loans than prior generations.”

According to the Pew report, “Most of today’s older homeowners got into the housing market long ago, at ‘pre-bubble’ prices.  Along with everyone else, they’ve been hurt by the housing market collapse of recent years, but over the long haul, most have seen their home equities rise.  For young adults who are in the beginning stages of wealth accumulation, there has been no such luck, at least so far.”

The impact of the Great Recession on individual wealth was taken into account by the Pew Researchers. We don’t know what the future will bring, but things are happening much more slowly for this generation,” said Paul Taylor, director of Pew Social & Demographic Trends and co-author of the analysis.  “If this pattern continues, and this difficult start plays out and slows this generation down, then you start to call into question the basic tenets of the American dream, which is that every generation does better than the one before.”

While the recession hurt people of all ages, the older group was much better sheltered, and saw its median net worth drop just six percent between 2005 and 2009.  Generally speaking, it has increased 42 percent since 1984 when the Census Bureau first began measuring wealth according to age.  The median net worth for the younger-age households fell 55 percent since the recession and 68 percent when compared with 25 years ago.

Net worth consists of the home’s value, possessions and savings, minus debt such as mortgages, college loans and credit-card debt.  Fully 37 percent of younger households reported that they have a net worth of zero or less, nearly double the amount reported in 1984.  That percentage remained at approximately eight percent for households headed by a person 65 or older.  “It makes us wonder whether the extraordinary amount of resources we spend on retirees and their healthcare should be at least partially reallocated to those who are hurting worse than them,” according to Harry Holzer, a labor economist and public policy professor at Georgetown University.

The news isn’t all bad for young people.  For example, they may have more student debt.  That’s good news because it means that more of them are going to college, a choice that will show returns in the long-run, according to the study.  Education is essential  to making money in today’s economy, said Steven Klineberg, a professor of sociology at Rice University.  Unlike in the past, the availability of blue-collar jobs and unions that could boost a worker into the middle class no longer exist.  “The ability to keep learning is a critical requirement,” Klineberg said.

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Housing Prices Still Weak, But Show Welcome Improvement

Tuesday, September 13th, 2011

Home prices revived somewhat during the 2nd quarter, but the housing market is still struggling.  Prices climbed an impressive 3.6 percent, compared during the three months ending March 31.  Despite the upbeat news, home prices are still down 5.9 percent compared with the 2nd quarter of 2010.  The rise in home prices came after three straight quarters of drops, the S&P/Case-Shiller national index — a recognized gauge of residential real-estate markets — reported.  The year-over-year decline was slightly more than the than the 4.7 percent drop that had been forecast by a consensus of experts at Briefing.com.  A separate monthly index of home prices in 20 major metro areas reported a month-over-month gain of 1.1 percent for June, and a 4.5 percent decline compared with last year.

The quarter-over-quarter price increase may be the last one for a while, said Stan Humphries, chief economist for the real estate website Zillow. He expects prices will weaken again.  “The August turmoil of credit rating downgrades, negative GDP revisions, stock oscillations and European debt woes are likely to leave a mark on both August home sales and home value appreciation,” according to Humphries.  “Monthly home value appreciation in June may mark the last hurrah before beginning to weaken in the back half of this year,” Humphries said.

Foreclosures still constituted a higher proportion of sales throughout the winter and spring as families took a break from home shopping; cash-rich investors dominate the market.  Nationally, home prices have returned to their 2003 levels.

Chicago, Minneapolis, Washington and Boston saw the largest monthly increases.  Cities hit hardest by the housing crisis, such as Las Vegas and Phoenix, reported small seasonal increases.  Housing has remained a drag on the economy and is one of the most important reasons why it is still struggling to recover two years after the recession officially ended.  Home sales in 2011 are likely to be at the lowest level in 14 years.  Home prices in many cities have reached their lowest points since the market bubble burst more than four years ago.  Home prices in Cleveland, Detroit, Las Vegas, Phoenix and Tampa are at 2000 levels.  “These shifts suggest that we are back to regional housing markets, rather than a national housing market where everything rose and fell together,” said David M. Blitzer, chairman of the S&P’s index committee.  “This month’s report showed mixed signals for recovery in home prices. No cities made new lows in June 2011, and the majority of cities are seeing improved annual rates,” Blitzer said.  “Looking across the cities, eight bottomed in 2009 and have remained above their lows.  These include all the California cities plus Dallas, Denver and Washington D.C., all relatively strong markets.”

“There’s no theoretical floor for prices. If the economy worsens, housing will get into a vicious cycle of falling prices and foreclosures,” said Mark Zandi, chief economist at Moody’s Analytics. “When prices fall, confidence wanes.”

Foreclosures and short sales — when a lender sells for less than what is owed on a mortgage – accounted for approximately 30 percent of all home sales in July, an increase from about 10 percent reported in normal years.  Nearly 1.7 million potential foreclosures are being delayed, according to real estate firm CoreLogic, either by backlogged courts or lenders waiting for the conclusion of state and federal investigations into questionable foreclosure practices.

“Prices aren’t going to rebound back rapidly,” said Paul Dales, a senior U.S. economist at Capital Economics Ltd. in Toronto.  “Most people think that when the downturn ends the recovery will be pretty good, but that’s not going to be the case at all.”

 “Consumer confidence is still weak, and the housing sector remains in a fragile state,” According to Robert Toll, chairman of Toll Brothers, Inc. the nation’s largest luxury homebuilder.  “The nation’s economy continues to suffer from the lack of jobs in housing construction and the related manufacturing and service sectors that a decent new-home market would typically generate.” 

Federal Reserve Chairman Ben Bernanke said “an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines” are hurting the housing market.

Lawrence Yun, chief economist at the National Association of Realtors, described the activity as “underperforming.  The market can easily move into a healthy expansion if mortgage underwriting standards return to normalcy,” he said.  “We also need to be mindful that not all sales contracts are leading to closed existing-home sales.  Other market frictions need to be addressed, such as assuring that proper comparables are used in appraisal valuations, and streamlining the short sales process.”

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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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Equity Loans Putting Homeowners Under Water

Thursday, June 23rd, 2011

Homeowners who took out second mortgages, or borrowed against their homes to use the money as a cash advance,  may regret their decisions.  Close to 40 percent are now underwater on their loans — owing more than their home is worth, according to CoreLogic Data.  The data show 38 percent of borrowers who took second mortgages are now under water, compared with 18 percent of mortgage holders who haven’t taken out home equity loans.  The study did not examine how the cash was used.  This type of negative equity can result from increased mortgage debt, a decline in home value — or both.  Additionally, the report found that during the 1st quarter of 2011 the number of underwater homeowners fell to 22.7 percent from 23.1 percent in the 4th quarter of 2010.   Although this decrease may seem like good news, it is due to the fact that completed foreclosures lessened the total number of homeowners in the market.

The study illustrates the consequences of easy borrowing amid the housing boom’s inflated prices.  Home-equity loans, which total approximately 10 percent of the mortgage market, have been a problem for both homeowners and lenders.  Second mortgages are any loan taken out on a property that is in addition to the first mortgage; they include home-equity loans and lines of credit.  Second mortgages are taking a toll on a fitful recovery, in which housing has been the weakest spot.  The S&P/Case-Shiller National Index recently showed that home prices fell another 4.2 percent nationally in the 1st quarter, its third straight quarter of price declines after a modest recovery in early 2010.  Across the country, prices have fallen 34 percent since peaking in 2006.  The inventory of unsold homes will take more than nine months to sell, according to the National Association of Realtors.  This is approximately 50 percent longer than is considered a healthy market.  “When a homeowner’s house is under water, “it’s harder to get a credit card or a car loan, you can’t put your home up for a small business loan,” said Mark Zandi, chief economist at Moody’s Analytics.  “There are all sorts of little, pernicious effects that you don’t necessarily think about.”

Writing on the Mortgage Rates &Trends:  Mortgage Blog, Michael Kraus says “Unsurprisingly, there is a strong correlation between negative equity and home equity loans.  Thirty-eight percent of borrowers with home equity loans are under water.  Those with negative equity and HELOCs (home equity lines of credit) are down $98,000 on average, compared to $52,000 for those without HELOCs.  Intuitively, this makes a ton of sense and serves to illustrate the danger of using your home equity as an ATM.  Hindsight being 20/20, of course.  The negative equity problem remains the most acute in all the same places.  Nevada leads the nation in negative equity, with an incredible 63 percent of Nevada homeowners with mortgages under water.  Fifty percent of mortgaged Arizona homes are upside down, followed by Florida (46 percent), Michigan (36 percent), and California (31 percent).  These figures have changed relatively little since the last report on home equity, and negative equity will likely remain a massive problem in these markets for years to come.  Also of interest is the amount that the average borrower with negative equity is underwater.  Across the country, the average person who has negative equity is $65,000 underwater.  The highest average negative equity is in New York ($129,000), followed by Massachusetts ($120,000), Connecticut ($111,000), Hawaii ($98,000), and California ($93,000).  These areas typically have the highest home prices, so the high amounts of negative equity make sense.”

Treating your home as an ATM by taking out a second loan puts owners in the position of being more than twice as likely as single-mortgage homeowners to owe more than it’s worth.  This scenario isn’t what economic leaders had pictured.  During the housing market’s boom years, Federal Reserve chairman Alan Greenspan promoted second mortgages and home-equity loans as a way to tap homeowners’ most valuable asset to pay bills or buy a car.  Then the bubble burst.  Because home values are still falling, those loans have now become just another burdensome payment.

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Foreclosures Are Down, So Why Isn’t That Good News?

Tuesday, June 7th, 2011

There’s good news and bad news about foreclosures.  Although the number of foreclosures fell to their lowest rate in 4 ½ years in April, the reason is a delay in processing the orders, not because Americans are experiencing less trouble paying their mortgages.  “Foreclosure activity decreased on an annual basis for the seventh straight month in April, bringing foreclosure activity to a 40-month low,” James J. Saccacio, chief executive officer of foreclosure data company RealtyTrac, said.  “This slowdown continues to be largely the result of massive delays in processing foreclosures rather than the result of a housing recovery that is lifting people out of foreclosure.”

According to Saccacio, “The first delay occurs between delinquency and foreclosure, when lenders and services are no longer automatically pushing loans that are more than 90 days delinquent into foreclosure but are waiting longer to allow for loan modifications, short sales and possibly other disposition alternatives.  Data from the Mortgage Bankers Association shows that about 3.7 million properties are in this seriously delinquent stage.  The second delay occurs after foreclosure has started, when lenders are taking much longer than they were just a few years ago to complete the foreclosure process.”

Nationally, homes typically are taking 400 days to go from the initial default notice to bank repossession, an increase when compared with 340 days a year earlier and 151 days in the 1st quarter of 2007, RealtyTrac said.

According to RealtyTrac’s report,  219,258 American homes were involved in the foreclosure process in April, either having received a notice of default, been scheduled for auction or been repossessed.  This is nine percent less than from March and a 34 percent cut from April 2010.  The report also shows one in every 593 American homes received a foreclosure filing during April 2011.  In New York, it took a property 900 days to go through the process.  In Florida, it was 619 days and in California, 330 days.

Nevada tops the list of states for foreclosures in proportion to its population, with one out of every 97 homes receiving a foreclosure filing in April.  Arizona ranked second.  Although Arizona foreclosures fell 15 percent,  REOs (bank repossessions) rose 22 percent, keeping the state in second place for the fifth consecutive month.  One in every 205 homes received a foreclosure filing.  Similarly, a 22 percent jump in REOs kept California in third place for a sixth month despite a decline in activity, with one in every 240 units affected during the month.  Other states in the top five are Utah (one of every 322) and Idaho (one of every 325).

Just ten states account for 70 percent of all foreclosure activity.  The first two in terms of numbers of foreclosures, California with 55,869 filings and Florida with 19,649 and the fourth, Michigan with 12,996, have large populations.  Arizona and Nevada, with relatively small populations rank in the top five by virtue of numbers as well as foreclosure rate with 13,419 filings and 11,761 filings.  The next five states with the greatest number of foreclosures are Illinois, Texas, Georgia, Ohio, and Colorado.

Writing in The Atlantic, Daniel Indiviglio notes that “It’s hard to see how this is good news for the housing market.  Prices are likely falling more slowly since the foreclosures aren’t hitting the market as quickly as they should be.  But they cannot be held up artificially — the decline will just happen over a longer period of time instead of quickly and steeply.  That means it will take longer for the housing market to hit its true bottom.  Only when that occurs can a recovery begin.  In other words, banks’ failure to process foreclosures in a timely manner will prolong the housing market’s struggles.”

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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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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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Barney Frank: Scrap Fannie Mae and Freddie Mac

Tuesday, February 16th, 2010

Congressman Barney Frank (D-MA) wants to scrap Fannie Mae and Freddie Mac in favor of an entirely new mortgage-financing system. According to Frank, Chairman of the House Financial Services Committee and who previously supported the programs, “The committee will be recommending abolishing Fannie Mae and Freddie Mac in their current forms and coming up with a whole new system of housing finance.”Congressman Barney Frank wants to start an entirely new mortgage-financing system.

Fannie Mae and Freddie Mac, which back a majority of the nation’s home loans, buy mortgages from lenders, insure them against default and supply new money to create new loans. Thanks to growing losses on these loans that threatened the health of Fannie Mae and Freddie Mac, the federal government took control of the programs in September 2008.  Since their seizure, Fannie and Freddie have been run by regulators and kept alive by $110.6 billion in taxpayer money.  Frank says that Congress needs to decide what to do with Fannie’s and Freddie’s remaining shareholders, as well as investors in the companies’ $5.4 trillion in mortgage bonds and $1.7 trillion in unsecured corporate debt.

Fannie Mae and Freddie Mac profit by financing mortgage-asset purchases with low-cost debt and on guarantees of home-loan securities they create out of loans from lenders.  They currently own or guarantee more than $5 trillion in U.S. residential debt, and were responsible for as much as 75 percent of the new mortgages made in 2009.

“We’re going to look at the whole question of housing finance,” Frank said.  “Sorting out the function of promoting liquidity in the market, and also the secondary market in general but then also doing some kind of subsidy for affordability.”

Fannie/Freddie were caught in the eye of the subprime meltdown.  In February of 2007, the residential mortgage-backed securities market crashed with sales plummeting 90 percent.  While reform is needed, Fannie and Freddie operate like a public option – by making home ownership more affordable and creating competition to commercial banks.  A positive step is the Deed for Lease program.  After foreclosure – at 57,000 homes in the first half of 2009 – the new program allows owners to lease their homes and avoid foreclosure.

Artificially creating/guaranteeing a market for home loans has lost billions. Hopefully, whatever entity replaces Fannie and Freddie will be prohibited from contributing to congressional campaigns and PAC’s.

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