Posts Tagged ‘Fannie Mae And Freddie Mac’
Gov’t likely to keep big mortgage market role
Keeping Fannie Mae and Freddie Mac in business will cost taxpayers billions. But getting the federal government out of the mortgage business would cost homebuyers dearly in the form of higher interest rates. The Obama administration began tackling the dilemma last week at a public conference on the future of the mortgage system. Fannie and Freddie lost a combined $9 billion in the April-to-June quarter and have needed more than $148 billion to stay afloat since the government rescued them nearly two years ago. Figuring out what to do with Fannie and Freddie could take years and involves a more difficult question: How much should the government do to subsidize the housing market? The government has helped make mortgages attractive to Americans for decades with a range of policies, from allowing homeowners to deduct mortgage interest payments to backing loans that make long-term fixed-rate mortgages widely available. Now, Fannie and Freddie are facing scrutiny for the billions that taxpayers have covered for the bad loans made during the housing boom. And the administration and Congress are under pressure to address Fannie and Freddie’s role that contributed to the mortgage crisis after leaving that out of the broader financial regulatory overhaul. Some would like the government to scale back its support for Fannie and Freddie to give the private sector a chance to compete. But others say ending it is unrealistic because it would make the 30-year fixed rate mortgage less available or more expensive. “When Congress overhauls the housing finance system, it’s going to have to preserve something close to the status quo,” said Jaret Seiberg, an analyst with Concept Capital’s Washington Research Group. “Our whole housing system is built upon the ability of borrowers to get 30-year fixed-rate mortgages. You just can’t remove that product from the market.” Without the government’s backing, banks would prefer not to make loans that leave interest rates fixed for more than five years. They don’t want to take the risks that interest rates will skyrocket, leaving them with an unprofitable loan a decade later. Fannie and Freddie buy home loans from lenders, package them into bonds with a guarantee against default, and sell them to investors. The pair nearly collapsed two years ago under the weight of soaring foreclosures and defaults. On Monday, Freddie said it lost $6 billion, or $1.85 per share, in the April-to-June period. The company lost $840 million, or 26 cents a share, in the same quarter last year. And it asked for an additional $1.8 billion from the federal government, bringing its total request to $63.1 billion. There are numerous ways to restructure the mortgage system, ranging from a fully privatized system to one totally controlled by the government. Here’s a look at some of the options: • A fully private system: Fannie and Freddie would be eliminated and private lenders would take over, either holding loans on their books or selling mortgage bonds. But the market for mortgage securities issued without any government backing has been virtually dead since the housing bust. It’s unclear whether it can come back. • A semi-private system: Fannie and Freddie would be dissolved. Their function would be assumed by private companies, which would apply for permission to issue government-backed mortgage securities. They would pay the government for the ability to do so, creating a government-run insurance fund to absorb losses if the market went bad. This arrangement would ensure 30-year loans are available even during bad economic times and limit the damage to taxpayers for future meltdowns. Still, mortgage rates could rise under this scenario, and smaller banks might not like this because it could increase the power of the nation’s biggest banks. • A hybrid system: Fannie and Freddie would continue to exist, but would compete against other companies that would issue government-backed mortgage securities. • A government-run system: Fannie and Freddie would be folded into the government. This option is unlikely because it would further balloon the already-expanding federal debt. Experts say Congress is likely to choose a semi-private or hybrid system. “In the end, the politics are going to dictate that some sort of guarantee remains,” said Republican economist Douglas Holtz-Eakin, a former adviser to Sen. John McCain’s presidential campaign. Obama administration officials are giving only vague hints about where they stand. Treasury Secretary Timothy Geithner said last month the administration wants to “bring fundamental change” to the mortgage market but offered few specifics. But he hinted that he sees some role for the government. Copyright © 2010 The Associated Press, Alan Zibel, AP real estate writer. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. Related Topics: Mortgages
Feds rethink subsidies for homeownership
Just how much should Uncle Sam do to help Americans buy their own homes? For 70 years – and for the last 15 in particular – the answer has been: Whatever it takes. Now, policymakers are pausing to reconsider. In the next few months, they’ll weigh whether there can be too much of a good thing when it comes to helping families finance the American Dream. The rethink could mean a shake-up for a mortgage market addicted to government subsidies. “This process of figuring out the government’s role is going to involve some hard choices,” says Alyssa Katz, author of Our Lot: How Real Estate Came to Own Us. “The moment you start changing the nature of what is guaranteed by the government, what is subsidized, you start to change the alignment of winners and losers. ... We took for granted that anyone could get a mortgage.” Using guarantees and tax breaks, the government pushed homeownership past 69 percent in 2004. Then it all came crashing down. Housing prices started crumbling in 2007, panicking financial markets, forcing the government to seize mortgage giants Fannie Mae and Freddie Mac, and pushing the economy into the worst recession since the 1930s. Homeownership has fallen below 67 percent. Now, Washington is preparing to rebuild the national mortgage market atop the ruins of Fannie and Freddie. The proposal, due early next year from the Obama administration, could make it harder to buy a home by reducing available credit or requiring bigger downpayments. Low-income renters might get more government help. Congressional Republicans doubt the administration has the nerve to make bold changes. They say the White House squandered an opportunity to deal with what they see as the No. 1 problem – limiting taxpayer losses on Fannie Mae and Freddie Mac – in an overhaul of financial regulations Congress passed last month. “What you’ve seen is two years of lip service,” says Rep. Spencer Bachus of Alabama, ranking Republican on the House Financial Services Committee. “The administration and the congressional Democrats have not shown any willingness to address the issue other than to talk about it and have planning sessions.” Other critics say eliminating or overhauling Fannie and Freddie isn’t enough: The government must reconsider such bedrocks of housing policy as the mortgage interest deduction and the tax exemption of most capital gains from home sales. They say these misguided or outdated government policies encourage the United States to massively overinvest in housing, shortchanging other parts of the economy. “There’s only so much subsidy to go around at the end of the day,” Katz says. The administration isn’t tipping its hand in advance of a conference next Tuesday on housing finance reform in Washington. But officials insist that big changes are coming to housing finance. Treasury Secretary Timothy Geithner has said the reforms must: continue to make mortgage credit widely available; promote affordable housing for homebuyers and renters alike; protect consumers from predatory lending; and promote financial stability. “We have committed to having a proposal in place by early next year,” says Federal Housing Administration Commissioner David Stevens. “This is not about delaying. This is about being thoughtful.” Policymakers are moving cautiously because the housing market is on government life support two years after the worst of the financial crisis. “Even today, private capital has not yet fully returned to this market,” Jeffrey Goldstein, the Treasury Department’s undersecretary for domestic finance, wrote recently. “Fannie Mae, Freddie Mac and other government entities guarantee more than 90 percent of newly originated mortgages. They are practically the only game in town.” (In 2005, they accounted for just a third of the market.) Square 1: Fannie & Freddie Whatever Washington does in the next few months will likely focus on Fannie and Freddie. The housing giants buy mortgages from banks and other lenders. Usually, they package the mortgages into securities and sell them to investors. Sometimes, they keep the mortgages in their own portfolios. The idea: to create a thriving secondary market in mortgages. By selling their mortgages to Fannie and Freddie, the banks clear room on their balance sheets to make more, ensuring a plentiful supply and making it easier for homebuyers to find financing. Fannie (established by Congress in 1938) and Freddie (1970) were private, profit-seeking companies, but they operated with the implicit understanding that taxpayers would bail them out if they ran into trouble. That assumption gave them access to low-cost financing. They made enormous profits, paid their top executives extravagant salaries and accumulated outsize influence in Washington. They used their clout to lobby for bare-minimum levels of capital to cushion against losses. Thin capital proved lethal when Fannie and Freddie caught the virus that infected the rest of the financial system in the mid-2000s: irrational exuberance about housing prices. The mortgage giants had strayed from conventional mortgages. In 2000, they held few securities backed by subprime or undocumented Alt-A loans from private lenders; by 2007, those mortgages accounted for nearly a quarter of their portfolios. When housing prices collapsed, Fannie and Freddie were sitting on huge losses. The government seized the two companies, making explicit Uncle Sam’s implicit guarantee. Geithner says regulators couldn’t just let the mortgage giants fail without risking “devastating consequences for the housing finance system and the broader economy.” The Congressional Budget Office estimates that bailing out Fannie and Freddie will cost taxpayers $389 billion between 2009 and 2019. Just about everyone agrees that Fannie and Freddie, known as government-sponsored enterprises or GSEs, were built around a fatally flawed model – one in which investors and executives pocketed profits and taxpayers absorbed losses. “After reform, the GSEs will not exist in the same form as they did in the past,” Geithner told Congress in March. “Private gains will no longer be subsidized by public losses.” House Republicans are calling for Fannie and Freddie to be put out of business within four years. Democrats don’t go that far: “We know we have to replace them,” says Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. Whatever supplants Fannie and Freddie in the mortgage business, Frank says, should be either 100 percent private or 100 percent public, not a hybrid. In April, Treasury and the Department of Housing and Urban Development asked various players in the housing market, from lenders to advocates for the homeless, to weigh in on reform proposals. Many call for Fannie and Freddie to be replaced by private firms that enjoy straightforward government support but have a narrower mission and are far more tightly regulated than the failed housing giants. Tinkering with housing finance is like playing with political dynamite, says Raj Date, executive director of the Cambridge Winter Center for Financial Institutions Policy. Fannie and Freddie “actually do provide a very large subsidy to homeowners who borrow money,” he says. “Here’s the thing about upper-middle-income suburban homeowners: They vote. When you take away a huge housing subsidy, they notice.” 30-year mortgages One example: Freddie and Fannie, with their government backing, allowed the proliferation of 30-year, fixed-rate mortgages – a product that lenders would otherwise shun. Reason: Long-term, fixed-rate loans struggle in any interest rate scenario. If rates rise, banks are squeezed, because their revenue remains fixed even though they have to pay more for deposits and other funding. If rates fall, homeowners refinance. “No rational market participant is going to bear that risk,” Date says. Long-term fixed-rate mortgages make sense only if the government is absorbing some of the risk. Reforming housing finance, Date says, could jeopardize the future of long-term, fixed-rate mortgages or raise interest rates on them, perhaps a quarter to half a percentage point. Even if the government doesn’t make radical changes in the way housing is financed, it likely will shift emphasis away from encouraging homeownership and toward helping low-income families find affordable apartments to rent. “We have to be very pro-homeownership,” Housing Commissioner Stevens says. But “we strongly believe in a balanced housing policy. ... Not everybody was prepared to own a home.” Until now, government policy has been lopsided in favor of putting people into privately owned houses. The Congressional Budget Office reports that government subsidies for homeownership, including the mortgage interest deduction, reached $230 billion last year. That compares with $60 billion in tax breaks and federal spending programs supporting the rental market. A lot of renters could use the help, the CBO says. In 2007, 45 percent of tenants spent more than 30 percent of their incomes on shelter – the threshold for affordable housing – compared with 30 percent of homeowners. Things are worse for the poorest renters, households earning 30 percent or less of the median income in their area: The National Low Income Housing Coalition found that 71 percent of the poorest households spent more than half their income on rent in 2008. Rent consumes half of Dorotha Allamand’s $1,300 monthly Social Security check. The retired nurses’ aide lives in Gridley, Calif., alone except for her three cats. She’s on a two-year waiting list for Section 8 rental housing assistance and faces a three-year wait for a senior [...]
Mortgage rates hit 4.44%
Growing pessimism over the weak economic recovery pushed mortgage rates to the lowest level in decades for the seventh time in eight weeks. The average rate on a 30-year fixed mortgage hit 4.44 percent this week, mortgage buyer Freddie Mac said Thursday. And some brokers say homeowners looking to refinance have even managed to do so for as low as 4 percent. Still, cheap rates have done little to boost the struggling housing market. Instead, they are highlighting investors’ fears that the rebound is stalling and the country could be slipping back into a recession. Investors are shifting their money away from stocks and into safer Treasury bonds. That is sending Treasury yields lower. Mortgage rates track those yields. And the Federal Reserve is pushing those yields down even further. The central bank said Tuesday it would buy Treasurys to help aid the recovery, using the proceeds from debt and mortgage-backed securities it bought from Fannie Mae and Freddie Mac. That move alone is unlikely to push average rates down to 4 percent, said Bob Walters, chief economist at Quicken Loans. But average rates that low are still a possibility if the economic outlook worsens even further. “The silver lining to a bad economy is that interest rates fall,” Walters said. “If you can lower your debt burden by refinancing, that’s great.” Up to now, low rates have failed to spark a struggling housing market. Slow job growth, a 9.5 percent unemployment rate and tight credit standards have kept people from buying homes. Applications to refinance have grown but remain well short of a massive boom. Overall home loan applications rose only 0.6 percent last week from a week earlier, the Mortgage Bankers Association said Wednesday. For those homeowners with solid finances, the opportunity to refinance below 4 percent is persuading some to consider 15-year fixed loans. Those average rates dropped to 3.92 percent, down from 3.95 percent last week and the lowest in decades. More homeowners are choosing that option because it allows them to save money in the long run, though it costs more in monthly payments. Freddie Mac says nearly a third of borrowers refinancing 30-year loans in the April-to-June picked loans with 15-year or 20-year terms. Still, savvy consumers can already find 30-year fixed rates at or near 4 percent if they are willing to pay a little more upfront. Chik Quintans, assistant sales manager with Atlas Mortgage in Seattle, said he was able to get two clients into mortgages with a 4 percent interest rate and a fee of 1 percent of the total mortgage amount on Wednesday. But rates have inched up since then. “Every day’s different,” Quintans said. “Sometimes people have to ruminate, and then the opportunity’s gone.” Refinancing could pick up significantly if rates fall further. An average rate below 4.375 percent could be enough of a drop so that many people who refinanced last year could shave a half of a percentage point of their mortgage rates, said Scott Buchta, chief mortgage strategist with Braver Stern Securities. Lenders could find themselves in a bind if traffic picks up, Buchta said. Many have laid off thousands of workers over the past three years and don’t have enough staff to handle a crush of new applications. Mortgage rates often fluctuate significantly, even within a given day. To calculate the national average, Freddie Mac collects mortgage rates on Monday through Wednesday of each week from about 125 banks, thrifts and credit unions around the country in a voluntary survey. Rate quotes from parts of the country with more lending activity – such as the West and Northeast – are given more weight in creating the average. Rates on five-year adjustable-rate mortgages averaged 3.56 percent, down from 3.63 percent a week earlier. Rates on one-year adjustable-rate mortgages fell to an average of 3.53 percent from 3.55 percent. The rates do not include add-on fees known as points. One point is equal to 1 percent of the total loan amount. The nationwide fee for loans in Freddie Mac’s survey averaged 0.7 a point for all loans except for 15-year mortgages, which averaged 0.6 of a point. Copyright © 2010 The Associated Press, Alan Zibel, AP real estate writer. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Decision on Fannie and Freddie May Come Soon
Government and banking experts meet next week to decide the future of Fannie Mae and Freddie Mac. The likeliest solution is a complex one. The Mortgage Bankers Association is proposing a system where risk-based fees on a class of mortgage-backed securities would be charged in exchange for a government guarantee against losses. Whatever the outcome, it is unlikely that Fannie and Freddie will be able to pay back the nearly $150 billion in taxpayer bailout money that they have received since 2007. Source: Reuters News (08/12/2010)
Risks abound if too many refinance
Lots of homeowners are frustrated these days that they can’t seem to get a mortgage refinance even though interest rates are at historical lows. It turns out they’re not alone. Plenty of people on Wall Street would also love to see a boom in refinancing activity, saying it would be a near-painless way to inject more money into the economy. If more people can refinance, the thinking goes, the more cash they’ll have to spend. Those economists and analysts calling for a mass mortgage reset say it could be engineered by the government, which controls the giant mortgage lenders Fannie Mae and Freddie Mac. Have them loosen underwriting standards and give breaks on fees, and more people will qualify to refinance. Here’s what the Obama administration says about that idea: Don’t get your hopes up. And that’s a good thing, since ushering in a refinancing boom would only be a short-term fix for the housing market and the economy that would have long-term consequences. A widespread refinancing of loans would mean reverting to looser lending standards, one of the things that got us into this mess. It could also boost mortgage rates for new borrowers and force U.S. taxpayers to shoulder more risk, since they technically own Fannie and Freddie. “At some point, we have to ask ourselves how much more can we ask taxpayers to do to support people staying in their homes,” says Dean Baker, co-director of the left-leaning Center for Economic and Policy Research in Washington. Wall Street has been abuzz in recent weeks over the possibility of the government engineering a broad refinancing of loans. Mortgage rates for a 30-year fixed home loan are now 4.49 percent, the lowest it has been since Freddie Mac began tracking rates in 1971. But millions of borrowers haven’t been able to benefit from those low rates. A big reason has to do with the fact that falling housing prices have left many borrowers with little or no home equity, which is also known as being “underwater.” As a result, they can’t qualify for refinancing. Others are deterred from refinancing by strict lending standards and the high fees that come with it. To get more mortgage resets done, some well-known economists and analysts at firms like Morgan Stanley and Goldman Sachs say the government should encourage a refinancing wave by adjusting lending policies at Fannie and Freddie. The mortgage lenders were taken over by the government two years ago. They own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. They buy home loans from lenders, package them into bonds with a guarantee against default and sell them to investors. The savings from a major mortgage reset could be significant. Allow someone with a $200,000 mortgage at 6 percent to refinance down to 4.5 percent, and suddenly there is $3,000 a year available to be plunged back into the economy. Add that up across millions of people, and you have what Morgan Stanley economist David Greenlaw calls a “slam dunk stimulus.” The government is already trying to help borrowers refinance, but its existing program has been a bust. The Home Affordable Refinance Program, or HARP, is directed at homeowners whose loans nearly or completely outsize the value of their homes. The government had hoped HARP would lead to millions of mortgage resets, but only a few hundred thousand have been done. The problem is that there are too many restrictions when trying to refinance under HARP. That’s why some people on Wall Street want the government to roll out a less restrictive program to get more mortgages resets done. Regardless of the pressure coming from homeowners and some on Wall Street for the government to ease refinancing rules, Treasury Department spokesman Andrew Williams tells The Associated Press that “the administration is not considering a change in policy in this area.” The government sees where the pitfalls are. Taxpayers have already pumped $145 billion into Fannie and Freddie over this last two years, and widespread refinancing now could raise that burden. Fannie and Freddie would very likely see their earnings decline and writedowns on their mortgage securities go up. In total, a mass mortgage reset could cost the mortgage lenders $75 billion, according to research from investment firm Keefe, Bruyette & Woods. Let’s also consider that a refinancing boom could have unintended consequences. The pace of foreclosures might not slow. A lower interest rate still might not be attractive enough for deeply underwater borrowers to stay in their homes. To some, it is not worth paying any money toward a depreciating asset, regardless of the interest rate. New borrowers could also face higher interest rates. A large refinancing wave would depress the value of mortgage-backed securities, making them less attractive to investors such as pension funds and foreign governments. Weak demand for those securities could lead to higher mortgage rates because lenders could have a harder time selling off their loans to investors. A short-term refinancing wave could help stabilize the housing market now, but it could also hurt home sales later. Homeowners who are able to lock in a once-in-a-lifetime interest rate could be deterred from moving in the future. Hitting the mortgage reset button could put more money into homeowners’ pockets today, and would also give the economy a quick jolt. But the ultimate costs may be too high. Copyright © 2010 The Associated Press, Rachel Beck, AP business writer.
Does the Government Have Authority in Private Label Mortgage Securities?
Today the FHFA, overseer of Fannie Mae and Freddie Mac, made an unprecedented move, issuing 64 subpoenas to "various entities," seeking information on private-label mortgage-backed securities in which the two invested, specifically "the contents of loan files, which include documents used in the underwriting process, such as loan applications and property appraisals."
Is Home Ownership an American Right?
Today we begin a series on CNBC called The Housing Fix. To be honest, it grew out of our need to look at the biggest elephant in the home today: Fannie Mae and Freddie Mac.
