Posts Tagged ‘Fannie Mae’
Financial 411: More on Fannie & Freddie
WNYC radio’s Financial 411 had me on yesterday to talk about the future of Fannie Mae and Freddie Mac, and the great mystery I wrote about in Politico last week: Why has the Obama administration been silent about its intentions for restructuring the mortgage finance system? The tape, please.
Why Fannie & Freddie matter most
New from me in Politico: an op-ed stressing that as important as a Consumer Financial Protection Agency is, the most important looming financial reform battle on the Hill is over the future role of the federal government in backing homeownership. The administration knows that any debate touching on Fannie Mae, Freddie Mac and $300 billion or so in public investment is radioactive. It has been silent on the GSEs’ fate for more than a year, even after it promised that it would illuminate its plans this February.
The House Financial Services Committee was supposed to hear something, anything, about the future of housing finance from Treasury Secretary Timothy Geithner at a March 2 hearing that was then postponed to March 23. I’m marking my calendar again but not holding my breath.
Housing Watch highlights
I’ve been blogging at Aol’s new Housing Watch site, sharing my take on the mortgage/financial crisis, regulatory reform (what little there is of it so far), and what it all means for consumers.
Some highlights. Dig the traffic-bait headlines! See all my posts here.
The New Mortgage Revolution: Walk Away
Borrowers Pay to Refill FHA’s Pot
U.S. Cracks Down on “Reverse Redlining”
Brian Lehrer Show question
If you didn’t catch the Brian Lehrer Show this morning, you can hear my segment here.
I’m not sure I follow Ms. Katz’s explanation about the Community Reinvestment Act. If pro-CRA activists had to convince Fannie Mae to insure formerly redlined mortgagors, why would there be competition between Solomon Bros. and other sub-prime lenders and Fannie Mae to finance the mortgages?
I had to condense a decade of history into a brief explanation, so let me unpack the sequence of events that led from a drought of financing for high-risk borrowers in the 1970s to a ferocious race to the bottom by the end of the 1990s.
When the pro-CRA activists first persuaded Fannie Mae to buy mortgages they previously wouldn’t have, in the late 1980s, the Wall Street mortgage-backed securities market was still in its infancy. It was only in 1983 that Congress permitted open trading in mortgage-backed securities, and only with the tax code overhaul of 1986 was it even feasible for investment bankers to sell mortgage-backed securities on a large scale. Then it took a few years of persuasion and demonstrated returns to convince investors that mortgages to high-risk borrowers were worth betting on. The Wall Street-backed subprime market really took off in 1994, when mortgage lenders essentially ran out of new customers.
Once the subprime industry, backed by Wall Street mortgage-backed securities, got growing and producing returns by charging high interest rates and fees to high-risk customers, there was no looking back – it was a lucrative business that had to keep pursuing new customers to grow. Those customers were ones who either didn’t qualify for Fannie Mae/Freddie Mac-financed mortgages, even under those agencies’ newly generous lending standards, or were qualified but pushed into subprime by unscrupulous mortgage brokers.
The future revealed
If you want to see what the future of home mortgages looks like, it’s lurking somewhere in the testimony the Mortgage Bankers Association presented to Congress this week. In a reasoned policy document that the mortgage bankers should have thought of writing about 15 years ago, the MBA’s Council on Ensuring Mortgage Liquidity lays out principles for how a home finance system should work as well as nine different models that could get it there – everything from covered bonds (aka the Danish system) to a public utility to keeping Fannie Mae and Freddie Mac as the main forces generating funds.
Creating a fully privatized finance system is on the list of options, but not something the mortgage bankers, homebuilders or Realtors (I don’t dare lowercase the “r”) support – why should they if they can benefit from government subsidies and guarantees through a strong government role? Indeed, some of the backing the mortgage bankers are asking the feds to provide would hand additional risks on the public sector, in the name of stabilizing the mortgage markets and maintaining credit for the biggest number of borrowers possible – a bargain Congress ought to be wary of.
As recently as last summer, in the breath between Freddie Mac’s collapse and the Lehman implosion, the calls for privatizing Fannie Mae and Freddie Mac came loud and often. What a difference less than a year makes. This week’s hearings featured just one token opponent of keeping Fannie and Freddie as public entities at the heart of the mortgage market, Dr. Lawrence J. White of NYU’s Stern School of Business. He called for the privatization of the agencies, along with a “program of targeted assistance to low- and moderate-income households to encourage them to become homeowners.” I can’t think of a more reckless combination – it’s like turning the clock back to 2003.
Fannie and Freddie 4evah
Wednesday sees the House Financial Services Committee’s Subcommittee on Capital Markets hold a hearing on “The Present Condition and Future Status of Fannie Mae and Freddie Mac.” The lineup includes the usual industry suspects (mortgage bankers, Realtors, homebuilders), a requisite but reasonably sane kill-the-agencies voice, NYU Stern School’s Lawrence White, and Susan Wachter from Wharton, whose wonderfully titled paper “Explaining the United States’ Uniquely Bad Housing Market” provides an authoritative insta-account of how Fannie and Freddie made mortgage securitization work and Wall Street played the game so wretchedly wrong. Congress will do well to listen to Wachter.
What to stress?
The coincidental timing of the release of stress test results and Fannie Mae’s 1st quarter statement makes a tempting target for comparison — look at the stress test assumptions, compare them with Fannie Mae’s actual results, and show how accurate the Fed’s “most adverse” scenario for credit defaults actually is and how much scarier things actually are in the real world.
The New York Times’ Gretchen Morgenson gives the calculus a go in her column today, and botches it.
Losses recently seen in Fannie Mae’s portfolio support this view. In the first quarter, its subprime loans had average losses of around 68 percent; the Fed expects two-year losses in subprime to be, at worst, 28 percent.
Alarming, right? But Morgenson appears to be comparing two totally different numbers. The stress tests projected loss *rates* — that is, what proportion of a portfolio would end up in default.* For subprimes, it anticipated loss rates on subprime betweem 21 and 28 percent. The Fannie numbers Morgenson cites show loss *severity* — that is, how much Fannie will lose on those loans that do go into default, not its losses on the entire portfolio.
The Fannie statement does include some ominous indicators — of Fannie’s small subprime portfolio, between 22 and 47 percent of mortgages are more than 60 days late on payment — but the “serious delinquency” rate right now for Fannie subprime, indicating the loans likeliest to go into foreclosure, currently stands at 17.95%, well within the stress tests’ projections.
* Clarification: The stress tests projected the “loss rate” — that is, the projected total proportion of the holdings’ value that will be lost. The Fannie loss severity numbers don’t show that.
Oh, boy
What’s more troubling than a world in which all home loans come from Bank of America and Wells Fargo? One where Fannie Mae and Freddie Mac guarantee lines of credit for smaller mortgage bankers, which is what the Mortgage Bankers Association is now asking the Federal Housing Finance Agency to do.
Today’s Journal also has a story about how default rates for FHA-insured mortgages are rising fast, and that should give you an idea of what’s at stake here. Most FHA lenders are the very kinds of institutions that are now seeking the Fannie/Freddie guarantee on their credit lines — mortgage banks, which don’t do any other kind of business and therefore don’t have deposits or any other sources of funds to turn to. While many mortgage banks are solid and valuable institutions, over the last few years mortgage brokers seeking to increase their profit margins have also opened up their own banks, and quite a few mortgage banks are basically new incarnations of sleazy subprime loan mills.
So let me get this straight: the credit markets won’t take the risk of guaranteeing warehouse lines of credit for mortgage bankers, but the federal government should?
Bursting the bursting
I always appreciate Dean Baker’s thoughtful assessments of the dynamics of the housing markets, so I was glad to belatedly come across his December brief advocating for the systematic deflation of housing prices, by basically putting Fannie Mae, Freddie Mac and Ginnie Mae on strike in overpriced housing markets until sales prices come down — they would simply stop buying mortgages there. Eerie overtones of Fannie’s history of redlining aside, it’s an appealing idea. Housing prices indeed must come down. But there’s one thing I can’t get past in the Baker plan: doesn’t deflating housing prices kick out whatever wobbly support all the existing mortgage backed securities (and their derivatives) depend on? After all, those falling housing prices reflect the collateral on which all those securities are underwritten. Deflate those rapidly, as Baker is suggesting, and it would cause even greater havoc to the banks vested in those securities than we have now. And much as I don’t feel for the banks or bankers that made the misery, we can ill afford to worsen their plight now.
I do like Baker’s idea of a structured rental program for owners who’d otherwise go into foreclosure — companies have been doing these leasebacks anyway, under conditions that leave the now-tenants with few rights. Better to bring the practice out into the daylight.
How the homes we live in turned into the monsters that ate our economy and the United States became a nation obsessed with real estate.
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- Lincoln Institute of Land Policy
- National Consumer Law Center
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- National Low Income Housing Coalition
- National Training and Information Center
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What Alyssa reads
- Baseline Scenario
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- Felix Salmon
- Galleycat
- Housing Wire
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