Thursday, February 10, 2011

The Fix Is In Part I

Yesterday the House Capital Markets Subcommittee held a hearing on the steps that need to be taken to "fix" Fannie Mae and Freddie Mac.  As you may recall, as part of the Dodd Frank Bill, Secretary of the Treasury Tim Geithner was supposed to present Congress with a report for the administration's plans to deal with Fannie and Freddie in January.  Based on comments made by Congressman Barney Frank last summer, many of us who have watched the soap opera that is financial reform believed that the administration's solution to Fannie and Freddie was to replace both entities with an entirely new, entirely government-run agency which will set the rules for housing.  However, presumably the political upset in November put a damper on some of the administration's plans, which may be one reason that we did not see the new policies from Geithner in January.

Now, as we approach the middle of February, we are getting glimpses of what the proposed solutions are to the problems of Fannie and Freddie.  Remember that these two entities were mostly privately owned up until 2008 when the federal government took them into conservatorship.  Since 2008, both entities have cost tax payers approximately $150 billion in what may ultimately amount to the single largest bailout in the financial collapse.  A January 2011 article by the New York Times states that taxpayers have spent $160 million alone defending Fannie and Freddie from lawsuits accusing them of fraud.

Still, Fannie and Freddie back nearly 70% of the mortgages in the United States even today.  So getting rid of the agencies is not as simple as it sounds.  Conservatives have long sought to completely privatize the two giants, but that poses a problem if the private markets cannot raise enough capital to effectively back the demand for mortgages.  Liberals like Barney Frank have implied that they want a completely government-based public system which will be government backed and government run.  Either way, we are going to see massive changes to how mortgages are originated in the United States.  To paraphrase the old African proverb, when you take away the primary means of financing homes, you had better replace it with something of value.
 
We got our first taste of those changes yesterday when three conservative think tanks and one liberal one gave their recommendations of what needs to be done to stop the bleeding and change the system.  The first three advocate for privatization and the fourth for continued government intervention.

Suggestions included lowering the maximum loan amount which can be sold to Fannie and Freddie from $729,000 to $500,000.  I wonder if the experts making this suggestion understand that up until about three years ago, the maximum loan limits for Fannie and Freddie were $417,000.  This whole idea of the super conforming mortgage, which is just a fancy way of saying that Fannie and Freddie would make jumbo loans in high cost areas, was a bailout of sorts in itself to allow people living in more expensive areas of the country to be able to purchase and refinance homes after the loan sources for jumbo loans dried up.  I wonder if they are also aware that super conforming loans are available only to those people living in high cost areas--for example, a person living in El Paso, Texas, where there are quite a few homes that cost upwards of a half a million dollars, is not eligible for one of these super conforming mortgages and must get a jumbo loan or qualify for a first and second lien.

One way to immediately reduce risk would be to eliminate the super conforming mortgages by the end of 2011.  And if $500,000 is to be the loan limit, why not make it the loan limit across the United States rather than just in high cost areas?

One problem that I believe that Fannie and Freddie have always had is that they did business differently in different regions of the country.  For example, while El Paso is not eligible for the high cost mortgage relief, we are considered a low income city and so practically the entire city was eligible for aggressive affordable housing loans.  That means that individual people, regardless of their own personal income, living in virtually every neighborhood in El Paso were eligible to take advantage of programs designed to help lower income families obtain cheap loans.  So you could, and did, have families with six figure incomes getting loans with 100% financing and low cost mortgage insurance.  And that brings me to the second recommendation--move all affordable housing initiatives from Fannie and Freddie to HUD.  That would mean that any borrowers needing first time home buyer loans or loans with lower downpayments would have to get FHA loans.

Other suggestions include requiring that Fannie and Freddie's debt be shown on the government books (a sure fire way to dramatically raise the deficit in a matter of hours), requiring that Fannie and Freddie purchase only qualified residential mortgages conforming to the new guidelines being developed now, and requiring a new one page disclosure on all Fannie/Freddie backed loans (we already have page after page of disclosures, so what's one more!)   The most disheartening proposals from a mortgage originator's standpoint are those to immediately restrict loans by Fannie and Freddie to those for primary residences with a projected delinquency rate of less than 5% and to impose a 1% fee on each loan which will help the government raise money to recoup costs and  reduce "the competitive advantage of the GSEs [Fannie and Freddie]."  That means loans that are a lot more expensive and much more difficult to obtain.

I realize that stopping the bleeding of taxpayer money from Fannie Mae and Freddie Mac is a major goal and concern, but maybe the House Capital Markets Subcommittee should hear from some housing professionals rather than people who work for think tanks, whether liberal or conservative.  The housing market is stagnant and many Americans are choosing to rent rather than buy because getting a mortgage loan has become an out of reach goal for many Americans.  Raising the costs of financing and making qualifying still more difficult is going to keep housing prices down and keep the market stagnant. We cannot expect a meaningful recovery unless the housing market begins to recover, and it cannot recover unless mortgage money is available again.

Tomorrow the White House is supposed to unveil its proposals to fix Fannie Mae and Freddie Mac.

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