Federal takeover of Fannie Mae and Freddie Mac

Fannie, Freddie overhaul unlikely, by Vicki Needham, Thehill.com

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An overhaul of Fannie Mae and Freddie Mac is unlikely again this year despite recent Republican efforts to move the issue up the agenda.

Congressional Republicans, along with some Democrats — and even GOP presidential candidate Newt Gingrich — are renewing calls to craft an agreement to reduce the involvement of Fannie and Freddie in the nation’s mortgage market.

But without a broader accord, passage of any legislation this year is slim, housing experts say.

 

Jim Tobin, senior vice president of government affairs for the National Association of Home Builders, concedes that despite a mix of Democratic and Republican proposals, including a push by the Obama administration last year, congressional leaders probably won’t get far this year on a plan for Fannie and Freddie, the government-controlled mortgage giants.

 

Tobin said there are “good ideas out there” and while he expects the House to put some bills on the floor and possibly pass legislation, the Senate is likely to remain in oversight mode without any “broad-based legislation on housing finance.”

“We’re bracing for a year where it’s difficult to break through on important policy issues,” he said this week.

While the issue makes for a good talking point, especially in an presidential election year, congressional efforts are largely being stymied by the housing market’s sluggish recovery, prohibiting the hand off between the government and private sector in mortgage financing, housing experts say.

David Crowe, chief economist with NAHB, said that the market has hit rock bottom and is now undergoing a “slow climb out of the hole.”

The House has taken the biggest steps so far — by mid-July the Financial Services Committee had approved 14 bills intended to jump-start reform of the government-sponsored enterprises.

“As we continue to move immediate reforms, our ultimate goal remains, to end the bailout of Fannie, Freddie and build a stronger housing finance system that no longer relies on government guarantees,” panel Chairman Spencer Bachus (R-Ala.) said last summer.

Meanwhile, a number of GOP and bipartisan measures have emerged — Democrats and Republicans generally agree Fannie and Freddie are in need of a fix but their ideas still widely vary.

There are a handful of bills floating around Congress, including one by Reps. John Campbell (R-Calif.) and Gary Peters (D-Mich.), and another by Reps. Gary Miller (R-Calif.) and Carolyn Maloney (D-N.Y), which would wind down Fannie and Freddie and create a new system of privately financed organizations to support the mortgage market.

“Every one of those approaches replaces them [Fannie and Freddie] with what they think is the best alternative to having a new system going forward that would really fix the problem and would really give certainty to the marketplace and allow housing finance to come back, and therefore housing to come back, as well,” Campbell said at a markup last month.

There’s another bill by Rep. Jeb Hensarling (R-Texas) and bills in the Senate being pushed by Sens. Bob Corker (R-Tenn.) and Johnny Isakson (R-Ga.).

Corker, a member of the Senate Banking Committee, made the case earlier this week for unwinding government support for the GSEs while promoting his 10-year plan that would put in place the “infrastructure for the private sector to step in behind it.”

“A big part of the problem right now is the private sector is on strike,” Corker said.

He has argued that his bill isn’t a silver bullet, rather a conversation starter to accelerate talks.

“So what we need to do is figure out an orderly wind-down,” Corker said in November. “And so we’ve been working on this for some time. We know that Fannie and Freddie cannot exist in the future.”

He suggested getting the federal government this year to gradually wind down the amount of the loans it guarantees from 90 percent to 80 percent and then to 70 percent.

“And as that drops down, we think the market will send signals as to what the difference in price is between what the government is actually guaranteeing and what they’re not,” he said.

Even Gingrich, who has taken heat for his involvement with taking money while doing consulting work for the GSEs, called for an unwinding during a December interview.

“I do, in fact, favor breaking both of them up,” he said on CBS’ Face the Nation. “I’ve said each of them should devolve into probably four or five companies. And they should be weaned off of the government endorsements, because it has given them both inappropriate advantages and because we now know from the history of how they evolved, that they abused that kind of responsibility.”

In a white paper on housing last week, the Federal Reserve argued that the mortgage giants should take a more active role in boosting the housing market, although they didn’t outline suggestions for how to fix the agencies.

The central bank did argue that “some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”

Nearly a year ago, Treasury Secretary Timothy Geithner asked Congress to approve legislation overhauling Fannie Mae and Freddie Mac within two years — that deadline appears to be in jeopardy.

The Obama administration’s initial recommendations called for inviting private dollars to crowd out government support for home loans. The white paper released in February proposed three options for the nation’s housing market after Fannie and Freddie are wound down, with varying roles for the government to play.

About the same time last year, Bachus made ending the “taxpayer-funded bailout of Fannie and Freddie” the panel’s first priority.

While an overhaul remains stalled for now there is plenty of other activity on several fronts.

In November, the Financial Services panel overwhelmingly approved a measure to stop future bonuses and suspend the current multi-million dollar compensation packages for the top executives at the agencies.

The top executives came under fire for providing the bonuses but argued they need to do something to attract the talent necessary to oversee  $5 trillion in mortgage assets.

Earlier this month, the Federal Housing Finance Agency announced that the head of Fannie received $5.6 million in compensation and the chief executive of Freddie received $5.4 million.

Under the bill, the top executives of Fannie and Freddie could only have earned $218,978 this year.

Last week, Fannie’s chief executive Michael Williams announced he would step down from his position once a successor is found. That comes only three months after Freddie’s CEO Charles Haldeman Jr. announced that he will leave his post this year.

The government is being tasked to find replacements, not only for the two mortgage giants which have cost taxpayers more than $150 billion since their government takeover in 2008, but there is talk that the Obama administration is looking to replace FHFA acting director Edward DeMarco, the overseer of the GSEs.

In a letter to President Obama earlier this week, more than two dozen House members said DeMarco simply hasn’t done enough to help struggling homeowners avoid foreclosure.

The lawmakers are pushing the president to name a permanent director “immediately.”

Also, in December, the Securities and Exchange Commission (SEC) sued six former executives at Fannie and Freddie, alleging they misled the public and investors about the amount of risky mortgages in their portfolio.

In the claims, the SEC contends that as the housing bubble began to burst, the executives suggested to investors that the GSEs were not substantially exposed to sub-prime mortgages that were defaulting across the country.

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Real Estate News On The National Scene, by Phil Querin, Q-Law.com

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The credit and real estate meltdowns, coupled with the subsequent foreclosure crisis, caused many politicians, all with differing motives, to shift into high legislative gear.  Without commenting on motivation, which is an admittedly fertile area for discussion, let’s take a look at the national legislative scene to see what has occurred[1], and whether things are better today than in 2008.

MERS. I am addressing this issue at the beginning, primarily to get it out of the way.  I for one am suffering from “MERS Fatigue,” which is a malady afflicting many of us who watch and wait for something new to occur on this front.

It’s important to understand that MERS, which is the catchy acronym for the “Mortgage Electronic Registration System”, was never a creature of statute.  It was born and bred by the lending and title industries in the late 1990s, for reasons that most people already know.  But because of its national scope – affecting approximately 60% of all home mortgages – MERS bears mentioning here.

Despite all the national attention, the MERS controversy is really one that can only be resolved on the local level, since real estate recording and foreclosure statutes occur on a state – not national – level.  In Oregon, although there have been several federal court rulings, MERS’ legality is still up in the air.  This is because the local federal judges, who are supposed to follow Oregon law, have no binding Oregon appellate court precedent to follow when it comes to MERS.  The result is that there have been divergent federal court rulings.  And, the topic is so contentious at the Oregon legislature that there is little political appetite to tackle the problem, since few can agree on a solution.

So, the news is that there is no news.  It will take months for the one state court case currently on appeal to find its way to the Oregon Court of Appeals or Supreme Court.  And, although there is a slight chance of a breakthrough in the upcoming session, 2012 does not appear to be a year in which we will see a legislative answer.

Fannie and Freddie. Since the fall of Lehman Brothers in 2008, these two Government Sponsored Enterprises or “GSEs” have come under government ownership and control.  For a summary of the issues from the Congressional Budget Office, go to  the link here.  Since the private secondary mortgage market effectively disappeared between 2007-2008, this means that today, there is no viable buyer of residential loans except the federal government. To some observers, depending on their political bent, this is a good thing; but to others, it’s bad.

One thing is certain; as long as the federal government, through Fannie and Freddie, dictate borrower qualifications, LTVs, and conforming loan limits[2], the conventional mortgage market will continue to be tight.  This does not bode well for higher end homes, especially.  Unfortunately, we don’t have to go back very far in time to remember what happened in the “private label” secondary mortgage market (i.e. non-GSE market) where home loans were handed out like party favors, and those who should never have qualified did.

While there is much talk about doing away with Fannie and Freddie, it is unlikely any time soon.  However, what is occurring, albeit slowly and somewhat quietly, is a move to shift some of the GSEs’ loans to the private sector, where the risk would not be backed by the federal government.  If this works, perhaps more will follow.  While there may be some investors for such loans, it is likely that without a governmental safety net, the nascent private secondary market will demand a higher rate of return to offset the higher risk.

 

In the meantime, the loans of choice appear to be through the FHA.  While the paperwork may be daunting, the LTVs are good and the bar to borrower qualification is much lower and more flexible than conventional loans.

The Consumer Finance Protection Bureau. In recognition of Wall Street’s role in the credit and mortgage meltdowns, Congress established the Consumer Financial Protection Bureau (CFPB) through the Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21 of this year, it was opened for business. This is no ordinary federal agency.  It is a super agency, responsible for regulating many, many areas of consumer finance and mortgage loans.[3]

Elizabeth Warren, a Harvard law professor and Presidential Advisor, was the driving force behind the Agency’s creation.  She was a zealous advocate for the consumer.  Unfortunately, the political reality was that she may have been too zealous.  Instead of being appointed director, Richard Cordray, former Ohio Attorney General, was appointed to head the agency.  However, his nomination is currently tied up in Congress, and he may not be confirmed.  Many Republicans oppose the idea of so much power being wielded by a single person rather than a board of Senate-confirmed appointees.  So as it stands, the CFPB – this mega agency that was created to oversee so many aspects of consumer law – has a website, is hard at work making manuals and processing paperwork, yet has no director to oversee enforcement of anything.

Risk Retention, Skin in the Game, and the QRM. Mindful of the risks created when banks used their own safety net capital to trade in high risk loans, known as “proprietary trading,” the 2010 Dodd-Frank Act enacted Section 619, which placed severe restrictions on the ability of banks to use their funds to place risky bets (known as the “Volker Rule”).  Billions of dollars of these bets failed in 2008, leading up to the massive government bailouts that taxpayers funded.  What is the status of the Volker Rule today?  It’s still out for public comment, with banks arguing that the Rule will reduce their revenues and thereby force them to increase the cost of loans to borrowers. Given that big banks are still suffering the reputational fallout from the bailouts, the Volker Rule -with most of its teeth – may actually become law. When? Who knows.[4]

Also mindful of the risks created through sloppy underwriting of securitized loans, Dodd-Frank sought to require that banks retain a 5 percent interest in the risk of loss on those loans. This risk retention rule has been referred to as “skin in the game,” and was intended to require banks to share a portion of the risks they securitized to others.  Instead of investors taking on the entire risk of a slice of securitized loans, banks would have to hold back 5% on their own balance sheet.

However, the law made a major exception; it provided that through rule making, a standard be set for certain loan types with statistically lower default rates for which risk retention would be unnecessary.  This exception became known as the “Qualified Residential Mortgage” or “QRM.”  The QRM rules were intended to impose high standards for documentation of income, borrower performance, low debt-to-income ratios and other quality underwriting requirements.  Although they were to be the exception, not the rule, today, most lenders want these standards to be flexible rather than inflexible, so that there is more wiggle room for their loans to qualify as QRMs and thereby remain exempt from risk retention.  The argument in favor of looser loan standards is the fear that an inflexible QRM exemption will impair access to home loans by low and moderate income borrowers. This debate continues today, and there is some reason to believe that these rules will be substantially diluted before becoming law.

 

PCQ Editorial Comment: It was not so long ago that certain banks criticized borrowers of 100% home financing as creating “moral hazard” – i.e. they took risks because they had no financial risk of default since they had no down payment to lose.  Today, the concept of “moral hazard” seems to have been forgotten by those same banks opposing risk retention rules.  They now expect their borrowers to have “skin in the game” – hence the higher down payment rules – but deny the need to do so themselves.  “Pot meet Kettle.”

Conclusion. So, notwithstanding the fact that this country teetered on the brink of disaster in 2008, the politicians’ rush to legislate has continued to move at a snail’s pace.  Query:  Is the American consumer really better off today than in 2008?

[1] This article will not cover Mortgage Assistance Relief Services (“MARS”), since the much ballyhooed national law was never intended to apply to Realtors®, even though that realization did not come soon enough to avoid all sorts of unnecessary industry handwringing and forms creation. All of the Oregon-specific legislation has been discussed in my prior articles.

[2] On September 30, 2011, Fannie’s high loan limits for certain high housing cost parts of the country expired.  In portions of California, this may result in otherwise qualified buyers having to wait a year or two to save for the additional down payments.

[3] Here is a listing of its responsibilities: Board of Governors of the Federal Reserve: Regulation B (Equal Credit Opportunity Act); Regulation C (Home Mortgage Disclosure); Electronic Fund Transfers (Regulation E); Regulation H, Subpart I (Registration of Residential Mortgage Loan Originators); Regulation M (Consumer Leasing); Regulation P (Privacy); Regulation V (Fair Credit Reporting); Regulation Z (Truth in Lending); Regulation DD (Truth in Savings); FDIC: Privacy of Consumer Financial Information; Fair Credit Reporting Registration of Residential Mortgage Loan Originators; Office of the Comptroller of the Currency: Adjustable Rate Mortgages Registration of Residential Mortgage Loan Originators; Privacy of Consumer Financial Information; Fair Credit Reporting;  Office of Thrift Supervision: Adjustments to home loans; Alternative Mortgage  transactions; Registration of Mortgage Loan Originators; Fair Credit Reporting; Privacy of Consumer Financial Information; National Credit Union Administration: Loans to members and lines of credit to members; Truth in Savings; Privacy of Consumer Financial Information; Fair Credit Reporting Requirements for Insurance; Registration of Mortgage Loan Originators; Federal Trade Commission: Telemarketing Sales Rule; Privacy of Consumer Financial Information; Disclosure Requirements for Depository Institutions Lacking Federal Depository Insurance; Mortgage Assistance Relief Services; Use of Pre-notification Negative Option Plans; Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations; Preservation of Consumers’ Claims and Defenses; Credit Practices; Mail or Telephone Order Merchandise Disclosure Requirements and Prohibitions Concerning Franchising Disclosure Requirements and Prohibitions Concerning Business Opportunities Fair Credit Reporting Act Procedures for State Application for Exemption from the Provisions of the Fair Debt Collection Practices Act; Department of Housing and Urban Development: Hearing Procedures Pursuant to the Administrative Procedure Act; Civil Monetary Penalties; Land Registration Purchasers’ Revocation Rights; Sales Practices, and Standards Formal Procedures and; Rules of Practice Real Estate Settlement Procedures Act; Investigations in Consumer Regulatory Programs. For source, link here.

[4] It is rumored that Morgan Stanley and Goldman Sachs, both of whom changed their charters from securities firms to become “banks”, in order to be eligible for taxpayer funded bailout money, are now considering exiting that status, precisely so they will not have to comply with the Volker Rule – if it passes.

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U.S. To Have Tough Time in Suits Against 17 Banks Over Mortgage Bonds, by Jim Puzzanghera, Los Angeles Times

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Federal regulators allege the banks misled Fannie Mae and Freddie Mac over the safety of the bonds. But analysts say the two mortgage giants should have known that the loans behind the bonds were toxic.

Reporting from Washington—

The government’s latest attempt to hold large banks accountable for helping trigger the Great Recession could fall as flat as earlier efforts to punish Wall Street villains and compensate taxpayers for bailing out the financial industry.

Federal regulators, in landmark lawsuits this month, alleged that 17 large banks misled Fannie Mae and Freddie Mac on the safety and soundness of $200 billion worth of mortgage-backed securities sold to the two housing finance giants, sending them to the brink of bankruptcy and forcing the government to seize them.

Targets of other federal lawsuits and investigations have deflected such claims by arguing, for example, that the collapse of the housing market and job losses from the recession caused the loss in the value of mortgage-backed securities.

The big banks, though, might have a more powerful defense: Fannie Mae and Freddie Mac were no novices at investment decisions.

The two companies were major players in the subprime housing boom through the mortgage-backed securities market they helped create, and they should have known better than anyone that many of the loans behind those securities were toxic, some analysts and legal experts said.

“I can’t think of two more sophisticated clients who were in a better position to do the due diligence on these investments,” said Andrew Stoltmann, a Chicago investors’ lawyer specializing in securities lawsuits. “For them to claim they were misled in some form or fashion, I think, is an extremely difficult legal argument to make.”

But the Federal Housing Finance Agency, which has been running Fannie Mae and Freddie Mac since the government seized them in 2008, argued that banks can’t misrepresent the quality of their products no matter how savvy the investor.

“Under the securities laws at issue here, it does not matter how ‘big’ or ‘sophisticated’ a security purchaser is. The seller has a legal responsibility to accurately represent the characteristics of the loans backing the securities being sold,” the FHFA said.

The sophistication of Fannie and Freddie is expected to be the centerpiece of the banks’ aggressive defense. Analysts still expect the suits to be settled to avoid lengthy court battles, but they said the weakness of the case meant that financial firms would have to pay far less money than Fannie and Freddie lost on the securities.

Stoltmann predicted that a settlement would bring in only several hundred million dollars on total losses estimated so far at about $30 billion.

In the 17 suits, the FHFA alleged that it was given misleading data.

For example, in the suit against General Electric Co. over two securities sold in 2005 by its former mortgage banking subsidiary, the FHFA said Freddie Mac was told that at least 90% of the loans in those securities were for owner-occupied homes.

The real figure was slightly less than 80%, which significantly increased the likelihood of losses on the combined $549 million in securities, the suit said.

GE said it “plans to vigorously contest these claims.” The company said it had made all its scheduled payments to date and had paid down the principal to about $66 million.

The federal agency also has taken on some of the titans of the financial industry, including Goldman Sachs & Co., Bank of America Corp. and JPMorgan Chase & Co., to try to recoup some of the losses on the securities. That would help offset the $145 billion that taxpayers now are owed in the Fannie and Freddie bailouts.

The suits represent one of the most forceful government legal actions against the banking industry nearly four years after the start of a severe recession and financial crisis brought on in part by the crash of the housing market.

The FHFA had been negotiating separately with the banks to recover losses from mortgage-backed securities purchased by Fannie and Freddie, but decided to get more aggressive.

“Over the last couple of years, they’ve been doing sort of hand-to-hand combat with each of the banks,” said Michael Bar, a University of Michigan law professor who was assistant Treasury secretary for financial institutions in 2009-10. “The suits are an attempt to consolidate those fights over individual loans.”

Bar thinks the government has a legitimate case.

“The banks will say, ‘You got what you paid for,'” he said. “And the investors will say, ‘No we didn’t. We thought we were getting bad loans and we got horrible loans.'”

Edward Mills, a financial policy analyst with FBR Capital Markets, said the FHFA has a fiduciary responsibility to try to limit the losses by Fannie and Freddie. But the independent regulatory agency also probably felt political pressure to ensure that banks be held accountable for their actions leading up to the financial crisis, he said.

“There’s still a feeling out there that most of these entities got away without a real penalty, so there’s still a desire from the American people to show that someone had to pay,” Mills said.

Although the suits cover $200 billion in mortgage-backed securities, the actual losses that Fannie and Freddie incurred are much less. For example, the FHFA sued UBS Americas Inc. separately in July seeking to recover at least $900 million in losses on $4.5 billion in securities.

The faulty mortgage-backed securities contributed to combined losses of about $30 billion by Fannie and Freddie, but a final figure is likely to change as the real estate market struggles to work its way through a growing number of foreclosures.

Some experts worry that the uncertainty created by the lawsuits makes it more difficult for the housing market to recover, which adds to the pressure on the FHFA and the banks to settle.

The government case also could be weakened by an ongoing Securities and Exchange Commission investigation into whether Fannie and Freddie did to their own investors what they’re accusing the banks of doing — not properly disclosing the risks of their investments.

Banks are expected to make that point as well. But both sides have strong motives to settle the cases and move on, said Peter Wallison, a housing finance expert at the American Enterprise Institute for Public Policy Research.

“Within any institution there are people who send emails and say crazy things, and the more these things are litigated, the more they get exposed,” Wallison said.

Because of flaws in its case and political pressures, the FHFA also will be motivated to settle, Wallison said.

“There will be a settlement because the settlement addresses the political issue … that the government is going to get its pound of flesh from the banks,” he said.

jim.puzzanghera@latimes.com

U.S. may require more mortgage insurance Obama, FHFA outline possible help for underwater borrowers, by Ronald D. Orol, MarketWatch

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WASHINGTON (MarketWatch) — The regulator for Fannie Mae and Freddie Mac on Monday said the agency may force more borrowers to obtain private mortgage insurance as he also laid out further details about ideas he is considering to expand an Obama administration mortgage refinance program.

At issue is the extent to which Freddie and Fannie require private mortgage insurance for loans the firms guarantee. The two companies, which were seized by the government during the height of the financial crisis, typically require borrowers to obtain some form of private mortgage insurance if they make downpayments that are less than 20% of the value of the home they are buying.

For example, a borrower that makes a $10,000 downpayment — 5% down on a $200,000 home — must currently obtain mortgage insurance, while a borrower who puts $40,000 down on the same house doesn’t.

Federal Housing Finance Agency acting chief Edward DeMarco said in a speech at the American Mortgage Conference in Raleigh, N.C. that the agency will be considering a number of alternatives, such as hiking private mortgage insurance,to limit costs to taxpayers from Fannie and Freddie. Already the two firms have cost taxpayers some $130 billion.

DeMarco’s comments come as President Barack Obama discussed limiting costs to taxpayers from Fannie and Freddie as part of a broader deficit reduction plan released Monday. In his plan, Obama reiterated the government’s goal of gradually hiking the fees that Fannie and Freddie charge for guaranteeing home loans sold to investors. Obama said that this fee hike will help reimburse taxpayers for their assistance. The goal is also to drive investors to once again buy private-label residential mortgage-backed securities.

In his speech, DeMarco said the guarantee fee hike “will not happen immediately but should be expected in 2012, with some prior announcement.”

In addition, DeMarco discussed ways the agency could expand an expand an existing program that seeks to refinance mortgages. Obama also outlined the White House effort in this area as part of his deficit reduction proposal, following up on comments he made on Sept. 8 as part of a broader speech on the economy and jobs. Read about Obama’s deficit reduction plan

At issue is the White House’s Home Affordable Refinance Program, or HARP, which seeks to provide refinancing options to millions of underwater borrowers who have no equity in their homes as long as their mortgage is backed by Fannie and Freddie. The program has only helped roughly 838,000 borrowers as of June 30, with millions more underwater.

DeMarco said the agency is considering a number of options to encourage more borrower and lender participation, including the possibility of limiting or eliminating risk fees that Fannie and Freddie charge on HARP refinancings.

These fees are also known as “loan level price adjustments” and have been charged to offset losses Fannie and Freddie accumulate in cases when HARP loans go into default. The fees are typically passed on to borrowers in the form of slightly higher interest rates on their loans.

“Loan level price adjustments, representations and warranties… and portability of mortgage insurance coverage are among the matters being considered,” he said.

By saying the agency is consider “representation and warranties,” DeMarco indicated that the agency could seek to try and encourage more lender participation in HARP by offering to indemnify or limit banks’ “reps and warranties” risk when it comes to loans refinanced in the program.

Also known as put-back risk, in this context, is the possibility that the loan originator will have to repurchase the loan from Fannie and Freddie because the underwriting violated the two mortgage giants’ guidelines.

Observers contend that this kind of “put-back” relief would encourage lenders to invest in more underwater refinancings but critics argue that it also have the potential to pile up losses on Fannie and Freddie and taxpayers.

DeMarco also said the agency is looking at whether they can allow the borrower refinancing their loan to keep the same private mortgage insurance they had before the re-fi. Currently, the borrower must obtain new private mortgage insurance when they refinance the loan, at an additional cost.

DeMarco said the agency is also considering allowing for even more heavily underwater borrowers, those not currently eligible for the program, to participate. As it stands now, HARP only allows borrowers to refinance at current low interest rates into a mortgage that is at most 25% more than their home’s current value. The FHFA said Sept. 9 that it was considering such a move. However, DeMarco said there were several challenges with such an expansion and that the outcome of this review is “uncertain.” Read about how a quarter of U.S. mortgages could get help

A J.P. Morgan report Monday predicted the FHFA’s first focus to expand HARP will be to assist this class of super-underwater borrowers.

“Given this focus on high [loan-to-value] borrowers, we believe the first wave of changes will include lifting the 125 LTV limit,” the report said.

 

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Promoting Housing Recovery Part 3: Proposed Solutions For The Housing Market

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This is the final part of a three-part, two-post series.  Click here to read parts I and II, which focus on recognizing the fundamental economic problems, and fixing the underlying economic issues (such as unemployment)

Part Three – Proposed Solutions For The Housing Market

Home Prices

Home prices in many parts of the country are still inflated. People cannot afford the homes and cannot refinance to lower payments, so the homes go into default and are foreclosed up. Other homes remain on the market, vacant because there are no qualified buyers for the property at that price. This is a problem that can take care of itself over time, if the government gets out of the way.

Currently the government, in cooperation with banks, is doing everything to support home prices instead of letting them drop. Doing so prevents homeowner strategic defaults, and others going into defaults. It also lessens the losses to lenders and investors. In the words of Zig Zigler, this is “stinkin thinkin”.

Maintaining home prices artificially high will not stabilize the market. It is mistakenly thought this is the same as supporting home values. But inflating a price does not increase value, by definition. It just delivers an advantage to the first ones in at the expense of those coming later (think of the first and second homebuyer tax credits, which created two discernible “bumps” in home prices and sales in 2009 and 2010, both of which reversed).

We must allow home prices to drop to a more reasonable level that people can afford. Doing so will stimulate the market because it brings more people into the market. Lower home prices mean more have an ability to purchase. More purchases mean more price stability over a period of time.

To accomplish a reduction in home prices several steps need to be taken.

Interest Rates

The first thing to be done is that the fed must cease its negative interest rate policy. Let interest rates rise to a level that the market supports. Quit subsidizing homeowner payments on adjustable rate mortgages by the lower interest rates.

Allowing interest rates to return to market levels would initially make homeownership more difficult and would result in people qualifying for lower loan amounts. However, this is not a bad thing because it eventually forces home prices down and all will balance out in the end. Historically, as interest rates decrease, home prices increase, and when rates increase, home prices drop. So it is time to let the market dictate where interest rates should be.

Furthermore, by allowing interest rates to increase, it makes lending money more attractive. Profit over risk levels return, and lenders are more willing to lend. This creates greater demand, and would assist in stabilizing the market.

Fannie & Freddie

We have to eliminate the Federal guarantee on Fannie and Freddie loans. The guarantee of F&F loans only serves to artificially depress interest rates. It does nothing to promote housing stability. Elimination of the guarantees would force rates up, leading to lower home values, and more affordability in the long run.

It is seriously worth considering privatizing Fannie and Freddie. Make them exist on their own without government intervention. Make them concerned about risk levels and liquidity requirements. Doing so will make them responsive to the profit motive, tighten lending standards, and lessen risk. It will over time also ensure no more government bailouts.

Allow competition for Fannie and Freddie. Currently, they have no competition and have not had competition since the early 1990s. Competition will force discipline on F&F, and will ultimately prove more productive for housing.

The new Qualified Residential Mortgage rules must not be allowed to occur as they stand. If the rules are allowed to go forward, it will only ensure that Fannie and Freddie remain the dominant force in housing. Make mortgage lending a level playing field for all. Do not favor F&F with advantages that others would not have like governmental guarantees. We must create effective competition to counter the distorting effects of F&F.

Government Programs like HAMP

When government attempts to slow or stop foreclosures, it only offers the homeowner false hopes that the home can be saved. The actions will extend the time that a homeowner remains in a home not making payments, and also extend the length of time that the housing crisis will be with us. Nothing else will generally be accomplished, except for further losses incurred by the lender or investor.

When modifications are advanced to people who have no ability to repay those modifications, when the interest rates adjust in five years, all that has happened is that the problem has been pushed off into the future, to be dealt with later. This is what government programs like HAMP achieve.

If the government wants to play a role in solving the housing crisis, it must take a role that will be realistic, and will lead to restoration of a viable housing market. That role must be in a support role, creating an economic environment which leads to housing recovery. It must not be an activist and interventionist role that only seeks to control outcomes that are not realistic.

Portfolio Lenders

Usually, the portfolio lender is a bank or other similar institution that is subject to government regulations, including liquidity requirements. Because of liquidity issues and capital, it is not possible for many banks to lend, or in sufficient numbers to have a meaningful effect upon housing recovery at this time. Additionally, the number of non-performing loans that lenders hold restricts having the funds to lend do to loan loss reserve issues. Until such is addressed, portfolio lending is severely restricted.

To solve the problem of non-performing loans, and to raise capital to address liquidity requirements, a “good bank – bad bank scenario” scenario must be undertaken. Individual mortgage loans need to be evaluated to determine the default risk of any one loan. Depending upon the risk level, the loan will be identified and placed into a separate category. Once all loans have been evaluated, a true value can be established for selling the loans to a “purchase investor”. At the same time, the “bank investor” is included to determine what capital infusion will be needed to support the lender when the loans are sold. An agreement is reached whereby the loans are sold and the new capital is brought into the lender, to keep the lender afloat and also strengthen the remaining loan portfolio.

The homeowner will receive significant benefit with this program. The “purchase investor” should have bought the loans for between 25 and 40 cents on the dollar. They can then negotiate with the homeowner, offering them significant principal reductions and lowered payments, while still having loans with positive equity. Default risk will have been greatly reduced, and all parties will have experienced a “win-win” scenario.

However, portfolio lending is still dependent upon having qualified borrowers. To that end, previous outlined steps must be taken to create a legitimate pool of worthy borrowers to reestablish lending.

MERS

Anyone who has followed the foreclosure crisis, the name MERS is well known. MERS (Mortgage Electronic Registrations System) represents the name of a computerized system used to track mortgage loans after origination and initial recording. MERS has been the subject of untold articles and conspiracy theories and blamed for the foreclosure process. It is believed by many that the operation of MERS is completely unlawful.

To restart securitization efforts, a MERS-like entity is going to be required. (MERS has been irrevocably damaged and will have to be replaced by a similar system with full transparency. Before anyone gets upset, I will explain why such an entity is required.)

Securitization of loans is a time consuming process, especially related to the tracking and recording of loans. When a loan is securitized, from the Cut-Off date of the trust to the Closing Date of the trust when loans must be placed into the trust, is 30 days. During this 30 day period of time, a loan would need to be assigned and recorded at least twice and usually three times. To accomplish this, each loan would need assignments executed, checks cut to the recorder’s office, and the documents delivered to the recorder’s office for recording.

Most recorder’s offices are not automated for electronic filing with less than 25% of the over 3200 counties doing electronic filing. The other offices must be done manually. This poses an issue in that a trust can have from several hundred to over 8000 loans placed into it. It is physically impossible to execute the work necessary in the 30 day time period to allow for securitization as MERS detractors would desire. So, an alternative methodology must be found.

“MERS 2.0″ is the solution. The new MERS must be developed with full transparency. It must be designed to absolutely conform with agency laws in all 50 states. MERS “Certifying Officers” must be named through corporate resolutions, with all supporting documentation available for review. There can be no question of a Certifying Officer’s authority to act.

Clear lines of authority must be established. The duties of MERS must be well spelled out and in accordance with local, state, and Federal statutes. Recording issues must be addressed and formalized procedures developed. Through these and other measures, MERS 2.0 can be an effective methodology for resolving the recording issues related to securitization products. This would alleviate many of the concerns and legal issues for securitization of loans, bringing greater confidence back into the system.

Securitization & Investors

Securitization of loans through sources other than Fannie and Freddie represented 25% of all mortgage loans done through the Housing Boom. This source of funding no longer exists, even though government bonds are at interest rates below 1%, and at times, some bonds pay negative interest. One would think that this would motivate Wall Street to begin securitization efforts again. However, that is not the case.

At this time, there is a complete lack of confidence in securitized loan products. The reasons are complex, but boil down to one simple fact: there is no ability to determine the quality of any one or all loans combined in a securitization offering, nor are the ratings given to the tranches of reliable quality for the same reasons. Until this can be overcome, there can be no hope of restarting securitization of loans. However, hope is on the way.

Many different companies are involved in bringing to market products and techniques that will address loan level issues. Some products involve verification of appraisals, others involve income and employment verification. More products are being developed as well. (LFI Analytics has its own specific product to address issues of individual loan quality.)

What needs to be done is for those companies developing the products to come together and to develop a comprehensive plan to address all concerns of investors for securitized products. What I propose is that we work together to incorporate our products into a “Master Product”, while retaining our individuality. This “Master Product” would be incorporated into each Securitization offered, so that Rating Agencies could accurately evaluate each loan and each tranche for quality. Then, the “Master Product” would be presented to Investors along with the Ratings Agency evaluation for their inspection and determination of whether to buy the securitized product. Doing so would bring confidence back into the market for securitized products.

There will also need to be a complete review of the types of loans that are to be securitized, and the requirements for each offering. Disclosures of the loan products must be clear, with loan level characteristics identified for disclosure. The Agreements need to be reworked to address issues related to litigation, loan modifications, and default issues. Access to loan documentation for potential lender repurchase demands must be clarified and procedures established for any purchase demand to occur.

There must be clarification of the securitization procedures. A securitized product must meet all requirements under state and Federal law, and IRS considerations. There must be clear guidance provided on how to meet the requirements, and what is acceptable, and what is not acceptable. Such guidance should seek to eliminate any questions about the lawfulness of securitization.

Finally, servicing procedures for securitization must be reviewed, clarified, and strengthened. There can no longer be any question as to the authority of the servicer to act, so clear lines of authority must be established and agency and power of attorney considerations be clearly written into the agreements.

Borrower Quality

Time and again, I have referenced having quality borrowers who have the ability to buy homes and qualify for loans. I have outlined steps that can be taken to establish such pools of buyers and borrowers by resolving debt issues, credit issues, and home overvaluation issues. But that is not enough.

Having examined thousands of loan documents, LFI Analytics has discovered that not only current underwriting processes are deficient in many areas still, but the new proposed Qualified Written Mortgage processes suffer from such deficiencies as well. This can lead to people being approved for loans who will have a high risk of default. Others will be declined for loans because they don’t meet the underwriting guidelines, but in reality they have a significantly lower risk of default.

Default Risk analysis must be a part of the solution for borrower quality. Individual default risk must be determined on each loan, in addition to normal underwriting processes, so as to deny those that represent high default risk, and approve those that have low default risk.

This is a category of borrower that portfolio lenders and securitization entities will have an advantage over the traditional F&F loan. Identifying and targeting such borrowers will provide a successful business model, as long as the true default risk is determined. That is where the LFI Analytics programs are oriented.

Summary

In this series of articles, I have attempted to identify stresses existing now and those existing in the future, and how the stresses will affect any housing recovery. I have also attempted to identify possible solutions for many of the stresses.

The recovery of the housing market will not be accomplished in the near future, as so many media and other types represent. The issues are far too complex and interdependent on each other for quick and easy remedy.

To accurately view what is needed for the housing recovery, one must take a macro view of not just housing, but also the economic and demographic concerns, as I have done here. Short and long term strategies must be developed for foreclosure relief, based upon the limiting conditions of lenders, borrowers, and investor agreements.

Lending recovery must be based upon the economic realities of the lenders, and the investors who buy the loans. Furthermore, accurate methods of loan evaluation and securitization ratings must be incorporated into any strategy so as to bring back investor confidence.

Are steps being taken towards resolving the housing crisis and beginning the housing recovery? In the government sector, the answer is really “no”. Short term “solutions” are offered in the form of different programs, but the programs are ineffective for most people. Even then, the “solutions” only treat the symptom, and not the illness. Government is simply not capable of taking the actions necessary to resolve the crisis, either from incompetence or from fear of voter reprisal.

In the private sector, baby steps are being taken by individual companies to resolve various issues. These companies are refining their products to meet the needs of all parties, and slowly bringing them to market.

What is needed now is for the private sector to come together and begin to offer “packages of products” to meet the needs of securitizing entities. The “packages” should be tailored to solve all the issues, so that all evaluation materials are complete and concise, and not just a handful of different reports from different vendors. This is the “far-sighted” view of what needs to be done.

If all parties cannot come together and present a unified and legitimate approach to solving the housing crisis, then we will see a “lost decade” (or two) like Japan has suffered. Housing is just far too important of an economic factor for the US economy. Housing has led the way to recovery in past recessions, but it not only lags now, it drags the economy down. Until housing can recover, it shall serve to be a drag on the economy.

I hope that I have sparked interest in what has been written and shall lead to a spirited discussion on how to recover. I do ask that any discussion focus on how to restore housing. Recriminations and blame for what has happened in the past serves no purpose to resolution of the problems facing us now, and in the future.

It is now time to move past the anger and the desire for revenge, and to move forward with “can-do” solutions.

Related articles

Promoting Housing Recovery Parts 1 and 2, by Patrick Pulatie

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Previously, I have posted articles regarding housing and foreclosure issues. The purpose was to begin a dialogue on the steps to be taken to alleviate the foreclosure crisis, and to promote housing recovery.   Now, we need to explore how to restart lending in the private sector.  This will be a three part article, with parts I and II herein, and III in the next post.

To begin, we must understand how we got to the point of where we are today, and whereby housing became so critical a factor in the economy. (This is only an overview. I leave it to the historians to fill in all the details.)

Part One – Agreeing On The Problems

Historical Backdrop

At the beginning of the 20th century, the U.S. population stood about 76,000,000 people. By the end of 2000, the population was over 310 million. The unprecedented growth in population resulted in the housing industry and related services becoming one of several major engines of wealth creation during the 20th century.

During the Depression, large numbers of farm and home foreclosures were occurring. The government began to get involved in housing to stop foreclosures and stimulate housing growth. This resulted in the creation of an FHA/Fannie Mae– like program, to support housing.

WWII led to major structural changes in the U.S., both economically and culturally. Manufacturing and technological changes spurred economic growth. Women entered the work force in huge numbers. Returning veterans came back from the war desiring to leave the rural areas, begin families, and enter the civilian workforce. The result was the baby boom generation and its coming influence.

From the 1950s through the 1970s, the US dominated the world economically. Real income growth was occurring for all households. Homeownership was obtainable for ever increasing numbers of people. Consumerism was rampant.

To support homeownership, the government created Fannie Mae and Freddie Mac so that more people could partake in the American Dream. These entities would eventually become the primary source of mortgages in the U.S. F&F changed the way mortgages were funded, and changed the terms of mortgages, so that 30 year mortgages became the common type of loan, instead of 5 to 15 year mortgages.

Storm clouds were beginning to appear on the horizon at the same time. Japan, Korea, Germany, and other countries had now come out of their post war depressions. Manufacturing and industrial bases had been rebuilt. These countries now posed an economic threat to the U.S. by offering improved products, cheaper labor costs, and innovation. By the end of the 1970s, for many reasons, US manufacturing was decreasing, and service related industries were gaining importance.

In the 1980s and 1990s, manufacturing began to decline in the U.S. Service Industries were now becoming a major force in the economy. With the end of the Cold War in 1989, defense spending began to decline dramatically, further depressing the economy.

In the early 1990s, F&F engaged in efforts to increase their share of the mortgage market. They freely admitted wanting to control the housing market, and took steps to do so, undermining lenders and competition, and any attempts to regulate them.

In 1994, homeownership rates were at 64% in the US. President Clinton, along with Congress and in conjunction with Fannie and Freddie, came out with a new program with the intent to promote a 70% homeownership rate. This program was promoted even though economists generally considered 64% to be the maximum amount of homeownership that an economy could readily support. Above 64%, people would be 

“buying” homes, but without having the financial capabilities to repay a loan. The program focused upon low income persons and minorities. The result was greater demand for housing and homeownership, and housing values began to increase.

Lenders and Wall Street were being pushed out of the housing market by F&F, and had to find new markets to serve. F&F did not want to service the new markets being created by the government homeownership programs. The result was that Wall Street would naturally gravitate to that market, which was generally subprime, and also to the jumbo market, which F&F could not serve due to loan amount restrictions. This was the true beginning of securitized loan products.

The events of 9/11 would ultimately stoke the fires of home ownership even further. 9/11 occurred as the US was coming out of a significant recession, and to keep the country from sliding back into recession, the Fed lowered interest rates and kept them artificially low until 2003. Wall Street, recognizing the promise of good financial returns from securitized loans, freed up more and more capital for banks and mortgage bankers to lend. This led to even greater demand for homes and mortgages.

To meet the increased demand, home construction exploded. Ancillary services did well also, from infrastructure, schools, hospitals, roads, building materials, and home decor. The economy was booming, even though this was “mal-investment” of resources. (Currently, as a result of this activity, there are estimated to be from 2m to 3.5m in excess housing units, with approximately 400k being added yearly to housing stock.)

It did not stop there. Buyers, in their increasing zeal, were bidding for homes, increasing the price of homes in many states by 50 to 100,000 dollars more than what was reasonable. The perception was that if they did not buy now, then they could never buy. Additionally, investors began to purchase multiple properties, hoping to create a home rental empire. This led to unsustainable home values.

Concurrently, the Fed was still engaged in a loose money policy. This pumped hundreds of billions of dollars into the housing economy, with predictable results. With increasing home values, homeowners could refinance their homes, often multiple times over, pulling cash out and keeping the economy pumped up artificially. A homeowner could pull out 50,000 to 100,000 dollars or more, often every year or two, and use that money to indulge themselves, pretending they had a higher standard of living than what existed. The government knew that this was not a reasonable practice, but indulged in it anyway, so as to keep up an appearance of a healthy economy. Of course, this only compounded the problem.

The end result of the past 40 years of government intervention (and popular support for that intervention) has been a housing market that is currently overbuilt and still overvalued. In the meantime, real wages have not increased since the mid 1990s and for large numbers of the population, negative income growth has been experienced. Today, all segments of the population, homeowners especially so, are saddled with significant mortgage debt, consumer debt, and revolving credit debt. This has led to an inability on the part of the population to buy homes or other products. Until wage and debt issues are resolved, employment increases, and housing prices have returned to more reasonable values, there can be no housing recovery.

Current Status

As all know, the current status of housing in the US is like a ship dead in the water, with no ability to steer except to roll with the waves. A recap:

Private securitization once accounted for over 25% of all mortgage loans. These efforts are currently nonexistent except for one entity, Redwood Trust, which has issued one securitized offerings in 2010 and one in 2011. Other than this, Wall Street is afraid to invest in Mortgage Products (to say nothing of downstream investors).

Banks are unable to lend their own money, which represented up to 15% of all lending. Most banks are capital impaired and have liquidity issues, as well as unknown liabilities from bad loans dating to the bubble.

Additionally, banks are suffering from a lack of qualified borrowers. Either there is no equity in the home to lend on, or the borrowers don’t have the financial ability to afford the loan. Therefore, the only lending that a bank can engage in is to execute loans and sell them to Fannie Mae, Freddie Mac, or VA and FHA. There are simply no other options available.

F&F are buying loans from the banks, but their lending standards have increased, so the loan purchases are down. F&F still distort the market because of government guarantees on their loans (now explicit instead of implicit), and they are still able to purchase loans above $700k, which was implemented in response to the housing crisis.

F&F are still having financial issues, with the government having bailed them out to the tune of $140b, with much more to come.

VA is buying loans and doing reasonably well, but they serve a tiny portion of the market.

FHA has turned into the new subprime, accepting credit challenged borrowers, and with loan to values of 95% or greater. Default rates on FHA loans are rising significantly, and will pose issues for the government when losses absorb all FHA loss reserves, which may have already happened (depending on how you look at the accounting).

The Mortgage Insurance companies are financially depressed, with PMI being forced to stop writing new policies due to loan loss reserves being depleted. Likely, they will cease business or be absorbed by another company. Other companies are believed to be similarly in trouble, though none have failed yet.

The US population is still overburdened with debt. It is believed that the household consumer debt burden is over 11%, for disposable income. This is far too high for effective purchasing of any products, especially high end. (There has been a lessening of this debt from its high of 14% in 2008, but this has primarily been the result of defaults, so most of those persons are not in a position to buy.)

Patrick Pulatie is the CEO of LFI Analytics. He can be reached at 925-522-0371, or 925-238-1221 for further information. http://www.LFI-Analytics.com, patrick@lfi-analytics.com.

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Government Officials Weigh New Refi Program, Carrie Bay, DSNEWS.com

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Word on the street is that the Obama administration is sizing up a new program to shore up and stimulate the housing market by providing millions of homeowners with new, lower interest, lower payment mortgage loans.  According to multiple media outlets, the initiative would allow borrowers with mortgages backed by Fannie Mae and Freddie Macto refinance at today’s near record-low interest rates, close to the 4 percent mark, even if they are in negative equity or have bad marks on their credit.

The plan, first reported by the New York Times, may not be seen as a win-win by everyone. The Times says it could face stiff opposition from the GSEs’ regulator, the Federal Housing Finance Agency (FHFA), as well as private investors who hold bonds made up of loans backed by the two mortgage giants.

The paper says refinancing could save homeowners $85 billion a year. It would also reach some homeowners who are struggling with underwater mortgages, which can disqualify a borrower from a traditional refinance, and those who fail to meet all the credit criteria for a refinance as a result of tough times brought on by the economic downturn.

Administration officials have not confirmed that a new refi program is in the works, but have said they are weighing several proposals to provide support to the still-ailing housing market and reach a greater number of distressed homeowners.

According to information sourced by Bloomberg, Fannie and Freddie guarantee nearly $2.4 trillion in mortgages that carry interest rates above the 4 percent threshold.

The details that have been reported on the make-up of the refi proposal mirror recommendations put forth by two Columbia business professors, Chris Mayer and R. Glenn Hubbard.

They’ve outlined the same type of policy-driven refi boom in a whitepaper that calls for Fannie- and Freddie-owned mortgages to be refinanced with an interest rate of around 4 percent.

They say not only would it provide mortgage relief to some 30 million homeowners – to the tune of an average reduction in monthly payments of $350 — but it would yield about $118 billion in extra cash being pumped into the economy.

Other ideas for housing stimulus are also being considered. One involving a public-private collaboration to get distressed properties off the market and turn them into rental homes has progressed to the point that officials issued a formal notice earlier this month requesting recommendations from private investors, industry stakeholders, and community organizations on how best to manage the disposition of government-owned REOs.

Treasury is also reviewing a proposal from American Home Mortgage Servicing that would provide for a short sale of mortgage notes from mortgage-backed securities (MBS) trusts to new investors as a means of facilitating principal reduction modifications.

There’s speculation that President Obama will make a big housing-related announcement in the weeks ahead as part of a larger economic plan.

Fannie vs. Freddie Earnings; Loan Limit Reduction Ahead; Jumbo Market Chatter; Think Tank Opinion on GSEs, by Rob Chrisman. Mortgage News Daily

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Yesterday I went through denial, anger, bargaining, depression, and acceptance – which are now the 5 stages of buying gas.

Incidents of mortgage fraud dropped from 2009 to 2010. Either that, or incidents rose – it depends who you ask. FRAUD. Regardless, Florida took the “top” honors, followed by New York, California, New Jersey, and Maryland (No. 5).

The FDIC’s chairman Sheila Bair will indeed be stepping down when her term expires, as has previously been announced. Cake and soda pop will be served in the FDIC’s cafeteria on July 8th – no gifts please.

Fannie & Freddie recently released results that appear to point to the different focus in the past of their two companies. One reader wrote, “Freddie Mac reported its first true net profit in almost two years, earning $676 million in the first quarter and not asking the taxpayer for more money. But Fannie reported at $6.5 billion loss for the quarter, and asked Treasury for $8.5 billion in taxpayer money. From my vantage point, the difference rests in the amount of Countrywide business that Fannie bought in the past – CW was Fannie’s best customer for several years, selling Fannie a variety of A-paper, alt-A, pay option ARMs, and other products. I bet that if you take Countrywide out of the equation, Fannie would show similar results to Freddie. But last year Fannie agreed to one lump sum from BofA to settle the bulk of buyback claims – good for BofA, bad for Fannie.”

Last month the Cato Institute published its opinion of the agencies, and it is making the rounds. “Foremost among the government-sponsored enterprises’ deleterious activities was their vast direct purchases of loans that can only be characterized as subprime. Under reasonable definitions of subprime, almost 30 percent of Fannie and Freddie direct purchases could be considered subprime. The government-sponsored enterprises were also the largest single investor in subprime private label mortgage-backed securities. During the height of the housing bubble, almost 40 percent of newly issued private-label subprime securities were purchased by Fannie Mae and Freddie Mac. In order to protect both the taxpayer and our broader economy, Fannie Mae and Freddie Mac should be abolished, along with other policies that transfer the risk of mortgage default from the lender to the taxpayer.”

Who is going to teach your staff about NMLS? Be sure to scroll down a little for news on NMLS and Federally regulated institutions! NMLSTraining

For any jumbo mortgage fans, here is some chatter: Jumbo

By the way, at this point the conforming loan level in the higher-priced areas will indeed drop to $625,500 from $729,750. Although it is not set in stone and could be subject to some political wrangling, few doubt that it will drop. Here is Fannie’s memo stating the loan limits Fannie along with the FHFA’s.

Aventur Partners & Aventur Mortgage Capital appear to be turning some heads in the jumbo world. Led by the former co-founder and CEO of Thornburg Mortgage (Larry Goldstone) is developing a new mortgage company specializing in jumbo lending. Past and current legal nightmares aside, Thornburg-style companies certainly have their fans in the business, and the former vice president of Thornburg, David Akre, is the serving COO at Aventur.

“Soldiers do not march in step when going across bridges because they could set up a vibration which could be sufficient to knock the bridge down.” Fortunately not every housing market moves in exactly the same direction and in the same magnitude, but Zillow posted some housing numbers that certainly would make a bridge shake a little. There seem to be dozens of house price indices, but the one from Zillow yesterday showed that home values posted the largest decline in the first quarter since late 2008. Home values fell 3% in the first quarter from the previous quarter and 1.1% in March from the previous month, and Zillow reports prices have now fallen for 57 consecutive months. Our economy needs job & housing, housing and jobs, to truly recover, and although mortgage rates continue to be low, the expiration of the housing tax credit and the continued flow of foreclosures hitting the market aren’t helping prices. Detroit, Chicago and Minneapolis posted the largest declines during the first quarter of the top 25 metro areas tracked by Zillow, while Pittsburgh, Dallas and Washington posted the smallest declines.

As an interesting side note to this, housing is certainly more affordable than any time in a few decades, but credit, appraisal, and documentation standards remain tight (many would say they should, and if they were in place 5 years ago we wouldn’t have these issues). One report mentioned that the average credit score on loans backed by Fannie Mae stood at 762 in the first quarter, up from an average of 718 between 2001-2004.

Franklin American relaxed its conventional condominium guidelines to allow established condominiums with 200 units or more to be approved through DU Limited Review or CPM. FAMC also tweaked its policies for “Purchase of a short sale/foreclosure or REO – Appraisal Requirements” (added the requirement for a full appraisal if the borrower is purchasing a property sold under a short sale in addition to transactions where the borrower is purchasing a foreclosure or REO), required that utilities must be on at time of appraiser’s inspection, and revised the income documentation guidelines for borrowers employed by an interested party to require a written VOE in addition to the most recent 30 day paystub. FAMC announced the introduction of the Conforming Fixed Rate 97 product which allows loans up to 97% through DU, with certain restrictions.

GMAC Bank Correspondent Funding, echoing FHA Mortgage Letter 2011-11 on the subject of Refinance Transactions, refined its stance on the use of FHA TOTAL Scorecard to underwrite Credit Qualifying Streamlines (will continue to be eligible) and determining the mortgage basis on a Cash-out transaction when a borrower is buying out ground rent. GMAC also reminded clients that the Freddie Mac Relief Refinance Open Access product has been discontinued, and after tomorrow several of its loan program codes will no longer be available. GMACB will not purchase loans where LP feedback states Open Access.

Wells’ wholesale notified brokers about changes to its “Compensation and Anti-Steering: BYTE Fee Details Now Accepted, Compensation and Anti-Steering: Appraisal Fee Reimbursement, and Best Practices to Avoid FHA Case Number Cancellation. WF’s broker clients were also reminded not to delay in learning about the NMLS Federal Registration*, given a new address for the “Change of Servicer” notifications, updated the processing fee for Guaranteed Rural Housing loans and curing TIL material disclosure errors, and reminded of the final documentation delivery address for VA loan Guaranty Certificates and Rural Development Loan

Note Guarantees.

*Three months ago the Board of Governors of the Federal Reserve System, Farm Credit Administration, FDIC, National Credit Union Administration, OCC, and OTS announced the opening of the Nationwide Mortgage Licensing System and Registry for Federally Regulated originators. “All originators (company and loan level) who are federally regulated will have 180 days to complete the SAFE Act requirements and register with the federal S.A.F.E. registry. One should not delay, as at the end of July all federally regulated originators will be required to provide their NMLS Loan Originator and LO Company ID’s: FederalNMLS

Out in California, First California Mortgage is looking for someone to lead its new Multi-Family division. The person will be handling the full range of processing and monitoring activities associated with the multi-family housing program, along with cultivating new and enhancing established relationships with realtors, builders, community groups/clubs and associates resulting in new loan originations and referrals. In addition, the person will be securing new Agency lending opportunities, working primarily with Freddie and Fannie. (The complete list of duties and requirements is too lengthy for this commentary.) If you’re interested, or know someone who is, contact Shannon Thomson, Director of Human Resources, at sthomson@firstcal.net.

Parkside Lending, a west coast wholesaler, reminded its brokers that it will fund Non-owner high balance purchase loans up to 80% LTV up to $625,500 through its Freddie Mac Super Conforming product line and subject to other restrictions. Parkside also allows broker/owners to select individual compensation plans for each of their branch offices. “This means one branch could be at 1.0% monthly comp contract while another is at 1.5% monthly comp -and so on, as long as they are under separate branches as recognized by DRE.”

Wall Street continues to see good interest by investors in mortgage products, “…buying from all investor types…Japanese, Real Money and Central Banks have been the largest – the market continues to under estimate the short base…,” which is another way of saying that Central Banks and investment firms have an enormous amount of cash to be put to work. And specifically for mortgages, banks have been very large buyers of MBS (per the H8 data). Monday was very quiet, with the 10-yr yield closing at 3.14% and MBS prices a shade better/higher as there is still a flight to safety bid on continued worries about European debt issues – particularly related to Greece.

Just before the funeral services, the undertaker came up to the very elderly widow and asked, “How old was your husband?”

“98,” she replied. “Two years older than me.”

“So you’re 96,” the undertaker commented.

She responded, “Hardly worth going home, isn’t it?”

Reporters interviewing a 104-year-old woman:

“And what do you think is the best thing about being 104?” the reporter asked.

She simply replied, “No peer pressure.”

I’m happy to announce that I will be writing a twice-a-month blog that you can access at the STRATMOR Group web site located at http://www.stratmorgroup.com. Each blog will address what I regard as an important topic or issue for our industry. My first blog, for example, considers the near and longer-term outlook for jumbo lending. Since you can comment on my blogs, I’m hoping each topic I address will generate a thoughtful dialogue.

Mortgage News Daily

http://www.mortgagenewsdaily.com

Fannie Mae and Freddie Mac HARP Refinancings Increase in Third Quarter, Rismedia.com

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Half million dollar house in Salinas, Californ...

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RISMEDIA, December 27, 2010—Refinancings through the Home Affordable Refinance Program (HARP) increased 26% in the third quarter of 2010. Fannie Mae and Freddie Mac loan modifications through the Home Affordable Modification Program (HAMP) increased 16% in the quarter, although the overall volume of loan modifications and the pace of HAMP modifications declined from previous periods. The data were released in FHFA’s Third Quarter 2010 Foreclosure Prevention & Refinance Report, which includes data on all of the Enterprises’ foreclosure prevention efforts.

Findings of the report include:

-Loans modified in the last three quarters are performing substantially better three months after modification, compared to loans modified in earlier periods.

-More than half of the loan modifications completed in the third quarter lowered borrowers’ monthly payments by over 30%.

-Loans that are 30-days delinquent increased by 17,600 loans or 2.7% during the third quarter to approximately 682,000.

-Loans 60-plus-days delinquent declined for the third consecutive quarter. The 60-plus-days delinquent loans decreased by 109,700 loans, or 6.8% during the third quarter to approximately 1.5 million.

-Nearly 35,400 HAMP trial modifications transitioned to permanent during the third quarter, bringing the total number of active HAMP permanent modifications to nearly 260,000.

For more information, visit http://www.fanniemae.com and freddiemac.com.

RISMedia welcomes your questions and comments. Send your e-mail to: realestatemagazinefeedback@rismedia.com.

Have you heard about RISMedia’s Real Estate Information Network® (RREIN)? RREIN is an elite network of leading real estate companies dedicated to providing consumers and their agents with leading real estate information, and committed to the belief that Information Share Equals Market Share. Having only launched this past June 2010, the RREIN network is already comprised of 40 leading brokerages, which make up 575 offices, 30,000 agents, 167,000 closings and represents over $41 billion in transactions. How can RREIN help your recruiting efforts and differentiate your company today? For more information, email rrein@rismedia.com.

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Christopher Whalen: Freddie and Fannie Helped to Create Epidemic of Mortgage Fraud, by Zerohedge.com

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Chris Whalen (co-founder of Institutional Risk Analytics [1]) knows a thing or two about banking and mortgages. Whalen has been hailed by Nouriel Roubini as one of the leading independent analysts of the U.S. banking system, and there are few people who know more about mortgage fraud.

Whalen points out [2] in a must-read article that Fannie and Freddie helped create the epidemic of mortgage fraud:

By summer of 2007 most of the bulk GSE pools underwritten by the MIs [mortgage insurers] started to experience extremely high levels of delinquencies. But rather than curtail MI operations and shore up underwriting, the MIs made a big push and increased subpirme production insuring large amounts of subprime product (lots of 220s) all the way into first quarter 2008.

The MIs tripled down and did so in hopes of making enough fee income to (1) meet plan and (2) shore up capital that had started to bleed. This push, which was not always reported honestly to share and bond holders, signed the respective death warrants for Fannie and Freddie. But the zombie dance party rocks on.

So today the MIs are still operating, though they are not providing insurance because they can’t. Observers in the operational trenches tell The IRA that virtually no MI claims are being paid – even if the claim is legitimate. The MIs are very undercapitalized and still bleeding heavily. But they get continued business because the GSEs demand MI on high LTV loans. Lenders are forced to use the MIs and consumers are made to pay the premium. Thus the auditors of the GSE continue to respect the cover from the MIs, even though the entire industry is arguably insolvent.

Thus we go back to the low-income borrower, who is forced by the GSEs to pay for private mortgage insurance that will never pay out. The relationship between the GSEs and the MIs is identical to the “side letter” insurance transactions between AIG andGen Re, and come to think of it, the AIG credit default swaps trades with Goldman Sachs (GS) and various other Wall Street dealers. In each case the substance of the transaction is to falsify the financial statements of the participants. And in each case, the acts are arguably criminal fraud.

Whalen blasts the cowards in Washington for failing to unwind the mortgage fraud:

The invidious cowards who inhabit Washington are unwilling to restructure the largest banks and GSEs. The reluctance comes partly from what truths restructuring will reveal. As a result, these same large zombie banks and the U.S. economy will continue to shrink under the weight of bad debt, public and private. Remember that the Dodd-Frank legislation was not so much about financial reform as protecting the housing GSEs.

Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: “This is not a monetary problem.”

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The policy of the Fed and Treasury with respect to the large banks is state socialism writ large, without even the pretense of a greater public good.

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The fraud and obfuscation now underway in Washinton to protect the TBTF banks and GSEs totals into the trillions of dollars and rises to the level of treason.

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And in the case of the zombie banks, the GSEs and the MIs, the fraud is being actively concealed by Congress, the White House and agencies of the U.S. government led by the Federal Reserve Board. Is this not tyranny?

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The Obama Foreclosure Relief Package What it Contains and How to Determine If You Qualify, Expertforeclosurehelper.com

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Official presidential portrait of Barack Obama...

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On Wednesday, February 18, President Obama unveiled his administration’s latest attempt to stabilize prices in the housing market and help stop the rising tide of foreclosures. Will this plan be any better than the half-dozen that the Bush administration passed? With a $275 billion price tag, we should expect the foreclosure problem to be resolved, but this latest bailout act seems to be just another way to avoid helping homeowners.
As with the FHA Hope for Homeowners Act, Obama’s newest plan is simply out of the financial reach of many homeowners. The requirements are quite strict, which should have been no surprise when the president announced a longer list of people who would not be helped by the plan than who would receive assistance. But taking hundreds of billions of dollars away from homeowners, employers, and everyone else to avoid helping people will not promote economic recovery.
As the government spreads pain and misery around the economy, redistributing poverty from the banks to the rest of us, homeowners may not want to put too much hope in this latest plan. But for those interested in having another government-sponsored program to stop foreclosure, the following is a list some of the requirements to qualify for the plan.
To qualify for a foreclosure refinance loan from the government at a fixed rate of around 4-5% for 15-30 years fixed, all of the following requirements must be met:
  • The loan must be a conforming loan under Fannie Mae and Freddie mac guidelines.
  • The mortgage must be owned by either of the Government Sponsored Enterprises, Fannie Mae or Freddie Mac.
  • Alternatively, the loan may have been sold by Fannie Mae or Freddie Mac in a mortgage security.
  • The homeowners are not currently behind on payments or have a history of on-time payments.
  • The homeowners must continue to pay any second mortgage on the property even after the refinance.
  • The first mortgage on the house must not be more than 5% of the fair market value of the property, or it must be written down to that amount. For example, if the house is worth $100,000, the first mortgage may not be more than $105,000.
Looking at this list of requirements, it will become apparent that many, many homeowners will not qualify for this program with current housing market declines. Borrowers with 80/20 loans whose home values have fallen under the amount due on the first mortgage will have to keep paying on the second mortgage, as well as either pay down the first or have the bank agree to reduce the balance due.
And this program is voluntary for banks who have not received federal bailout money from the Troubled Assets Relief Program (TARP). While most of the big banks have received funds, many smaller regional banks have not — and these banks may not be willing to write down the value of their loans by 10-20%. Writing down the value of bad mortgage securities is what has caused so many paper losses on bank balance sheets already; it is inconceivable that many struggling banks will want to admit to even more.
There is also a second part of the bailout plan that may allow homeowners to qualify for a government-guaranteed mortgage modification program. This involves the bank modifying the loan to be within 38% of the borrowers’ gross income and the government stepping in with money to help reduce the payment to 31%. The requirements for this part of the plan are the following:
  • The mortgage must be conforming under Fannie and Freddie guidelines — jumbo loans are not permitted.
  • This program must be done on a principal residence — investment homes, second homes, or vacation properties do not qualify.
  • The homeowners must be in danger of default on the loan or have already defaulted. In danger of default can be a mortgage where the payment is more than 31% of the borrowers’ gross (before tax) income.
  • The lender must be willing to modify the mortgage to reduce the homeowners’ monthly payment to 38% of their gross income or less.
While the new bailout program gives banks more incentives to negotiate with borrowers, it may not give enough to convince banks to change their normal business practices and dedicate more resources to helping homeowners. As mentioned above, participation is voluntary, except for banks that have received TARP money and Fannie Mae and Freddie Mac, which are under government conservatorship.
Does the plan go too far? Some critics point out that using taxpayer money to bail out failing banks or failing individual borrowers will only create more moral hazard in the future. Once debts are paid back or discharged and banks loosen up lending, there will be a strong incentive to reinflate a housing bubble, especially in the presence of low interest rate targets set by the government. A new bubble and collapse will send all of the same players back for more government bailouts.
Or does the plan not go far enough? Other critics point out that this is not nearly enough money that the government is taking away from taxpayers to bail out the housing market. Property values fall for everyone in areas hard hit by foreclosure, so it is in everyone’s best interest to do whatever it takes to prevent more foreclosures, or so the argument goes.
In either case, the full details of the plan will be released on March 4th, which gives all of us a week to contemplate how the government’s latest bailout plan will save the housing market. Unfortunately, previous plans have failed to assist many borrowers, and this plan seems to offer little in the way of really novel proposals. For most homeowners facing foreclosure, it will probably be best to keep looking at other options, in addition to considering receiving mortgage assistance from the federal government.
The ForeclosureFish website has been created to provide homeowners in danger of losing their properties with relevant and importantforeclosure help and advice. The site describes various methods that may be used to save a home, such as foreclosure loans, mortgage modification, filing bankruptcy (Chapter 7 or 13), and more. Visit the site to read more about how to save a home, what options may be applicable in your situation, and how to recover afterwards:http://www.foreclosurefish.com/
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Nightmare on Every Street, by Alex J. Pollock, Reason Magazine

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Fannie Mae and Freddie Mac are broke. The two government-sponsored enterprises (GSEs) that togetherfinance more than $5 trillion in mortgages are insolvent, if you don’t count the $150 billion already injected into them by the federal government. The common shares of these state-corporate hybrids have lost more than 99 percent of their value, both have been delisted from the New York Stock Exchange, and since September 2008 they have been official wards of the state. The largest owner of their obligations is now the United States Federal Reserve.

Housing finance inflation was at the center of the financial crisis, and the GSEs were at the center of housing finance inflation. Any meaningful reform of the mortgage system, and therefore the financial problems underlying the recession, must deal directly with Fannie and Freddie. But last summer our elected representatives instead passed a 2,300-page financial “reform” act that purposefully avoided addressing this central issue.

Discussions of how to reform Fannie and Freddie have now belatedly begun on Capitol Hill and in the Obama administration. The process will be complicated and controversial. But if we are to avoid future distortions and government-inflated bubbles in the housing market, Fannie and Freddie can and should be dismantled.

Divided and Conquered

The core problem with GSEs isn’t hard to understand. You can be a private company disciplined by the market, or you can be a government entity disciplined by the government. If you try to be both, you can avoid both disciplines.

To fix that, the first step is to put the GSEs into receivership (as opposed to the current conservatorship), so that the small remaining value of the common shares and all their governance rights are wiped out. Then the restructuring can proceed, Julius Caesar style: divide them into three parts.

The first of those parts, unfortunately, must be a “bad bank,” a liquidating trust that will bear Fannie and Freddie’s deadweight losses–the $150 billion spent by the Treasury so far, plus the additional losses that are embedded in the GSEs’ portfolios and will be realized over time. According to various estimates by the CBO and private analysts, it will cost in the range of $200 billion to $400 billion to make whole the foreign and domestic creditors of Fannie and Freddie. That cost will unjustly, but at this point unavoidably, be borne by taxpayers.

All the current debt and mortgage-based securities obligations that bear the Treasury’s implicit but very real guarantee should be placed in these trusts to run off over time, with all the current mortgage assets of the GSEs dedicated to servicing them. These trusts will be responsible for liquidating the old GSEs. They can be modeled on the structure used in the 1996 act that privatized another GSE: Sallie Mae, the federal student loan company.

The second of the three parts should be formed by privatizing Fannie and Freddie’s prime mortgage loan securitization and investing businesses. All their intellectual property, systems, human capital, and business relationships should be put into truly private companies, sold to private investors, and sent out into the world to compete, flourish, or fail like anybody else. As fully private enterprises, they will be free to do anything they think will create a successful business–except trade on the taxpayers’ credit card.

When there is a robust private secondary market for the largest segment of Fannie and Freddie’s business–high-quality prime mortgage loans to the middle and upper middle classes–private investors can then put private capital at risk, taking their own losses and reaping their own gains. In this mortgage sector, the risks are manageable, and no taxpayer subsidies or taxpayer risk exposures are necessary.

Decades ago, there may have been an argument for GSEs to guarantee the credit risk of prime mortgage loans in order to overcome the geographic barriers to mortgage funding, barriers that were themselves largely created by government regulation. More recently, there may have been a case for using GSEs to get through the financial crisis that they themselves had done so much to exacerbate. But as we move into the future mortgage finance system, the prime mortgage market can and should stand on its own, just like the corporate bond market.

A private secondary market for prime mortgages should have developed naturally a long time ago. It didn’t because no private entity could compete with the GSEs’ government-granted advantages. Bond salesmen, pushing trillions of dollars of GSE debt and mortgage-backed securities to investors all over the world, basically told them this: “You can’t go wrong buying this bond, because it is really a U.S. government credit, but it pays you a higher yield. So you get more profit with no credit risk.” Although there was, and still is, no formal government guarantee of Fannie and Freddie’s obligations, what the bond salesmen told the investors was nonetheless true, as events have fully confirmed. The Treasury has made it clear that its financial support of Fannie and Freddie is unlimited.

There can be no private prime middle class mortgage loan market as long as Fannie and Freddie use their government advantages both to make private competition impossible and to extract duopoly profits from private parties. The duopoly element of the old housing finance system should not be allowed to survive.

The third part to be carved from Fannie and Freddie should consist of intrinsically governmental activities, such as housing subsidies and nonmarket financing of risky loans. These should move explicitly to the government, where they will be fully subject to the discipline of congressional approval and appropriation of funds. This would be in sharp contrast to past practice, in which the GSEs received huge subsidies and used some of the money to win political favor, all concealed off budget. Instead, the funding for these activities would have to be appropriated by Congress in a transparent way, subject to the disciplines of democracy. These functions of Fannie and Freddie should be merged into the structure of the Department of Housing and Urban Development, along with the government mortgage programs of the Federal Housing Administration and Ginnie Mae.

Ending Freddie and Fannie, SlowlybIt is unrealistic to expect to achieve all this at once, but by clarifying where we should arrive, we can start the journey. That process has become somewhat easier because Fannie and Freddie are basically government housing banks

now, overwhelmingly owned and entirely controlled by the government.

Fair and transparent accounting demands that the GSEs not receive the political benefits of off-balance-sheet accounting. The Accurate Accounting of Fannie Mae and Freddie Mac Act (H.R. 4653), proposed by Rep. Scott Garrett (R-N.J.), would require Fannie and Freddie to be part of the federal budget, a change recommended by the Congressional Budget Office. Honest, on-budget accounting would give Congress a strong incentive to junk the GSE model and restructure Fannie and Freddie on the principle of “one or the other, but not both.”

Congress should also take up a proposal from Rep. Jeb Hensarling (R-Texas), the GSE Bailout Elimination and Taxpayer Protection Act (H.R. 4889), which lays out a transition to a world with no GSEs. Hensarling’s bill would increase Fannie and Freddie’s capital requirements, reduce their role in the mortgage market, and establish a sunset on the GSE charters.

The ongoing, unlimited bailout of the GSEs will hit the taxpayers for much more than the $150 billion cost of the notorious savings and loan collapse of the 1980s. It is obviously difficult for Fannie and Freddie’s longtime political supporters to admit that the GSEs were a massive blunder. But that is now undeniable. The failure of Fannie and Freddie creates a perfect opportunity to restructure these hybrids, leaving no government-sponsored enterprise behind.

Alex J. Pollock is a resident fellow at AEI.

http://www.aei.org/article/102663

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