FHA Loan Limits Can Drop Much Further, Study Finds, by Mortgageorb.com


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The Obama administration‘s proposal for Federal Housing Administration (FHA) loan limits to reset to lower levels in October will have only a small impact on the agency’s current market share, a new study suggests. According to researchers at George Washington University (GW), larger reductions may be necessary to return the FHA to its traditional role as a lender to first-time and low- to moderate-income borrowers.

The report, titled “FHA Assessment Report: The Role and Reform of the Federal Housing Administration in a Recovering U.S. Housing Market,” concludes that the FHA still could serve 95% of its historic targeted market even if the maximum FHA loan limits were reduced by nearly 50%. To serve its target population, the report concludes that the FHA only needs a market share of somewhere between 9% and 15% of total mortgage originations. Currently estimates by the administration show that nearly one-third of new originations have FHA backing.

“FHA’s expansion played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009,” says Robert Van Order, co-author of the report. “However, we now are left with large loan limits that were set when home prices were at the top of the bubble. They don’t reflect current market conditions and are unlikely to assist the FHA in reaching its historical constituencies – first-time, minority and low-income home buyers.”

As part of its broader proposals to reshape the housing finance industry, the Obama administration wants to reduce the FHA’s high-end loan limit of $729,750 to $629,500. The GW report says an FHA limit of $350,000 in the high-cost markets and a limit of $200,000 in the lowest-cost markets is sufficient to satisfy more than 95% of the FHA’s target population.

The report also finds that the administration’s proposed reductions in loan limits would affect only 3% of loans endorsed last year.

“We find that FHA’s current market share exceeds what is needed to serve these markets,” says Van Order. “In the wake of significant declines in home prices, we believe the FHA could reduce its loan limits by approximately 50 percent and still almost entirely satisfy its target market. That would reduce its currently large market share, which is difficult for FHA to manage.”

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Panel Is Critical of Obama Mortgage Modification Plan, by David Streitfeld, Nytimes.com


The Treasury Department’s loan modification program, which has been criticized as ineffective almost since its inception, came in for another battering in a Congressional report released Tuesday.

Only about 750,000 households will be helped by the Home Affordable Modification Program, which pays banks to modify loans under Treasury guidelines. That is far fewer than the three million or four million modifications promised in early 2009 by the Obama administration, the Congressional Oversight Panel said.

The panel’s report calls the program a failure, although Senator Ted Kaufman, a Democrat from Delaware and chairman of the panel, declined to go that far in a conference call with reporters.

“The program has turned out to be a lot smaller and had a lot less impact on the housing market than we thought,” Mr. Kaufman said.

One reason: the loan servicers, who act as middlemen between the distressed homeowners and the investors who own the mortgage, often find it more profitable to foreclose than modify. The modification program provides incentives for servicers to participate in the program but no penalties for their failure to do so.

The oversight report estimated that the modification program would spend only about $4 billion of the $30 billion approved for it. With the deadline for reallocating the money having passed, “an untold number of borrowers may go without help,” the panel said.

Tim Massad, acting assistant secretary for financial stability, said at his own press briefing that the criticism was “somewhat unfair.”

Aside from the borrowers directly helped by the modification program, Mr. Massad said, many others have been helped indirectly, as servicers used the government standards in proprietary modifications.

The program “is having a real impact on the ground, even though I certainly acknowledge there are a lot of challenges and a lot of difficulties,” he said.

One of the challenges is a persistently weak housing market. Many households that have won permanent modifications are still heavily in debt, which leaves them vulnerable to redefaulting.

If the redefault level rises significantly, Mr. Kaufman said, “that’s a lot of taxpayer money down the drain with no effect.”

Other members of the oversight panel include Damon Silvers, director of policy and special counsel to the A.F.L.-C.I.O., and Richard H. Neiman, New York superintendent of banks.

Timothy Geithner forecloses on the moratorium debate, Dean Baker, Guardian


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Treasury Secretary Timothy Geithner is good at telling fairy tales. Geithner first became known to the general public in September of 2008. Back then, he was head of the New York Federal Reserve Board. He was part of the triumvirate, along with Federal Reserve Board chairman Ben Bernanke and then Treasury secretary Henry Paulson, who told congress that it had to pass the Tarp or the economy would collapse.

This was an effective fairytale, since congress quickly handed over $700bn to lend to the banks with few questions asked. Of course, the economy was not about to collapse, just the major Wall Street banks. To prevent the collapse of the banks, congress could have given the money – but with the sort of conditions that would ensure the financial sector would never be the same. Alternatively, it could have allowed the collapse, and then rushed in with the liquidity to bring the financial system back to life.

But the Geithner fairytale did the trick. Terrified members of congress tripped over each other to make sure that they got the money to the banks as quickly as possible.

Now, Geithner has a new fairytale. This time, it is that if the government imposes a foreclosure moratorium, it will lead to chaos in the housing market and jeopardise the health of the recovery.

For the gullible, which includes most of the Washington policy elite, this assertion is probably sufficient to quash any interest in a foreclosure moratorium. But those capable of thinking for themselves may ask how Geithner could have reached this conclusion.

The point of a foreclosure moratorium would be to ensure that proper procedures are being followed. We know that this is not the case at present. There have been several outstanding stories in the media about law firms that specialise in filing documents for short-order foreclosures. They hire anyone they can find to sign legal documents assuring that the papers have been properly reviewed and are in order.

In some cases, this has led to the wrong house being foreclosed. People who are current on their mortgage – or who, in one case, did not even have a mortgage – have been foreclosed by this process. The more common problem would be the assignment of improper fees and penalties to mortgage holders. Or, in many cases, foreclosures have probably occurred where the servicer did not actually possess the necessary legal documents.

A moratorium would give regulators the time needed to review servicers’ processes and ensure that they have a system in place that follows the law and will not be subject to abuse. This is the same logic as the Obama administration used when it imposed a moratorium on deepsea drilling following the BP oil spill.

No one can seriously dispute that there is a real problem. Three of the largest servicers, Bank of America, JP Morgan and Ally Financial have already imposed their own moratorium to get their procedures in order. This is just a question of whether we should have regulators oversee the process or “trust the banks”.

If the argument for a moratorium is straightforward, it is difficult to see any basis for Geithner’s disaster fairytale. If there were a moratorium in place for two to four months, then banks would stop adding to their inventory of foreclosed properties.

But most banks already have a huge inventory of unsold properties. Presumably, they would just sell homes out of this inventory. This “shadow inventory” of foreclosed homes that were being held off the market has been widely talked about by real estate analysts for at least two years. It is difficult to see the harm if it stops growing for a period of time.

Of course, it actually was Obama administration policy to try to slow the process of foreclosure. This has repeatedly been given as a main purpose of its Hamp programme, the idea being that this would give the housing market more time to settle down. Now, we have Geithner issuing warnings of Armageddon if a foreclosure moratorium slows down the foreclosure process.

It doesn’t make sense to both push a policy intended to slow the foreclosure process and then oppose a policy precisely because it would slow the process. While this is clearly inconsistent, there has been a consistent pattern to Geithner’s positions throughout this crisis.

Support for the Tarp, support for Hamp and opposition to a foreclosure moratorium are all positions that benefit the Wall Street banks. I’m just saying.

 

 

http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/18/mortgage-arrears-banking

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