Fannie and Freddie Could Raise Fees in 2012

-Realty Biz News

Analysts believe that the government may need to charge higher fees to lenders and increase mortgage insurance from borrowers in order to guarantee loans when they go ahead and overhaul Fannie Mae and Freddie Mac – a move that could lead to increased borrowing costs.

The government is trying to boost competitiveness within mortgage markets, and at the same time reduce their expenses over the next ten years by $28 billion.

Currently, government-sponsored enterprises (GSEs) purchase mortgages before packaging them into securities which are sold on to investors. As part of the transaction, GSEs ask for a “guarantee fee”, and this is set to be increased next year.

Such an increase, says the Wall Street Journal, would result in borrowers seeing a modest increase in their monthly repayments. If guarantee fees are increased by just 0.1%, as has been proposed by the government, a $220,000 mortgage’s monthly payments would rise by about 15%.

In order to reduce the risk to taxpayers, Fannie Mae and Freddie Mac would likely ask borrowers to take out additional mortgage insurance, as GSEs have been federally-owned since 2008.

However, any changes would have to be introduced gradually, says Edward DeMarco of the Federal Housing Finance Agency, in order to avoid causing any more harm to fragile housing markets.

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Fannie, Freddie refi market set to enter housing Twilight Zone

-Housingwire

U.S. residential mortgage lending volume will struggle to reach the mid-$800 billion range in 2012, according to market research, as the recent boom in refinancings dries up at Fannie Mae and Freddie Mac.

Furthermore, the report from iEmergent, paints a picture of a housing market floating in its own Twilight Zone — a reality where "the distribution and location of local lending opportunities will continue to re-shape and reset the long-term home financing prospects and projections for most U.S. communities."

This year, roughly 838,400 Fannie and Freddie loans received a refinancing, according to data released by the Federal Housing Finance Agency.

In 2012, this market share is likely to dry up, according to the forecasting and advisory firm (click chart below).

Even more unfortunate, the other side of the mortgage origination — new home sales, is unable to fill the gap in business.

"Home affordability indicators have never been better, yet total buyer demand shows no signs of life," the iEmergent report states.

The reason for this forecast, according to the analysis, is that housing is in its own dimension of economic recession.

The nation's economy may be recovering, but in terms of housing, lack of jobs, lower income and continued high levels of negative equity, America's property ladder is missing more than a few rungs.

"The middle-class buyers on whom future home buying demand depends will continue to struggle to re-build their cash reserves, pay down their debts, and grope their way out of the shadows," the report states. "Their recovery will be very slow."

But there is a silver lining to the forecast that Fannie Mae, Freddie Mac will see higher purchases, yet very low refinance volume in 2012 (click chart below).

In the total originations market, outside of the government sponsored enterprises, iEmergent projections indicate purchase home loan volume might actually rise 0.3%. However, through 2012, mortgage originations as a whole will see less business.

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Another Fannie servicing portfolio up for sale

-Housingwire

MountainView Servicing Group will help sell a $485 million servicing portfolio of Fannie Mae mortgages.

Nearly all of the loans in the portfolio are fixed rate and primarily located in Illinois. The average delinquency rate on the portfolio is 2.21%. Interest rates average 4.67%, and the average FICO score is 761. The portfolio also carries an average 30-basis-point servicing fee.

A spokesman for MountainView said the portfolio is being sold by a private mortgage bank but did not specify which one. Bids will be taken until Sept. 7.

So far in 2011, MountainView has helped sell more than $800 million in Fannie Mae servicing portfolios. In April, the firm began marketing a $262 million portfolio. It also sold a $110 million portfolio in January.

It is also marketing a $45 million portfolio of Ginnie Mae servicing rights. All of these loans are fixed rate with more than 78% of the mortgages located in California. The seller of these loans will be taking bids through Sept. 7 as well.

MountainView is a financial services firm specializing in asset management and valuation, among other services. It is also a subsidiary of MountainView Capital Holdings, a financial advisory firm to banks, thrifts and credit unions.

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Fannie Mae: Negative equity environment saps would-be homebuyers

-Housingwire

With 64% of Americans expressing pessimism over the state of the economy in the second quarter, Fannie Mae's latest quarterly national housing survey shows consumers walking a tight rope into a housing market focused more on renters as employment worries persist.

That's the highest percentage of Americans with a negative view of the country's economic shape, according to Fannie Mae, which began the survey in the first quarter of 2010.

What's more, negative equity levels continue to rise nationwide as house prices remain suppressed. In the second quarter, 26% of mortgage borrowers were underwater, or owed more than the property is worth, compared to 23% in the first quarter.

And when mixed with rising costs of living and fewer jobs, more and more would-be homebuyers say they are unlikely to get a mortgage.

Survey results show 73% of single-family renters believe it would be difficult to qualify for a mortgage, with 33% citing their own credit histories as a hurdle.

The survey studied consumer confidence across generational lines and found 51% of Gen X (ages 35 to 44) claim it would be hard for them to qualify for a mortgage. When looking at Generation Y (ages 18 to 34) —  the cohort most likely to be first-time homebuyers— the number rises to 59%.

Even though pessimism abounds across the market, the younger cohort seems more optimistic about the future. Fifty-seven percent of Generation Y participants said they expect their personal situation to improve over the next year, compared to 42% in Gen X and 35% of baby boomers.

The survey, which is based on interviews with more than 3,000 Americans, found 26% worry about losing their job.

One-third of respondents perceive their savings to be sufficient, while 44% said household expenses have increased significantly in the past year.

"Consumers are more cautious due to concerns over employment and household finances," said Doug Duncan, vice president and chief economist of Fannie Mae. "As a result, consumer spending, which accounts for about 70% of the economy, ground to a halt in the second quarter. Consumers are more hesitant to take on additional financial commitments, and a setback to confidence means a setback to the recovery of the housing market."

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S&P lowers ratings on Fannie, Freddie

-Housingwire

Standard & Poor's lowered the ratings on Fannie Mae and Freddie Mac Monday after downgrading the U.S. government's sovereign debt rating to double-A-plus late last week.

Analysts also lowered the ratings on 10 of the 12 Federal Home Loan Banks and on senior debt held by FHLB banks as well. All went from triple-A to double-A-plus. The outlook on all affected institutions is negative.

"The downgrades of Fannie Mae and Freddie Mac reflect their direct reliance on the U.S. government," S&P said in a statement. "Fannie Mae and Freddie Mac were placed into conservatorship in September 2008 and their ability to fund operations relies heavily on the U.S. government. In addition to the implicit support we factor into our ratings, the U.S. Treasury has demonstrated explicit support by providing these entities with capital quarterly, as necessary."

S&P also lowered ratings on the senior debt issued by the Federal Farm Credit Banks to double-A-plus, although ratings on the individual farm member banks are not affected.

The Chicago and Seattle Federal Home Loan Banks weren't downgraded because S&P already rated them at double-A due to lower stand-alone credit profiles.

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Fannie Mae unwind slows down

-Housingwire

Mortgage securitization business at Fannie Mae got a little smaller in June, according to the monthly survey from the government-sponsored enterprise, but the rate at which Fannie Mae business contracts is slowing down.

Fannie Mae’s gross mortgage portfolio declined at a compound annualized rate of 9.4% in June.

Under Dodd-Frank financial reform, both Fannie Mae and Freddie Mac are required to unwind operations, though the speed at which this happens is a variable.

For example, the new numbers show that the unwind is slowing down.

Fannie Mae said its gross mortgage portfolio fell at a much-faster compound annualized rate of 15.2% in February, while the government-sponsored enterprise's entire book of business fell 0.7%.

Fannie Mae's total book of business lessened at a compound annualized rate of 1% June.

Year-on-year, Fannie Mae mortgage-backed securities portfolio declined by a little more than $50 million to $231 million, compared to $282 million in June 2010.

Fannie Mae mortgage servicers completed 17,246 loan modifications in June, for a total of 101,379 loan modifications in the six months ended June 30, 2011.

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Fannie, Freddie investors likely steady, even in default

-Housingwire

The U.S. debt compromise deadline is days away with the prospect of a national downgrade looming in lieu of a solution.

In such an instance, it is likely that bonds issued by Fannie Mae and Freddie Mac will experience an implied downgrade as well, considering the implied government backing.

Indeed, in a commentary in The Washington Post, Neel Kashkari, managing director of the investment management firm PIMCO, suggested a U.S. downgrade has the potential to be as bad or perhaps worse than the Lehman Bros.' shock.

"The more strongly held a belief, and the larger the asset class it supports, the greater the potential damage to the economy when the belief is turned upside down," he writes. "We may not be certain what will happen if U.S. credit is downgraded, but there is no upside to finding out."

However, analysts at Barclays Capital are not as worried when it comes to Fannie Mae and Freddie Mac. They say among the largest investors of these bonds, there is little chance of a widescale withdrawal from the market. Banks have been a major source of demand for mortgage-backed securities this year, alongside real estate investment trusts, adding in excess of $100 billion in the past three quarters.

They admit that an investor concern is that a downgrade could sap bank demand by potentially raising the level of regulatory capital that must be held against the asset.

"But we do not think this will be the case," they say.

"We see the likelihood of regulatory capital increases based on a rating downgrade as extremely low," the Barclays Capital analysts write. "As such, in the event of a downgrade, there should not be much change in bank demand for this sector."

See the investor breakdown for Fannie, Freddie below.

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Fannie and Freddie cuts vanishing from debt ceiling proposals

-Housingwire

As the debt ceiling talks continue to limp along in Washington, government savings from reducing operations at Fannie Mae and Freddie Mac are disappearing from both the House and Senate proposals.

Congress has until Aug. 2 to come to an agreement on how to raise the debt ceiling, according to the Treasury Department. The House was expected to vote on a revamped proposal from Rep. John Boehner (R-Ohio) Friday evening, while Sen. Harry Reid (D-Nev.) prepped one of his own in anticipation of striking down the Boehner deal.

Buried in the flurry of negotiations were potential ramifications for Fannie and Freddie, the two mortgage giants that have cost the U.S. government roughly $164 billion in bailouts since the housing downturn.

According to the Congressional Budget Office, the original Boehner plan and subsequent Reid proposals would have saved the government $30 billion via reductions to Fannie and Freddie operations. This, sources within the House told HousingWire, would have meant raising the guarantee fees — the fees Fannie and Freddie charge for guaranteeing a pool of mortgages — up 5 basis points.

Sources said this contributed more than $26 billion to government "cuts," but it was eventually considered a "tax revenue" and was removed from not only Boehner's proposal but Reid's as well.

It was unclear Friday whether the Reid bill had any language pertaining to Fannie and Freddie within it, but an aide for one senator said the situation was "extremely fluid."

Rumors even flew Friday afternoon of a possible reduction to the conforming loan limit below the reduction that is already scheduled to occur Oct. 1. The conforming loan limit is the maximum amount Fannie and Freddie can purchase or guarantee.

In 2008, Congress raised the conforming loan limit to $729,750, but the limit is scheduled to expire Oct. 1 and drop to $625,500, varying by county. Discussions over the debt ceiling included talks of taking that limit down to $417,000 by 2013  for the cost savings it would provide in numbers of loans that the GSEs would guarantee going forward. However, sources on the Republican side of the House said such plans never surfaced in the deal.

Should any language regarding Fannie Mae and Freddie Mac disappear from the debt ceiling agreement, it would mark the latest landmark legislation since the Dodd-Frank Act that failed to address the future of housing finance.

Even though Republicans in the House made initial steps toward reforming fringe operations of the government-sponsored enterprises, including raising the g-fee, legislation on how to replace the roles of these companies have yet to be taken up by committee.

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Fannie Mae sees light at the end of housing tunnel

-Housingwire

Home sales in the second quarter of 2011 were bad, according to Fannie Mae. Home prices also remain volatile, moving with gains and losses, over the past two years.

However, according to a housing forecast report card released on Friday from the government-sponsored enterprise, 2012 is likely to be a different story.

Next year will likely see meaningful gains in both categories, especially in the multifamily space. Both home sales and house prices should begin to improve from the third quarter 2011, with faster growth in the final two quarters of 2012.

Meanwhile, the GSE said full-year growth is projected to slow to 2.4%, down from 2.8% in 2010.

There are many economic uncertainties dragging the recovery, the research states. Disruptions in Europe may impact the U.S. banking system to the downside, for example. Furthermore, consecutive poor employment reports are directly impacting home purchases.

"Clearly, the renewed slowdown in hiring underscores the uncertainty surrounding the economic outlook," said Fannie Mae Chief Economist Doug Duncan. "The lack of sustained, robust job growth continues to push out into the future the time for the housing market to heal, which is crucial to a meaningful economic expansion."

Fannie Mae also predicts mortgage rates on 30-year fixed to hit 5% in the second quarter of 2012 and keep rising from there. Liquidations, on the other hand will remain at low levels for the long term.

Demands for rentals should remain robust, according to Kim Betancourt, Fannie Mae director of multifamily economics and market research, in a separate research report.

"There is some concern that multifamily fundamentals may stagnate if job growth remains anemic, however, new rental supply will be limited, likely resulting in keeping current rent levels stable," Betancourt wrote.

"The outlook for the second half of 2011 remains the same for the multifamily sector, with an annualized increase of 3% expected for average asking rents and the vacancy rate expected to stay fairly stable, declining to 6.5% from 6.75% by the end of the year," the text states.

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Big four top contenders to replace Fannie, Freddie

-Housingwire

As the government-sponsored enterprises slowly wind down their massive domination of the mortgage finance markets, the most likely parties to fill the capital hole left behind are the big four banks.

However, how well or how much the big four can cover remain up for discussion.

On Tuesday, speakers tossed ideas back and forth at a panel titled: "Housing Finance Reform Proposals." They gathered in Washington at the annual meeting of the American Securitization Forum, a trade group representing secondary market players.

One speaker wryly referred to the unofficial title of the panel as "life without the GSEs." The future may be murky, and the present is unlikely to change in the near-term, one panelist said.

The evolution of the mortgage finance markets away from government support will become clearer as financial reform under Dodd-Frank begins to take hold. Until then, according to Alfred Pollard, general counsel Federal Housing Finance Agency, the government will continue support Fannie Mae, Freddie Mac and the dozen Federal Home Loan Banks.

"If the enterprises are in conservatorship we are supposed to conserve their assets," Pollard said. "We made a decision that Fannie and Freddie, and home loan banks should stick to their core businesses."

Moderator Christopher DiAngelo, partner at Katten Muchin Rosenman, said Bank of America (BAC: 10.78-0.65%), Citigroup(C: 39.91 -0.20%), JPMorgan Chase(JPM: 39.45 -1.08%) and Wells Fargo(WFC: 27.40-0.18%) hold 70% of the private mortgage origination market. Therefore, they seem the likely option to take market share from the GSEs.

Others financing options, such as developing a covered bond market or a greater presence of private investor bases, such as from real estate investment trusts, are only going to handle a small portion of the financing, the panel said.

"A covered bond market does not solve a lot of problems," said Nancy Mueller Handal of MetLife Investments, a $45 billion investor in mortgage-backed securities, 80% of which are GSE bonds.

"There is not the investor base to fill the gap that people think. We would have very little room for covered bonds," she added.

Furthermore, investors want a stronger foundation for investments in private-label MBS. Those investors will want vertical risk retention, adequate access to representations and warranties and a third-party arbitrator assigned to deals.

"The pipes are not in place yet," Handal added.

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Fannie Mae lowers growth estimate as home prices continue to search for bottom

-Housingwire

Fannie Mae economists predict slower economic growth for 2011 as home sales and consumer spending lag, and home prices search for a bottom that's unlikely to appear before the fourth quarter.

The overall economy is now expected to grow at a pace of 2.5% this year, down from a prior forecast of 2.9%, economists with the government-sponsored enterprise's economics and mortgage market analysis group said Monday.

A lackluster housing market is one of the key drivers of the slowdown, the report concluded. The housing slowdown became even more pronounced this year with the home-buyer tax credit long gone and unemployment still soaring above normal levels.

With more housing inventory and higher levels of unemployed citizens, supply currently outweighs demand, according to Fannie, resulting in a projection of steeper price declines in the third quarter before a leveling off in the final three months of the year.

"Ultimately, the labor market holds the key to a housing recovery, but job growth is needed in order to activate housing demand," said Fannie Mae Chief Economist Doug Duncan. "Hiring delays will continue to push out timing for the housing rebound."

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Reinventing Fannie and Freddie

-AlterNow

The initial steps to dismantle Fannie Mae and Freddie Mac are underway with the introduction of a bipartisan bill in the House of Representatives that would replace the mortgage giants with a minimum of five companies that would issue mortgage-backed securities with significant federal regulation.  The compromise legislation proposed by Representative John Campbell (R-CA) and Representative Gary Peters (D-MI) is likely to be the only plan that will attract sufficient support from both parties on a politically volatile subject, especially at a time when gridlock looms over issues such as how to curb federal spending.  The bailout of the two companies has cost taxpayers upwards of $100 billion.

According to Representative Campbell, “Rather than putting out a political marker, we can move a piece of legislation that is significant…and can actually become law.  The only other approach that’s out there in a bill is one that replaces Fannie and Freddie with nothing.”  Other policymakers, such as Treasury Secretary Timothy Geithner, have discussed the merits of a limited but unambiguous government guarantee of securities backed by certain types of mortgages.  The new entities - similar to Fannie and Freddie — would be limited to purchasing loans that meet certain standards, including size caps.  The difference would be that the firms would be required to hold much more capital than Fannie and Freddie.  Only the mortgage-backed securities that they issue –not the companies themselves — would enjoy federal guarantees.  The companies would operate similarly to public utilities and likely will not have exchange-listed shares.

Critics say the proposal risks recreating the same dynamics that led Fannie and Freddie to use their government ties to take risks that harmed taxpayers.  “In reality, this is almost surely going to be terrible,” said Dwight Jaffee, finance professor at the University of California, Berkeley.   Government insurance programs, he says, inevitably lead to “a catastrophe.”  Advocates argue that taxpayers will be less exposed to losses because borrowers will have to make significant down payments.  Additionally, the new firms will have to hold more capital.  Additionally, the firms will be required pay a fee for government backing to finance a catastrophic insurance fund, much as the Federal Deposit Insurance Corporation levies fees and handles bank failures.

The mortgage and housing industry support a continued government role in supporting mortgage lending, including the Mortgage Bankers Association, National Association of Realtors and National Association of Home Builders.

The agencies are still hemorrhaging money.  For example, Fannie Mae reported a loss of $8.7 billion for the 1^st quarter of 2011, which included a $2.2 billion dividend payment to the Treasury Department.  The loss was significantly less than the $13 billion reported one year ago.  “We need to manage our credit book — our old legacy book very vigorously,” said Fannie Mae President and CEO Michael Williams.  But that is not in conflict with helping distressed homeowners.  “Helping people to avoid foreclosure is a good thing,” Williams said.

Action must be taken to keep the mortgage market afloat and provide securitization for investments. According to a Washington Post editorial,  “The housing market is still in deep trouble.  Prices nationwide have fallen by about a third since the peak in 2006 — and they appear to be trending down again.  The resulting hit to household wealth may hinder the recovery, which is already sluggish.  Small wonder that various advocates for housing are once again asking Washington for help.  But in at least one area, the prescription would be worse than the disease.  We refer to calls for extending the current elevated limit on the size of loans eligible for securitization by Fannie Mae and Freddie Mac, the mortgage-finance giants operating under government control.  Congress ‘temporarily’ raised the limit to a maximum of $729,759 in certain markets in response to the sudden evaporation of private liquidity during the 2008 crisis, but that measure is set to lapse at the end of September.  At that point, the limit will not revert to the pre-crisis maximum of $417,000 in most of the country but to a level set in relation to local medians — and capped at $625,000.  But the Obama administration has supported a reversion to lower loan limits as the first step in gradually reforming the mortgage security market and reducing taxpayer exposure to Fannie and Freddie.  The administration’s goal is to lure cash-rich would-be mortgage securitizers back into the market, starting with the high end.  Treasury Secretary Timothy F. Geithner has described this as “crowding in” private capital, and it is the rare housing policy proposal that has enjoyed a measure of bipartisan support.”

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Fannie, Freddie may never pay back the government

-Housingwire

The Treasury Department paid $164.4 billion to Fannie Mae and Freddie Mac since placing them into conservatorship in September 2008, but that money may never be paid back.

Every quarter, Fannie and Freddie pay a 10% dividend payment on senior preferred stock. Through the first quarter, Fannie drew $99.7 billion and paid $12.4 billion in dividends. Freddie drew $64.7 billion and paid $11.6 billion in dividend payments. The Congressional Budget Office recently estimated the companies will need another $42 billion.

But if these companies are ever going to fully return the government investment, drastic measures will need to be taken that may be politically infeasible in the current environment.

Analysts at FBR Capital Markets said the only way Fannie and Freddie could repay the government is if Congress raises the guarantee fee, eliminates the dividend payment and allow the companies to sustain their portfolios.

"We estimate it would take Freddie Mac approximately 10 years in a normal credit environment to pay back the U.S. government investment, assuming the g-fee is set at 50 bps and the retained portfolio remained static. For Fannie, we estimate it would take approximately 13 years," analysts said.

If the mandate for Fannie and Freddie to continue winding down their portfolios by 10% every year to an eventual mark of $250 billion remains, the payback could take longer. Freddie would need 14 years, and Fannie would need 17 years, according to FBR.

However, these assumptions will likely never come to pass.

Raising the g-fees for both companies may be the most likely as both Republicans and Democrats see the need to entice more private capital into the market, which a competitive raise to the g-fees would provide. A bill from Rep. Jeb Hensarling already introduced will provide that.

But a bill about to be introduced in the House from Rep. Don Manzullo (R-Ill.) would prevent the Treasury from ever lowering the 10% dividend. Another bill from Hensarling would place hard caps on their portfolios until they are reduced to $250 billion within five years.

Analysts at the investment bank Keefe, Bruyette & Woods, too, see no real possibility of the government recouping its investment.

"Given the size of the dividend, we believe that the GSEs are very unlikely to be able to pay down their debt to the government before they are wound down," KBW analysts said.

FBR currently puts the combined GSEs' worth at $62 billion if the two companies were spun off in a public offering. This, of course, falls short of the capital needed to pay off the preferred stock, which FBR said is worthless.

"We do not believe the preferred stock has value, given the political nightmare that could be created if the government (a.k.a. the U.S. taxpayer) loses money on its investment while preferred shareholders make two-, five- or even 10-fold on the dollar," FBR said.

Whatever becomes of the GSEs, analysts at FBR do not expect Congress to come to an agreement for at least three to five years. And this stalemate will only make it harder to avoid the status quo.

"We are no closer to reform today than a few months ago, and, considering the current political climate, this will likely be the case throughout the current Congress. Given the complexity of the issue, we believe that as time goes by and we move further away from the crisis, wholesale reform will become more difficult to enact," FBR said. "If that is the case, this increases the odds that Fannie Mae and Freddie Mac remain intact."

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Do We Need Fannie and Freddie?

-Yahoo! News

The United States doesn't need government-sponsored enterprises such as Fannie Mae and Freddie Mac to sustain the housing market. At least that's what Anthony Sanders, professor of real estate finance at George Mason University, told the House Subcommittee on Capital Markets and Government Sponsored Enterprises last week.

Because government-sponsored enterprises (GSEs) back more than 90 percent of all home loans today, they have crowded out private sector lending and distorted the housing-finance landscape, he says. "Fannie and Freddie will not be missed, nor will their absence make a difference to the housing market or the economy, particularly if taxpayers are no longer on the hook for further losses," Sanders testified.

Since the housing bubble burst, the government has spent more than $160 billion of taxpayer money to shore up the mangled finances of the two federal mortgage giants. The Obama administration has said it plans to wind down the influence of Fannie and Freddie to trim the government's role in the housing market, and Congress has invited several housing market experts to offer opinions on the best ways to limit government involvement. Sanders presented seven proposals to the House subcommittee to facilitate the transition, including requiring Fannie and Freddie to dispose of assets not critical to their mission and capping bailout funds to the distressed duo at $200 billion.

U.S. News recently spoke with Sanders about the outlook for Fannie Mae and Freddie Mac. Excerpts:

What do the next few years look like for GSEs?

Over the next few years, there is much to be done with the GSEs. I recommended a five-year wind-down period. It will be slow to start, simply because the housing market--in part because of the GSEs--is in such fragile shape right now.

The concern from both sides of the aisle is that any massive disruption would be bad for the housing market and consumers. I don't agree with that. There's enough concern from the Democrats and some Republicans about removing the government subsidies to the housing market. Even HUD [U.S. Department of Housing and Urban Development] has acknowledged that we've oversubsidized the housing market and we really should be withdrawing that.

Does that mean there's no place for government subsidies in the housing market at all?

We have the FHA, which is primarily for first-time home buyers, but everyone forgets that HUD has Section 8 and has a big multifamily support mission. It's not as narrowly defined as some people say it is.

What's the problem with a GSE-dominated mortgage market?

Fannie and Freddie used to be the gold standard for mortgage lending. They're not lenders, but they would buy high down-payment, high credit-score loans. Why does the government need to be in that market? The private sector can purchase high down-payment, high credit-score loans with private mortgage insurance or other types of credit enhancements.

Here's the problem. When the government is in that space, they crowd out and drive away the private market. As a matter of fact, they drove them into the risky mortgages. So we sit here today and the private market is not functioning in terms of securitization. We stuck them in the risky space and it blew up.

How do we encourage private-sector lending?

Right now, Fannie and Freddie buy very high-quality loans, they have very tight underwriting standards, and then they apply the guarantee. We don't know yet how the world economy is going to receive mortgages without a guarantee.

There could be a very simple way to get the private sector back in. Why don't we have Fannie and Freddie do an experiment? Why don't they take those same high-quality mortgages that they're underwriting or purchasing and put them into new mortgage-backed securities without a guarantee? Put it up for bid and see what people bid on it.

Here are the two outcomes. If the premium paid by investors is, for instance, 1 percent. That's not really big in the general scheme of things. So that means the private market is ready to come back. [There have been] estimates that it's 3 percent. If that's true, that shows you how much government intervention in the housing market has done. [Investors] are going to want much bigger yields because they don't trust us anymore. That experiment would do the trick.

How would this transition affect prospective home buyers?

If I'm right and there's not this huge increase in interest rates, the market would be able to transition very easily to a world without Freddie and Fannie. The world is in a precarious position right now, that's why it has to be a five-year [time frame]. But if we get to the point and we find out that the world wants 300 basis points, [that] would mean a 4.5 percent mortgage would then be 7.5 percent. On the other side, it could be as low as 30 basis points.

Once we get out of this hole we're in, if it turns out it the world wants 300 basis points, interest rates would go up. In the short run, consumers would be taken aback, but if you look over history, even under President Clinton rates were about 7.5 percent.

The difference between the Clinton administration, which was 7.5 percent, and today, which is 4.5 percent, that's the impact of the housing bubble. Once we get back to normal conditions, 7.5 percent will be perfectly fine.

What needs to change about the mortgage system to improve the housing market?

This is all going to be trial and error. We must understand that the GSEs pump $8 trillion into the housing finance system. It's hard to close the door after you let the horse out of the barn. We're going to have to feel our way around this.

Right now, we are the only country in the world with 95 percent 30-year, fixed-rate mortgages. Other countries actually like to have a mix: adjustable rates, shorter-term mortgages, and they have lower default rates.

We've become so addicted to the government involvement in the housing market that the 30-year fixed mortgage has almost become an entitlement because it protects the consumer from interest rate increases. But somebody has to bear that interest rate risk when interest rates go up, and eventually they will. If interest rates pop up, whoever holds mortgage-backed securities is going to take a beating. So if we transfer [that risk], the borrowers no longer have that risk.

If you're protecting the borrowers of the 30-year fixed, which sounds admirable, just bear in mind that pension funds are probably going to get hammered if interest rates go up or any other investor in the mortgage market.

Let's go for a broader base of mortgages like ARMs, shorter-term mortgages, the Canadian rollover. The advantage of having consumers with an ARM bear some risk is that they're much more careful if they know that interest rates might double in three years. They're going to be more careful about how much house they buy. Having consumers bear some risk is actually a good thing.

That's the problem with the FHA's 3-percent-down program and Fannie and Freddie buying mostly fixed-rate. Consumers are not exposed to the risk that they create for other people. They do not have enough skin in the game. Three percent down is like the skin off of your fingertips.

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Fannie Mae servicers to evaluate more borrowers for imminent default

-Housingwire

Fannie Mae notified its mortgage servicers this week to begin evaluating borrowers for imminent default not just for the Home Affordable Modification Program but for any initiative.

Borrowers who do not qualify for HAMP and are less than 60-days delinquent on their mortgage must be evaluated for imminent default if they request a modification. If the servicer determines the borrower has less than $25,000 in cash reserves, the servicer must submit the loan to Freddie Mac's imminent default indicator, which evaluates the borrower's financial characteristics, such as credit score and property valuation, to determine if a default is likely.

If the test comes back negative, the borrower must provide documentation showing a specific hardship such as the death of a borrower or co-borrower, a prolonged illness or a divorce.

Both Fannie and Freddie completed 119,000 modifications in the fourth quarter, according to the latest report from their regulator, the Federal Housing Finance Agency. Roughly 20% of those were HAMP permanent modifications. Expanding the evaluation for imminent default to this larger percentage of non-HAMP workouts could boost numbers, as total modifications on Fannie and Freddie loans dropped 18% from the previous quarter.

When modification options failed, Fannie and Freddie conducted roughly 27,000 short sales and deeds-in-lieu of foreclosure in the fourth quarter.

A recent study from CoreLogic (CLGX: 17.96 -0.39%) showed the risk of losses from these transactions due to fraud. Fannie released new guidance for servicers to mitigate some of the same risks highlighted in the report.

Fannie will require servicers to obtain either a broker price opinion or an appraisal from an approved network of providers before completing a short sale or deed-in-lieu of foreclosure.

According to the new guidance, servicers have until July 15 to comply. The list of providers, much like Fannie's attorney network, will be updated from time to time.

Servicers cannot request more than 75% of its BPOs or appraisals from one provider, and it must wait at least 120 days after the original order for gathering an updated value.

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