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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Onward with Reverse: Avoiding reverse mortgage foreclosure

-The Herald Review

On any regular purchase or refinance mortgage, the main reason people get foreclosed on is they get too far behind in their monthly payments. With a reverse mortgage there are no monthly payments. Therefore any possible foreclosure must occur for another reason.

The cause of most reverse mortgage foreclosures is non payment of property taxes. Taxes and homeowners insurance payments are paid by the home owner in a reverse mortgage. Usually in a regular mortgage, the taxes and insurance payments are included with the monthly mortgage payment. Now, you can have your reverse mortgage company pay them for you also, but they do it by holding back money you would receive at closing. You would need to specify the number of years you want them to pay it and that’s how much they would hold back.

If you start to get behind in your taxes, that triggers other things for your mortgage company to check, such as, do you really still live there? Has the house been satisfactorily maintained?

In the closing papers at the title company you will be asked to sign a document stating that you will maintain the home and live in it as your primary residence.

If the lender finds a reason to foreclose, the borrower has a right to be reinstated. This right applies even after foreclosure proceedings have been started. To reinstate, the borrower shall correct the condition which resulted in the requirement for foreclosure. Foreclosure costs would be added to the principal balance.

Other required signatures at closing are on documents stating: 1) You will not participate in a real estate tax deferral program. 2) You will not put any other liens (credit lines, 2nd mortgages, etc) on your property. 3) You will not change the property in any way that would reduce its value. 4) You will pay any governmental or municipal surcharges (i.e., sewer, water, or other city provided utility improvements).

Lastly, a borrower would be in default and foreclosure could result, if it was discovered that during the loan application process, false or inaccurate information was given.

Because the non payment of taxes and insurance is the most prevalent cause of foreclosure in reverse mortgages, HUD is now indicating it will require checking credit scores and income verification in the future to make sure people are credit worthy and have enough income to pay the required taxes and insurance. As of now, credit scores and income verification are not considered in a reverse mortgage. Therefore, I would suggest that if you are contemplating a reverse mortgage in the near future that you consider doing it now before these new regulations become effective.

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Home prices hit lowest level since April ’09 in double dip

-The Washington Post

The prices of single-family homes have dropped to their lowest level since 2009, creating a “double dip” as values fell below where they were when the housing market collapsed, according to a closely watched price index released Tuesday.

The Standard & Poor’s Case-Shiller index shows that single-family home prices fell 4.2 percent nationally in the first quarter from the previous quarter, leading analysts to conclude that prices have fallen by more than they did during the Great Depression.

“The peak-to-trough decline is worse,” said Mark Zandi, chief economist at Moody’s Analytics. “It highlights the severity of the problems in the housing market.”

The report included prices in 20 major metropolitan regions and found that that index fell 3.6 percent in March from a year earlier. Prices slipped in all areas except Washington, where they rose 4.3 percent, buoyed by the region’s strong job market. By contrast, 12 metro areas fell to new lows, led by a 10 percent dip in Minneapolis.

The 20-city index had peaked in the second quarter of 2006, when the housing market sizzled. It bottomed out in April 2009, started climbing again in early 2010 and has now dropped below the 2009 low.

Housing prices face pressure from the bloated supply of foreclosures and the nation’s high unemployment rate. The problems are not expected to ease soon. Flawed paperwork prompted some of the nation’s largest banks to temporarily halt foreclosures in September, creating what many analysts called an artificial lull.

Federal and state officials have since teamed up to negotiate what’s expected to be a multibillion-dollar settlement with banks that embraced shoddy foreclosure practices. Many economists expect that foreclosure volume will pick up once a settlement is reached, if not before, creating another round of price declines.

“I’m thinking we might even see a triple dip,” said Mark Vitner, a senior economist at Wells Fargo Securities. Vitner says there are 2.2 million homes in foreclosure and an additional 2 million mortgages that are more 90 days past due. Clearing about a third of those foreclosures is necessary before prices can stabilize, and that could take at least a year, he said. Any setback in the economy can prolong that time frame.

Paul Dales, a senior economist at Capital Economics, said prices have fallen by more than the 31 percent decline endured during the Great Depression. He predicts a further drop of at least 3 percent this year. “We have another couple of years of falling prices and then stagnant prices before prices really rise again,” he said.

The glum numbers released Tuesday measure repeat sales of single-family homes, and the economists who crunched them focused on data that is not seasonally adjusted. They say that huge swings in foreclosure activity disguise seasonal patterns.

The report also showed that the month-over-month numbers are also grim, with the price index declining 0.8 percent overall. The two exceptions: Washington showed a 1.1 percent gain from February to March, and prices in Seattle were flat.

Once the foreclosures clear the system, the housing market should be poised for a comeback, economists said. They cite recent reports showing that the volume of seriously late mortgages is down and the prices of non-distressed properties are holding up.

Until the housing market recovers, “the U.S. economy will not grow on all cylinders,” said Jack Ablin, chief investment officer at Harris Private Bank.

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Want to Buy a Piece of a Greek Island?

Greece's Government Prepares to Sell Up to $42.9 Billion of Public Property to Reduce Its Mountain of Debt

-Wall Street Journal

Sales of public land by Greece may include a concession to develop a luxury resort on the island of Rhodes, whose harbor and historic city center in 2007 are shown. The first properties could be put on the market in the next few months

Now might be your chance to buy that portion of a Greek island you have been coveting.

As part of Greece's privatization plan to raise cash to reduce its mountain of debt, the national government is preparing to sell as much as €30 billion ($42.9 billion) of public property. It is still early in the process, but future sales are likely to include assets ranging from the government's stake in the Mont Parnes Casino resort in Athens, hotels, and even a concession to develop a luxury resort with a world-class golf course on the island of Rhodes.

The Hellenic Public Real Estate Corp., the government body that manages public property, has a list of about 75,000 individual government-owned properties. The corporation has appointed National Bank of Greece SA to lead a consortium of advisers who are now preparing to sell an initial portfolio of 20 to 30 properties, the first of which could be put on the market in the next few months, according to Aristotelis Karytinos, general manager of the real-estate division at National Bank of Greece.

The International Monetary Fund, in its latest report on Greece, estimates that as many as €15 billion could be raised through real-estate sales. Mr. Karytinos says expected proceeds from property sales or leasing is now estimated at between €15 billion and €30 billion. The first step is to sift through the long list of public property, identify the best real estate, and resolve any legal issues to ensure that the property is able to be fully developed by investors.

"We more or less know what the government owns, but many of the properties may have some legal or technical problems that need to be resolved before we can exploit them," Mr. Karytinos said in an interview. "In some cases, we may have to rezone properties."

The real-estate privatization is part of a broader program to sell government holdings valued at about €50 billion, which Athens agreed to do to obtain a €110 billion bailout by the European Union and the International Monetary Fund. The IMF has been pressing Greece to accelerate the privatization process and is particularly keen to see Athens dispose of stakes in properties and industries that it believes are better left to the private sector, such as running gambling casinos.

Greece hopes to attract international investors to create modern resorts and residential communities for foreign tourists. "The tourism industry is clearly one of our major strengths," Mr. Karytinos said. "This is an area where we have an advantage, and we are talking to international investors about creating these types of developments."

Most of the public real estate is undeveloped land or retired sites such as the old Athens airport at Hellenikon. In most cases, the Greek government may not actually sell the property outright but is more likely to lease the underlying land for development.

"Our strategy is to award concessions, long-term leases of 30 to 40 years, depending on the individual property, but the government will retain ownership of the land," Mr. Karytinos said. "The first properties should come to market in the next few months, but certainly by the end of the year."

Long-term leases are attractive partly for political reasons. Development by foreign investors would be more palatable for Greek citizens if the underlying land remains in government hands.

But investors also may welcome such an arrangement. Much of the property owned by the government consists of large land plots close to the sea, which may be prohibitively expensive in an outright sale. It will also be easier for the government to lease land than to sell it outright because the Greek public is largely opposed to any privatizations. "A concession with a long lease is better for all concerned," says Dika Agapitidou, director of Athens Economics Ltd., a property consultant and affiliate of Jones Lang LaSalle.

Another part of the real-estate privatization could involve raising cash through sale-and-leaseback deals with public buildings, although this would be a small part of the total property privatization, Mr. Karytinos said. In a sale and leaseback, the government would sell public buildings to an investor and enter into a long-term agreement to rent the space in the building. This way, the government receives cash upfront and the investor has long-term secure income.

Mr. Karytinos acknowledged, however, that the government may have to reform its tenant laws before pursuing sale-and-leaseback deals. Investors are wary of entering into such deals in Greece because of strong tenant rights.

"It is too easy for tenants to break leases in Greece, and that adds too much risk to the transaction," says Alistair Calvert, a London-based partner with Northcliffe Asset Management Ltd., an investment firm specializing in sale-and-leaseback transactions.

Whatever the next step is in Greece's plan to privatize public real estate, all eyes will be on how Athens handles the first deals that come to market.

"It is extremely important that they get the first couple of projects right," Ms. Agapitidou said. "If the first projects go well, the interest of international investors will increase."

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Economists predict no immediate end to government debt purchases

-HousingWire

The latest incarnation of quantitative easing is ending at the end of June. However, economists say the Federal Reserve's $600 billion Treasury debt buying program, called QE2, may not be the last federal liquidity injection into the nation's monetary supply.

Further, they say the removal of QE2 is not necessarily going to be a dramatic turning event.

Economist Roger Meiners, a professor with the University of Texas at Arlington, says the day of reckoning has already come in a sense and some economists believe the government will have to continue buying debt regardless of whether or not it is referred to as quantitative easing. Several market observers say they expect a third round of government debt purchases.

In an interview with HousingWire, Princeton economist Paul Krugman said he believes there should be a QE3, and that it should focus on private market debt purchases. "I'm in the boat the Fed isn't doing remotely enough," Krugman said.

Both Krugman and Meiners expect any new government debt program to likely be much larger than previously seen.

"It may be that the Fed is going to be buying up less than before, but that is doubtful because of government deficits," Meiners said. "I don't think there is going to be any choice but for the Fed to continue buying government debt."

Earlier this month, the Fed released minutes from its latest open market committee meeting, which showed the FOMC beginning to contemplate a move away from expansionary policies like QE2. However, no exact timelines were given for the transition.

After reviewing the minutes, analysts with Capital Economics estimated it will take more than a year before the Fed actually tightens its policies.

Meiners also doesn't see a dramatic shift at the end of the month when it comes to the Fed buying government debt.

"I would guess for the rest of the year, the Federal Reserve will continue to do exactly what they have been doing," he said. "I think the bigger problem is the long-term uncertainty that a lot of people feel — rightly or wrongly — that this is a house of cards, so we see many businesses holding off on making commitments because tax policies are up in the air."

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Private mortgage insurers write $3.7 billion worth of new policies in April

-HousingWire

As private mortgage insurers continue to fight for a future in the mortgage origination space, the industry is reporting that insurance firms wrote $3.691 billion in primary insurance on newly originated, conventional mortgages during the month of April.

Mortgage Insurance Companies of America — which represents member firms such as Genworth Mortgage Insurance, Mortgage Guaranty Insurance, PMI Mortgage Insurance, Radian Guaranty and Republic Mortgage Insurance — said all of the firms had a total of $615.7 billion of primary insurance in force during the same month.

During the same month-long period, about 17,400 borrowers used private mortgage insurance to buy or refinance a home, according to MICA.

In addition, mortgage insurance companies received 20,733 insurance applications in April and reported 40,875 defaults as well as 43,362 cures.

The mortgage insurance industry has continued to advocate for the proposed 'qualified residential mortgage' standard to include a role for private mortgage insurance. The current proposal does not create an exemption for private mortgage insurance when a borrower falls short of the proposed minimum standard. Instead, QRMs are defined narrowly, requiring a 20% down payment in the current proposed form. Standard & Poor's believes the rule as written will cut into the private mortgage insurers' business.

Standard & Poor's credit analyst Ron Joas, said in a recent report "as the QRM definition is currently written, mortgage insurance is not included as a credit enhancement. Absent the GSE exemption, this would significantly limit the loans on which MIs could write mortgage insurance."

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Derivatives Without Borders vs. Dodd-Frank

-New York Times Dealbook

 

The Dodd-Frank financial regulatory law spans nearly 1,000 pages — but apparently not the United States border.

Members of the Commodity Futures Trading Commission, the agency responsible for implementing dozens of Dodd-Frank’s restrictions on derivatives trading, told lawmakers in Washington on Wednesday that the exact scope of the law was vague.

“This is an issue that has been the subject of much legal debate, but I think that we need to cut through that morass to provide some certainty to market participants who are concerned about what laws are going to apply to them,” Bart Chilton, a Democratic commissioner at the Commodity Futures Trading Commission, told the House Agriculture Committee’s panel on commodities and risk management.

His comments echo larger complaints made by banks and other financial firms, which argue that the Dodd-Frank rules could push derivatives business and profits overseas.

The Dodd-Frank Act says that new restrictions on proprietary trading and the derivatives business do not apply in foreign countries unless there’s a “direct and significant connection with activities” in the United States.

It remains unclear how regulators will interpret that provision as they draw up the borders of the sweeping new regulations.

“The commission has not given the public any formal guidance on what this section means in practice,” Jill E. Sommers, a Republican member of the commission, told the panel. “This has already created regulatory uncertainty for firms with global operations as they attempt to plan for the future.”

Ms. Sommers also warned that European and Asian regulators have yet to complete — or in some cases even propose — rules that resemble Dodd-Frank. The law requires many derivatives contracts to be traded on regulated exchanges and run through clearinghouses, which act as a backstop in case one party defaults.

Under an agreement at the Group of 20 summit meeting in 2009, regulators across the world agreed to require clearing and exchange trading for derivatives. While the Commodity Futures Trading Commission and the Securities and Exchange Commission plan to complete these rules later this year, international regulators plan to wait until the end of 2012.

The European Commission, the European Union’s executive body, has discussed proposals that largely mirror Dodd-Frank’s requirements, but the regulators may take until 2012 or later to complete the plan.

Ms. Sommers warned that the disparate time frames may hurt American businesses or encourage firms to skirt the Dodd-Frank by booking derivatives deals out of Frankfurt or London.

The lag time “may shift business overseas as the cost of doing business in the U.S. increases and creates other opportunities for regulatory arbitrage,” Ms. Sommers said.

She also warned that some Dodd-Frank provisions would not match up with rules written by foreign regulators. The European Union, for instance, might exempt pension funds from mandatory clearing, she said.

Mr. Chilton, however, played down any disagreements among regulators.

“Of course, there are differences on some provisions of our respective laws, but the level of overall harmonization is substantial,” he said, adding that the Commodity Futures Trading Commission keeps in close touch with foreign regulators.

The commission’s staff exchanges daily e-mail with European Commission regulators, and the two teams hold video conferences. Gary Gensler, the chairman of the commission, also traveled to Brussels twice in the last year or so to work on the derivatives proposals.

But, as DealBook reported in April, the commission could not afford to send Mr. Gensler overseas. Mr. Gensler, a Goldman Sachs alumnus, paid his own way.

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