News, Research & Insights for American Homeowners, Patriots & Constitutional Conservatives
Uh oh.
Awfully thoughtful of the Times to toss this grenade in his lap just hours before Nevadans head out to caucus. Then again, what’s the worst that can happen? He loses by 30 points instead of 25? You know who this benefits? Once he became speaker in 1995, Mr. Gingrich’s support loomed large as the companies [...]
For the umpteenth time, President Obama has announced that his solution to the foreclosure crisis is to encourage "responsible" homeowners to refinance at lower interest rates. Adopting the Tea Party rhetoric and blaming home buyers who got houses in 2006 for their inability to foresee what few economists foresaw, Obama has steadfastly refused to push for principal reductions and payment suspensions for homeowners behind in payments, lest their luckier neighbors who bought at lower prices become resentful. As a result, he continues to offer help to homeowners who need it least.
Behind the rhetoric is an important policy choice: who will bear the billions of mortgage losses that have yet to be flushed out of the system. Principal reduction modifications for defaulted borrowers would distribute the losses among taxpayers (via Fannie and Freddie), private investors and banks (who hold non-GSE loans), and give underwater homeowners some relief. More importantly, principal modifications mitigate the aggregate losses to the system while accelerating the necessary deleveraging. Refinancing current borrowers does nothing to prevent the huge deadweight losses from continuing foreclosures, at 50% loss severities, on homes whose owners are delinquent. Choosing to do no more for the 7 million or so delinquent mortgage debtors means maximizing losses to those homeowners, but also to taxpayers and investors. It would certainly help to continue driving down home prices, which does benefit new first-time buyers, but at a huge aggregate cost.
In fact, as conservator of the nationalized Fannie Mae and Freddie Mac, the federal government could make the needed modifications of delinquent mortgages happen with a stroke of the pen, more or less. Instead, the Administration proposes the dubious strategy of loading up the FHA portfolio with 4% mortgages at 125% loan-to-value ratios, thus continuing the process of transferring future mortgage losses from banks to taxpayers, and amplifying those losses, while letting the foreclosure crisis continue, just as Mitt Romney proposes. Nothing about the refinancing strategy moves forward the process of realigning mortgage debt to home values. Instead, the strategy relies on the doubtful proposition that home values will soon return to rising at their pre-2007 clip.
Pacta sunt servanda and the housing market and broader economy be damned.
Gloves off.
I understand why he’d want to hit Newt hard on Freddie in Florida, which has taken a beating from the housing downturn. What I don’t understand is what he’ll say when Newt reminds the world tonight that Mitt put more than $250,000 in mutual funds that invested in Fannie Mae and Freddie Mac, among other [...]
The Administration seems to have cut a deal to extend the payroll tax cut, which is a smart economic move in terms of trying to support demand. But it's being paid for by an increase in the "G-fee" (guarantee fee) charged by FHA and Fannie Mae and Freddie Mac on the loans they purchase. In other words, anyone refinancing or taking out a mortgage now will be subsidizing reduced payroll taxes. The result is robbing Peter to pay Paul, which means the economic benefits from extending the payroll tax cut are going to be muted by the chill this puts on the struggling housing market.
The argument that it will encourage homeowners to look for non-GSE/FHA loans is pretty silly and hides the foolishness of using housing to pay for payroll tax cuts. Homeowners don't choose whether they have a GSE loan or not. They choose whether to do FHA or not, but if it's not an FHA loan, the homeowner doesn't know if the loan is going to stay in the lender's portfolio, be sold to another lender, be sold to a GSE (and maybe securitized by the GSE) or be privately securitized. Raising the costs of the GSE execution might encourage more portfolio lending, but it's hard to believe that a few basis point change in GSE execution costs is going to suddenly make the private-label securitization market revive. The problems in that market aren't just the economics--particularly of servicing--but the utter lack of trust investors have in the underwriting, documentation, and servicing. For the private-label market to revive, there will need to be a much more significant difference in execution costs between private-label and the GSEs. The increased G-fee doesn't do it.
It's painfully apparent that this Administration doesn't have a housing policy, and that's a serious problem when housing is the anchor weighing down the economy. Consider, on the one hand, the Administration tries to make refinancing easier via the expansion of HARP. Then it raises the "G-fee" that Fannie Mae and Freddie Mac charge on every loan they purchase, which gets passed on the homeowner in the form of a higher mortgage rate. (I'm not sure of the pass-through rate, but I'd guess it's pretty high.) If the Administration is trying to fix the housing market, this sure isn't the way to do it.
There are two things I feel the need to say. First, the economics profession sure has lost some points these past couple of years, wouldn’t you say? Sort of like the intelligence community did during the Bush presidency just a few years back. It pains me to see the entire economics profession relegated to being “The Pips,” to Barack Obama’s “Gladys,” if you know what I mean.
We’re never even told their names anymore, all we get to know is that when the news is bad, the “economists were surprised by the numbers.” Not any of the economists that I either know personally, or frequently read, but a nameless and faceless band of economists who seem to forecast so poorly, they couldn’t even get hired as San Diego weathermen.
It’s like, “the number of jobs created last month came in lower than economists expected,” or… “Economists were surprised to learn that home prices have fallen for 70 months in a row, that water is in fact wet, and that the sky is blue. Until that news was released today, the consensus answers to those three questions was: “really?”… “clean”… and “high.”
Then second thing I feel the ned to say is that while there’s no question but that Democrats do suck… they clearly suck less than anyone even remotely connected with the GOP. The latest example of this comparative suckiness can be seen in the letter sent this week by 21 members of Congress to Federal Housing Finance Agency (FHFA) Acting Director Edward DeMarco that urges him to allow principal reductions on loans backed by Fannie Mae and Freddie Mac.
The text of the letter states:
“We do not urge that the enterprises reduce principal on mortgages as a kindness to homeowners.” (Emphasis added.)
The letter, which cites data published by the GSEs themselves stating that 17.7 percent of Fannie borrowers are underwater, as are 19 percent of Freddie’s borrowers, goes on to explain that the representatives support principal reductions because they’ll save taxpayers from further losses, because these borrowers… “are obviously at great risk of eventual default.”
Of course, we are talking about DeMarco here, so I’d ease up on the use of the word “obviously.” The letter continues…
“The performance of the enterprises’ mortgage modifications leaves much to be desired for homeowners, for the housing market, and for taxpayers.”
This is not even close to the first time that DeMarco has heard this pitch, in fact I covered it in an article several months ago. But, DeMarco’s response to-date has been that the “short-term” impact to the GSEs is what prevents him from approving the principal reduction idea, which is refreshing, if you ask me. I mean, if you’re going to be a short-term thinker, I appreciate it that you identify yourself as such.
The representatives, however, are now specifically asking that DeMarco disregard the short-term effects of principal reductions on the GSEs’ balance sheets ans instead consider the much more meaningful long-term positive effects that such reductions would likely have. The letter also references a study conducted by Amherst Securities that negates the “moral hazard” theory, which idiotically hypothesizes that principal reductions actually encourage homeowners to default. Sort of like saying that if you’ll reduce the balance of my car loan by a few grand, I’d be willing to let it get repossessed.
George Miller (D-CA), one of the representatives whose signatures appears on the letter signed the letter, says:
“Right now, the FHFA is preventing underwater homeowners with mortgages backed by Fannie Mae or Freddie Mac from receiving balance reductions, even when a principal modification would save the investor – in this case meaning taxpayer – money compared to foreclosure.”
I guess at this point I should state my opinion as to whether I think this letter will have any effect… and the answer is that I think it is likely to be about as effective as crawling under one’s school desk in the event of a nuclear attack. Hard to believe, but word from inside the Beltway is that the most powerful man in the nation… and President Obama have both been asking DeMarco to green light the principal reductions plan for the GSEs for several months now. And if Treasury Secretary Tim Geithner can’t get it done, then I’m thinking it can’t be done. Still, I am glad to see 21 members of Congress writing a letter, because that’s more than I’ve seen them do in months.
So, I’m bringing all of this up because Mr. Edward DeMarco, who is just the “acting” director of the independent federal agency that placed both Fannie Mae and Freddie Mac into conservatorship in the fall of 2008, has actually become the single biggest impediment to a course correction in the housing market, by far, in the entire country. And when you consider the GOP’s position on foreclosures, which is only that they need to happen faster, that’s really saying something.
With a Ph.D. in Economics from the University of Maryland and a B.A. in Economics from the University of Notre Dame… DeMarco’s an “economist.” Prior to joining FHFA, he was COO at the OFHEO, where he provided policy advice for the FHA, before that he was Assistant Deputy Commissioner for Policy at the SSA, and before that he was the Director of the OFIP at Treasury where he oversaw analyses of public policy issues involving the GSEs… and before that he conducted economic and financial analyses of the GSEs at the GAO where he developed recommendations for improved safety and soundness related to the government’s exposure to the GSEs.
Read that last line again… “he developed recommendations for improved safety and soundness related to the government’s exposure to the GSEs?” Well, did he now? Obviously, that was some absolutely crackerjack work right there. Considering that Fannie and Freddie, so far, have cost us taxpayers about $170 billion in “safety and soundness,” I’d have to say that I sleep better at night knowing that we’ve now got Ed watching out for us at FHFA.
Best I can tell that Ed’s never had a job that wasn’t a TLA (three letter acronym), and to give you a picture of what he looks like… hmmm… well, picture what might happen if Tim Geithner and Peter Orszag had a child… I mean, the man just screams Caucasian. I’m not saying that to be a racist, I’m saying it because the combination of all of those factors makes me rock solid sure that this guy’s extensive knowledge of real people in this country comes from reading about them in policy reports.
So, even though last year, President Obama and Treasury Secretary Tim Geithner started asking Fannie and Freddie to start doing principal reductions for homeowners underwater and at risk of foreclosure, and even though Sec. Geithner testified that he believed there to be a solid economic case for Fannie & Freddie to participate in the principal reduction programs, such as the new HAMP PRA… DeMarco simply said no anyway. Ed’s stated rationale was that principal reductions, while positive for Fannie and Freddie in the long run, he agreed, would be bad for GSE books in the short run.
This is the sort of thing that makes one long for the ghost of Lyndon Johnson to come back and kick DeMarco in the pants… I mean, telling the president to go fish is one thing, but saying no to the most powerful man in the world? I don’t think so.
Geithner can snap his fingers and Ben Bernanke starts up the printing presses from the nightstand by his bed. Even Lord Blankcheck over at Goldman Sachs takes his calls. And Vikram Pandit over at Citi? Yeah, well I heard he comes over and rubs Geithner’s feet in the evenings. I swear… that’s what I heard.
Fannie & Freddie, in my way of thinking shouldn’t even be given a choice. They are both bankrupt… utterly failed mortgage banks. They’ve already been NATIONALIZED, no matter what they want to call it. For God’s sake, Fannie Mae stock is trading OTC right next to Blockbuster! And besides, Freddie and Fannie have been GSEs for years… “Government Spending Entities,” so why stop now?
And, since when does Fannie Mae base decisions on whether something is prudent in the short run, or the long run for that matter? Because that’s certainly what comes to my mind when I think of the word “prudent”… Fannie Mae.
Hey, nice castle, by the way.
Regardless of all of this, DeMarco has not been willing to budge an inch. It’s interesting… Obama does appoint the head of the FHFA, but apparently he can’t order him to do anything. I’d look up the reason behind this idiocy, but I don’t want to hurt myself… check with Yves Smith over at Naked Capitalism, I’m sure she knows. The bottom-line is that DeMarco is legally “independent,” he can’t be fired, and so far refuses to step down, so at this point he’s singlehandedly preventing our government from doing something to stop foreclosures, as if the Republicans alone weren’t enough of an obstacle in this regard. So… fine… I say, someone have him shot at dawn… and viola! Problem solved. I’ll even go pay-per-view, how’s that?
Recently, Mr. DeMarco, in his testimony to congress over the $35 million in bonuses being paid to Fannie and Freddie executives, said that executive compensation at Fannie Mae and Freddie Mac has been appropriate as well as necessary to prevent taxpayer losses. This is the kind of logic that’s obviously the product of a beautiful mind.
DeMarco defended the bonuses, saying that without them, there could be an exodus of talent, which could result in taxpayer losses. And I have just two things to say in response to that:
At this point Mr. Ed, a real horse’s behind, is standing right smack in the way of programs that could at least start turning around the housing market and that is making me insane.
On this topic, DeMarco recently told Politico.com:
“Sweeping plans to help homeowners ‘did not meet our responsibilities as conservator. That doesn’t mean principal forgiveness might not be appropriate… but it does not meet our mandate to return Fannie and Freddie to solvency and guard against another taxpayer bailout.”
He also said that the FHFA, “has exercised its responsibilities … to not undertake certain initiatives.” Did I tell you he was an out of touch policy wonk? I did? Okay, just checking.
He was also recently quoted as saying:
“Americans, whatever their political stripe is, whether they are lawmakers or businesspeople or citizens, we all are frustrated.”
No, Ed… you’ve got that wrong. I’m frustrated… homeowners are frustrated. You? You are FRUSTRATING.
And he also said:
“We are in a set of circumstances in the housing market we have not seen since the Great Depression. It has taken a long time to get to that point, and it’s going to take a long time to recover.”
And evidently, Ed is going to do everything in his unchecked power to make sure of that. So, ladies and germs… I have seen the enemy, and he is Mr. Edward DeMarco. To paraphrase the immortal Will Rogers… He makes me feel the way I do when the baby gets a hold of a hammer.
Mandelman out.
So the Administration has announced that it is expanding the HARP refinancing program to help underwater borrowers. Originally, HARP enabled borrowers with up to 125% loan-to-value (LTV) ratios to refinance (105% for adjustable rate loans). The revised program removes the LTV cap for fixed-rate loans, reduces some refi fees, permits refis of loans that have been mildly delinquent recently, and extends the eligibility date. All the news accounts have stated that the number of HARP refinancings is expected to roughly double, from about 900,000 refinancings to perhaps 1.8 million refinancings. This is trumpeted as a boon for underwater homeowners.
The revised program may well help some underwater homeowners lower their monthly payments. Unfortunately, the 900,000 and 1.8 million numbers are seriously deceptive. Most of the HARP refinancings to date have been for borrowers with positive equity. HARP has refinanced very few underwater borrowers. As of 2Q 2011, 92% of HARP refinancings (776,009 of 838,441) were of loans between 80% LTV and 105% LTV. Only 62,432 refis were between 105% and 125% LTV. In other words, HARP has provided very little help for underwater borrowers.
(It's not clear to me what makes a refi of a <100% LTV loan a HARP refi in the first place--it's defined by FHFA as a "Fannie Mae to Fannie Mae and Freddie Mac to Freddie Mac first lien refinance loans with limited and no cash out that are owner occupied with LTV's over 80 to 125." That means that an 80% Fannie to Fannie no cash out refi is counted as HARP, but that just looks like a regular refi to me. But that's another story.)
Recognizing that HARP hasn't helped very many underwater homeowners to date makes me skeptical that an increase in the HARP LTV limit will make a difference. If you can't get the 120% LTV homeowner to refi, what will get the 140% LTV homeowner in the door? (Indeed, since the 140% LTV mortgage isn't REMIC eligible, making the refinacing less attractive from the GSE end).
Recognizing that HARP hasn't helped very many underwater homeonwers also underscores a critical problem with the program: it's not a foreclosure prevention program. HARP refi recipients generally aren't avoiding foreclosure via because of HARP. If there's a job loss, a 4% mortgage is going to be hard to carry, just like a 6% mortgage. Instead, what's going on here is stimulus via subsidy. These homeowners are getting a new mortgage at a very low rate, subsidized ultimately by the taxpayer.
That might be great as a stimulus move, but I worry that it will set an expectation for homeowners going forward of 4% mortgages and that such an expectation will constraint the restructuring of the US housing finance system. What's worse is that it's a bailout of the wrong homeowners--HARP is directing help not to the homeowners most in need, but to those who are likely to hang on. If we're going to bail out homeowners, let's at least target the right ones.
In a rare moment of semi-lucid disclosure, the National Association of Realtors (“NAR”) reported that home sales contracts are falling apart TWICE as often as they did last year, according to the numbers released at its annual convention in Anaheim, California.
In an article published in National Mortgage News, titled: NAR: Sales Falling Through Twice as Often, the NAR said that recently 18% of its members are reporting “contract failures,” which is double the number that were being turned down one year ago.
Why? Well, according to the Realtors, it’s credit scores and appraisals coming in too low. Well shave my head and call me Baldy… what do you know about that? I certainly do declare, how can such a thing possibly be so? What could possibly be the cause? Who would have ever expected something like this to happen?
This really is precious, don’t you think? Absolutely adorable. Hey, I know how we can fix things… let’s have a bake sale… Lord, I do love a good bake sale.
Apparently, the Realtors are quite surprised that these days even good credit isn’t good enough, so the NAR conducted decided to conduct an “analysis.” These guys needed to study this problem, because apparently, when the topic of conversation moves beyond the houses themselves, the NAR has no clue what’s going on.
They found that the average credit score needed to get a loan in 2007 was 717, but lo and behold, will wonders never cease, in 2010 is was 760! So, I guess it’s going up. Go figure.
“Weighted average FICO scores for conventional loans purchased by Fannie Mae and Freddie Mac eased a bit in this year’s second quarter, declining to 755, but remain well above historic norms, the realty group said.”
Well, thank the good Lord for the NAR’s powerful analysis. Please do go on… I am totally glued…
Almost three out of every four loans were offered to buyers with scores of 740 or higher, while less than 1% were offered to those whose scores were 620 or lower, NAR said. Twenty-five percent of Americans have credit scores below 599 — almost double the level of two years ago.
Shut the front door! Twice as many Americans have credit scores below 599 than did just two years ago? Now why do you suppose that would be? Want to know what that looks like on a piece of graph paper? Ever heard of a trend line? Well, this trend line follows Thelma and Louise’s car at the end of the movie.
The stiffer mortgage requirements have come at a time when banks are seeing strong profits and runs counter to the government’s efforts to use rock-bottom interest rates to get the economy and the housing market moving again, said NAR’s chief economic, Lawrence Yun.
It “Yuns counter to the government’s efforts,” run? (Wait, flip those.) I meant, it “runs counter to the government’s efforts,” Yun? How weird is that? I mean interest rates have been at all time lows for the past… hmmm… oh, I don’t know… shall we say four straight years, and it’s been working great so far, wouldn’t you say? I mean, we’ve got a housing market that might even rival that of Paraguay.
Listen… Yun… you’re an idiot. Where did you get your economics degree? I mean specifically. Because you should ask for a refund. Seriously… if you paid for your economics education you got ripped off, dude.
“We need to get back to reasonable lending standards,” said Ron Phipps, the outgoing president of the 1.1 million member trade group.
Reasonable lending standards? Oh, for heaven’s sake. I’ll bet Ron thinks that… after all, he’s got to find a way to keep those 1.1 million NAR members paying their dues, does he not? But, I’m afraid Ron’s fighting a losing battle. There’s no way he’s going to be holding his ship together much longer. It’s going to be over soon.
It is, however, nice to see the NAR is offering some continuing education classes.
The convention featured two separate educational sessions on the importance of credit scores and how to improve them…
Improve them up to 760? That’s a lot of improving. How much does it cost to improve that much?
LOL… allow me to offer some slightly contradictory advice that is certain to save you a whole lot more than a couple hundred a month.
Unless there are specific reasons for you to do so, like you’re downsizing, or you simply have to move… don’t buy a house right now. I can absolutely assure you that you will lose money in year one, two and three… and very likely beyond that. So, RENT! And revel in it… especially if you’re renting now, there’s no reason to buy something today, because now is definitely NOT a good time to buy. And if anyone tells you otherwise, ask them if they’d care to debate me on a podcast… that ought to do it.
You want to know what you should be doing now? SAVING MONEY. Less buying and more saving is the new black.
Want to glance into my crystal ball for a few moments? Okay, here goes…
Meanwhile… back at the National Association of Realtors, the following headline appeared right below the one that motivated me to write this article…
NAR: Housing Market Poised to Turn
The ever-optimistic National Association of Realtors believes the worst housing downturn since the Great Depression is almost over.
So… umm… well, okay… Yay!
Let me guess… according to the NAR, now is a good time to buy, right?
As Yves Smith would say: Quelle surprise.
Mandelman out.
Hypocrisy.
Barack Obama has exhorted supporters to object to large bonus payouts at financial institutions that took TARP bailout money. The House Oversight Committee and its chair, Rep. Darrell Issa, want to know why Obama hasn’t objected to the ridiculous levels of compensation at the two largest bailout recipients — Fannie Mae and Freddie Mac. In [...]
The smoking gun?
By this time, everyone should be aware of the federal policies that precipitated the housing bubble and its collapse — the push by Congress and two administrations to push higher-risk lending in order to expand home ownership, as well as the effort by Congress to get Fannie Mae and Freddie Mac to spread that risk [...]
Foreclosure News