Please don't blame Fannie Mae and Freddie Mac, guarantors of most of the housing market's conventional mortgages and reason the housing market continues to function at all, for the housing bust. The bust was caused by the oversupply of housing built during the bubble, and aggravated by many commercial banks and hedge funds cooking up every kind of 'liar' loan they could think of to sell to Wall Street securitizers -- including to themselves.
Sure, Fannie/Freddie had to be taken over by the federal government and are being subsidized with approximately $167 billion to date, but that is because banks and other commercial lenders then withdrew from financing the housing market, leaving government to clean up the mess. So the government subsidy is a very cheap price to pay to keep housing from collapsing completely.
Credit was too cheap in early 2000, as Fed Chairman Alan Greenspan's Federal Reserve kept short term interest rates below the inflation rate to pay for the Bush tax cuts and wars. I.e., when short term interest rates were 1-2 percent and inflation in the 3 percent range at the time, it was borrowers who actually profited since inflation deflated the value of the debt This meant it was interest free money!
Economists have estimated that below inflation interest rates were probably also responsible for the double digit housing price rises during the height of the bubble. Don't take my word for it. Almost everyone, including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, have rejected the argument of conservative think tanks such as the American Enterprise Institute that it was federal affordable housing policies designed to make housing available to a broader public, that created so many high risk loans.
Fannie and Freddie created and have always maintained the gold standard of mortgage qualification standards, with the highest income, credit, and ability to pay requirements. As a mortgage banker/broker for 30 years, I have never originated or underwritten a conforming mortgage that didn't meet those standards.
So why do conservatives hate Fannie and Freddie so much? Because of their ties to the Democratic Party, mainly. As Gretchen Morgenson and Joshua Rosner detail in their book, Reckless Endangerment, Fannie Mae and Freddie Mac grew hugely under Democratic Administrations eager to encourage more affordable housing. And they did buy subprime mortgages from Countrywide Financial that were not underwritten to their conforming underwriting standards, thus fattening their portfolios in a bid to play catchup to the issuers of so-called 'private label' mortgages. But the subprime purchases were a drop in the bucket; just $60.8 billion for Freddie Mac, according to David Min of the Center for American Progress, with borrowers who had FICO scores under 620, a common definition of subprime mortgages.
In fact, the current delinquency and foreclosure rates of Fannie and Freddie, guarantors of Agency Prime mortgages, are close to the historical norm. Fannie Mae reported that the serious delinquency rate decreased to 4.27 percent in March, close to the long term historical average. This is down from 5.47 percent in March 2010. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59 percent. Freddie Mac reported that the serious delinquency rate decreased to 3.57 percent in April. (Note: Fannie reports a month behind Freddie). This is down from 4.06 percent in March 2010 and Freddie's serious delinquency rate also peaked in February 2010 at 4.20 percent.
Sadly, Lender Processing Services, Inc. (NYSE: LPS) Mortgage Monitor report shows the number of mortgages 90 or more days delinquent, combined with the foreclosure inventory at the end of June, still totaled 4,073,00 down very slightly from its May 4,084,557 total. so it looks like without additional government help, which doesn't seem likely (see Renae Merle at Washington Post: Obama administration not planning another big housing program), most of those units will be added to the existing home inventory over the next 2 years.
Then why doesn't the Obama Administration spend more of the reportedly $11 billion set aside for the HAMP loan modification program? It may be because Timothy Geithner's Treasury Department isn't requiring banks holding the delinquent loans to get them off their books more quickly. And that means not much upside potential for housing prices until when, maybe 2014?
Harlan Green © 2011
Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen
Existing home sales portend another bad year for the housing market
Summary Box: Apartments drove June construction gains, but housing market ...
The one common factor that caused the housing bubble was greed, so much of it to the point of criminality. The home buyer was motivated by the false notion that housing prices will continue a steep incline forever. Real estate agents, brokers and assessors found ways to make more money by promoting the hype. Buyers were steered towards more costly loans and towards short term thinking.
And of course, when Wall Street got their thieving crooked hands on it, the mess became huge. The financial trickery and theft is almost beyond comprehension.
Yet, some people tend to blame one factor or another for that mess. If one wishes to simplify, it is easy to just pick one thing and point at it. I see many factors at play, and if one wants to find one common thread, it is greed.
The only real and solid way to have a working housing market is to let home prices reflect income, material costs, labor costs... Trying to hold home prices artificially with government help, always end up in transfer of money from those that have nothing to do with the mess to the hands of those that created it.
The big banks bailout is one example of such activity.
This is not about conservative/liberal or out of work -> this is about buying loans that people could not pay back b/c you get bigger bonuses for volume and your management policies were too slack.
Of course you did not, that is the definition of “conforming mortgageâ€, if it did not meet Freddie or Fannie standards it is not conforming.
“… the current delinquency and foreclosure rates of Fannie and Freddie, guarantors of Agency Prime mortgages, are close to the historical norm. Fannie Mae reported that the serious delinquency rate decreased to 4.27 percent in March, close to the long term historical averageâ€
What??? The delinquency rate was 0.4% in April of 2007 and 0.77% in March of 2008 according to their press releases. It was between 0.7% and 0.4% from 2005 to 2008 and the last peak was in 2003 at 0.86%. No, they are currently 4 to 5 times higher than the long term average.
Fannie and Freddie had (have) two advantages. First, they can borrow more cheaply than any other commercial lender as they had an implicit (now explicit) government guarantee. Second, they operated at capital ratios of 2%, producing an ROE that outperformed commercial lenders even at tighter spreads. So is it a surprise that when commercial lenders decided to get out of the non-conforming loan business (which you think they never should have been in) they could not compete with the two GSEs? There was no other mortgage market where commercial lenders could be competitive other than non-conforming.
Therefore banks are only in the mortgage market indirectly, by buying the MBS and debt issued by Freddie and Fannie. In other words, without the commercial lenders buying this stuff, the market would not exist at all (even with the government subsidy).
Freddie and Fannie guaranteed or owned more than 50% of the total mortgage market right before the collapse, how do you assume that they did not help precipitate the events that occurred? They drove the pricing, they drove the structures, they lobbied congress for the rules that allowed them to buy securities that did not meet their own underwriting standards and they were run by management and boards appointed by congress.
To imply they were innocent bystanders is incredulous.
I just bookmarked it.
This article provides a good summary. I won't reiterate everything here, but...
"For Wall Street, high profits could be made from securities backed by subprime loans. Fannie and Freddie targeted the least-risky loans. Still, their purchases provided more cash for a larger subprime market.
"That was a huge, huge mistake," said Patricia McCoy, who teaches securities law at the University of Connecticut. "That just pumped more capital into a very unregulated market that has turned out to be a disaster."
Obama can do nothing to spend the HAMP modification funds. He isn't God. The banks refuse to follow the HAMP directives in their participation agreements which was forced upon them for getting TARP funding (now repaid at huge profit to taxpayers).
The banks commit consumer fraud in their deception to avoid HAMP modifications (sees AZ AG lawsuits vs BOA) for those that clearly qualify. Since there is no HAMP law, only an agreement which the banks refuse to follow that is why housing mess will continue for years.
The banks as servicers make huge profits from delaying and foreclosing. On most 1st morgtages the taxpayers take the huge loss on foreclosures (Fannie/Freddie/Ginnie) and the banks just bank all their fees and laugh all the way to their banks.
But, decades of government policies to encourage homeownership and real estate investment in general didn't help either. The US is one of the few countries that allow mortgage deduction, capital gain roll over, capital gain exclusion etc.. When you supercharge it with "federal affordable housing policies designed to make housing available to a broader public" (translation: policies designed to get people into buying homes that otherwise have no business buying them), the whole thing goes into hyper drive and .....here we are.
The government shouldn't be encouraging people to buy bigger homes (or homes at all) and take on more debt that they otherwise would. Hopefully we have learned a lesson, but I doubt it. Maybe if they lower income tax rates and eliminate a bunch of deductions ....but...nah.
Federal Government shold not be involved in the housing market. Let the chips fall where they may.
“1977 Congress passed The Community Reinvestme nt Act (House/ Senate/Pres. Dem), encouraged banks to halt the practice of lending discrimina tion
NOW PEOPLE THAT MOST LIKELY CANNOT AFFORD MORTGAGES CAN GET THEM.
1982 Congress passed The Alternative Mortgage Transactions Parity Act (House/Pres. Repub, Senate Dem), ending the rule that banks can only make fixed-rate mortgages.
NOW WE HAVE VARIABLE-R ATE MORTGAGES THAT CAN SKYROCKET AT ANYTIME.
1995, Government Sponsored Enterprises began receiving gov't tax incentives for purchasing mortgage backed securities including loans to low income borrowers. This made Fannie Mae and Freddie Mac part of the subprime market. In 1996, the Department of Housing and Urban Development (Dem) set a goal for Fannie Mae and Freddie Mac that at least 42% of the mortgages they purchase be issued to borrowers whose household income was below the median in their area. Increased to 50% in 2000 and 52% in 2005.
NOW THE GOV'T IS ON THE HOOK FOR HUNDREDS OF BILLIONS IN BAD MORTGAGES.
2000 Congress passed The Commodity Futures Modernizat ion Act, (House/Sen ate Repub, Pres. Dem), exempted derivatives from regulation , supervision, trading on established exchanges, and capital reserve requirements for major participants.
NOW BIG BANKS HAVE NO RESTRICTION FROM BLOWING UP THE ECONOMY.
Harlan decided to leave out some important facts that happened before the year 2000. The Government (Repubs/Dems) are both responsible don't be fooled.
Why subsidize over inflated prices?
By focusing (justified) middle-class anger downward -- on the poor, welfare recipients, immigrants, ACORN, minorities whatever the bogeyman of the day and not always poor -- they (the financial elite and their GOP puppets) can distract that anger away from themselves as they continue to plunder and shrink that same middle class by systematically dismantling its underpinnings (schools, jobs, pensions, health care, etc).
In sum: screw the middle class and keep them mad at the even lower class.
Carlin said it well.
1. The middle class does most of the work.
2. The rich (increasingly) keep most of the money.
3. The poor are there just to make sure that #1 still applies.
It is class warfare called Reaganomics. The only question is: when will the middle class catch on to the charade? The good news -- it IS happening with the Ryan plan and in WI.
Which is not to say that a lot of banks figured out a way to make money off of the whole thing, maybe even illegally. But the government meddling in the market preceded the banks making the money. Thats why the government didn't, and hasn't, really nailed the banks to the wall, and why the government (i.e. taxpayers) is footing the bill for the bubble bursting. Because the government was complicit in creating the bubble, because the end result looked acheivable (higher home ownership rates).
That my friend, is NOT conservative economic theory.
Look at the current all out attack on the already watered down attempts at
regulation.