Tag Archives: fannie

Hypothetically Reforming Fannie and Freddie

Posted on by

Ben Turner

S&P issued a report, Fannie, Freddie, and the FHLB System: Plus Ca Change . . . The report opens, “Despite reform talk in the years since the U.S. housing crisis, Standard & Poor’s Ratings Services believes the likelihood of extraordinary government support for key U.S. housing government­-related entities (GREs) Fannie Mae, Freddie Mac, and the Federal Home Loan Bank (FHLB) system remains “almost certain” in case of need.” (1) Notwithstanding the fact that S&P expects that this extraordinary support will last well into the next presidential administration, S&P “can envisage three “tail risk” scenarios in which such support could become less likely under certain conditions, but view each of these scenarios as improbable.” (1) The three scenarios, which S&P characterizes as plausible, albeit improbable, are

  • An electoral sweep, with favorable macroeconomic conditions and few competing legislative priorities;
  • Court judgments, pursuant to shareholder lawsuits, forcing the legislators’ hand; or
  • A renewed housing market crisis, with one or more of these GREs viewed as more cause than cure. (4)

In the first scenario, “an election gives one party control of all three legislative actors (the president, House of Representatives, and Senate), precluding the need for bipartisan compromise to enact major reforms to Fannie and Freddie via legislation.” (4)

In the second, Fannie and Freddie shareholders win lawsuits that stem from the “U.S. Treasury’s decision to modify, in 2012, the Preferred Stock Purchase Agreements (PSPAs) governing the terms of its financial support to Fannie and Freddie . . ..” (4)

The final scenario,

is a renewed housing market crisis, on a scale at least similar to that of 2008. Like the other two scenarios, we don’t view this as likely, at least in the coming few years . . . perhaps as a result of the unfortunate confluence of several negative surprises- ­­including, for example, overreaction to Federal Reserve monetary policy normalization, terms­-of­-trade shocks (geopolitical conflicts that cause a rapid and dramatic spike in energy costs, perhaps), fresh financial sector  problems that suddenly tighten the sector’s funding costs, and an abnormally long spell of bad weather. (5)

This seems like a pretty reasonable analysis of the likelihood of reform for Fannie and Freddie. But that should not stop us from bemoaning Congressional inaction on this topic. Obviously, Congress is too ideologically driven to bridge the gap between the left and right, but the likelihood that we are building toward some new kind of crisis increases with time. I can’t improve on S&P’s analysis in this report, but I’m sure unhappy about what it means for the long-term health of our housing finance system.

”

 

 

 

Better to Be a Banker or a Non-Banker?

Posted on by

 

The Community Home Lenders Association (CHLA) has prepared an interesting chart, Comparison of Consumer and Financial Regulation of Non-bank Mortgage Lenders vs. Banks.  The CHLA is a trade association that represents non-bank lenders, so the chart has to be read in that context. The side-by side-chart compares the regulation of non-banks to banks under a variety of statutes and regulations.  By way of example, the chart leads off with the following (click on the chart to see it better):

CLHA Chart

The chart emphasizes all the ways that non-banks are regulated where banks are exempt as well as all of the ways that they are regulated in the identical manner. Given that this is an advocacy document, it only mentions in passing the ways that banks are governed by various little things like “generic bank capital standards” and safety and soundness regulators. That being said, it is still good to look through the chart to see how non-bank regulation has been increasing since the passage of Dodd-Frank.

Home Purchase Sentiment Index

Posted on by

Diana Parkhouse

Home Sweet Home takes on a whole new meaning with Fannie Mae’s new Home Purchase Sentiment Index. The index

distills results from its consumer-focused National Housing Survey™ (NHS) into a single, monthly, predictive indicator. Reflecting more than four years of data, the HPSI is designed to provide distinct signals about the direction of the housing market, helping industry participants to make better informed business decisions.

The press release continues,

Unlike existing general indices of consumer economic sentiment, the HPSI is devoted entirely to housing. The index is constructed from answers to six key NHS questions that solicit Americans’ evaluations of housing market conditions and address topics related to their home purchase decisions. These questions ask consumers whether they think it is a good or bad time to buy or to sell a house, the direction they expect home prices and mortgage interest rates to move, how concerned they are about losing their jobs, and whether their incomes are higher than they were a year earlier.

The six questions incorporated in the Home Purchase Sentiment Index are

  • In general, do you think this is a very good time to buy a house, a somewhat good time, a somewhat bad time, or a very bad time to buy a house?
  • In general, do you think this is a very good time to sell a house, a somewhat good time, a somewhat bad time, or a very bad time to buy a house?
  • During the next 12 months, do you think home prices in general will go up, go down, or stay the same as where they are now?
  • During the next 12 months, do you think home mortgage interest rates will go up, go down, or stay the same as where they are now?
  • How concerned are you that you will lose your job in the next twelve months? Are you very concerned, somewhat concerned, not very concerned, or not at all concerned that you will lose your job in the next twelve months?
  • How does your current monthly household income compare to what it was twelve months ago?

I am not familiar with the research regarding the validity of consumer economic sentiment indices, but it seems helpful to add a specific home purchase sentiment tool to the toolbox. Future research should determine how this index tracks relevant economic measures and the extent to which it lags or leads those measures. Researchers can find more about the index on the Fannie Mae Consumer Attitude Measures page.

Principal-ed Reduction

Posted on by

Torn Dollar

 

The Urban Institute’s Housing Finance Policy Center has issued a report, Principal Reduction and the GSEs: The Moment for a Big Impact Has Passed. It opens,

The Federal Housing Finance Agency (FHFA) prohibits Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) from unilaterally reducing the principal balance of loans that they guarantee, known as principal reduction. When director Ed DeMarco established the prohibition, he was concerned that reducing principal would cost the GSEs too much, not only in setting up the systems required to implement it, but also— and to him more important — in encouraging borrowers to default in order to receive the benefit. DeMarco’s position generated significant controversy, as advocates viewed principal reduction as a critical tool for reducing borrower distress and pointed out that the program the Obama administration had put forward to provide the relief had largely eliminated the cost to the GSEs, including the moral hazard. We believe that at the time the advocates had the better side of the argument.

The FHFA is now revisiting that prohibition, though in a very different economic environment than the one faced by Director DeMarco. Home prices are up 35.4 percent since the trough in 2011, adding $5 trillion in home equity and reducing the number of underwater homeowners from a peak of 25 percent to 10 percent. This means that far fewer borrowers would likely benefit under a GSE principal reduction program today. (1, footnote omitted)

Principal reduction was highly disfavored at the start of the financial crisis as it was perceived as a sort of giveaway to irresponsible borrowers. Some academics have disputed this characterization, but it probably remains a political reality.

In any event, I think this report has the analysis of the current situation right — the time for principal reduction has passed. But it is worth considering the conditions under which it might be appropriate in the future (for that next crisis, or the one after that). The authors make four  assumptions for a politically feasible principal reduction program:

  1. borrowers must be delinquent at the time the program is announced, in order to avoid the moral hazard of encouraging borrowers to default;
  2. borrowers must be underwater;
  3. the house must be owner-occupied; and
  4. the principal reduction is in the economic interest of Fannie and Freddie.

It is worth noting that during the Great Depression, the federal government figured out ways to reduce the burden of rapidly dropping house prices on lenders and borrowers alike without resorting to principal reduction much. Borrowers benefited from longer repayment terms and lower interest rates. Below-market interest rates are similar to principal reduction because they also reduce monthly costs for borrowers. They are also politically more feasible. It would be great to have a Plan B stored away at the FHFA, the FHA and the VA that outlines a systematic response to a nation-wide drop in housing prices. It could involve principal reduction but it does not need to.

Mortgage Credit Conditions Easing

Posted on by

Home of Easy Credit

The Urban Institute’s Housing Finance Policy Center has released its July Housing Finance at a Glance. It opens,

Our latest update to HFPC’s Credit Availability Index (HCAI) shows early signs that the overly tight mortgage lending standards of the post-crisis period may finally be starting to ease. This HCAI update shows improvements for both GSE and FHA/VA channels. Between Q3 2013 and Q1 2015, the expected mortgage default rate increased from 1.8 to 2.1 percent (17 percent increase) for GSE originations, and from 9.6 to 10.8 percent (a 13 percent increase) for FHA/VA originations. The expected default rate for portfolio loans and PLS channels has remained largely flat at 2.6 percent over this period.

Long overdue, these improvements are largely a result of efforts to clarify put-back standards and conduct early due diligence. While the FHA has lagged the GSEs in these efforts, it has made some progress. Still, more needs to be done, especially to mitigate uncertain lender litigation risk arising out of FHA’s False Claims Act.

These improvements notwithstanding, there is still significant room to safely expand the credit box. Even if the mortgage market had taken twice the default risk it took in Q1 2015, that level would have still been below the level of default risk of the early 2000s. (3)

This excellent chartbook contains many very interesting graphs. I recommend that you look at the National Housing Affordability Over Time graph in particular. It shows that housing “prices are still very affordable by historical standards, despite increases over the last three years.” (16)

This Is What Bad Faith Looks Like

Posted on by

Silas Barnaby

A New York judge ruled in Federal National Mortgage Assoc. v. Singer, 2015 NY Slip Op. 51038(U) (July 15, 2015 Sup. Ct., New York County) (Moulton, J.) (unpublished opinion), that two lenders will forfeit more $100,000 in interest payments on two mortgages because they did not act in good faith in negotiating a mortgage modification, as required by New York law. There is a lot of choice language in the opinion, but it is useful to read the judge’s summary of what the borrowers went through in trying to get the modification.

The judge disagreed with the lenders’ “positive assessment of the negotiations” as it was “belied” by the facts:

Fannie Mae delayed filing of Action No. 1 (filed on June 14, 2011) 17 and 1/2 months after the date of default. Counsel then delayed filing the RJI [Request for Judicial Intervention] for another three months after the answer was filed. The first settlement conference, scheduled on March 14, 2012, had to be rescheduled to May 2, 2012 due to Fannie Mae’s non-appearance, a one and one-half month delay. It took Fannie Mae and its counsel another five and 1/2 months to provide an explanation for why the two mortgages could not be merged or consolidated, and only after wasting time at two conferences in June and July attended by attorneys without knowledge of the case or settlement authority and only after my court attorney probed for answers. Thereafter, the Singers submitted the requested documentation for a loan modification of the 400-Mtge., despite confusing and conflicting requests by the Rosicki firm, by August 3, 2012. When that application became “stale,” the court directed the Singers to update the information and, finally, after another two-month delay, Seterus offered the Singers a trial modification plan on or about October 11, 2012. When the Singers received the permanent loan modification papers from Seterus in January 2013, they objected to the payment of $63,632.21 in accrued interest and the $5,605.23 accrued interest. It took many months for Seterus to admit its mistake on the escrow deficiency, and only after much prodding by the court for status updates. Seterus did not offer the Singers a new loan modification agreement until the very end of October 2013 — a whopping nine-month delay. Finally, it took Fannie Mae’s counsel another five months to reject the Singers’ January 1, 2014 counteroffer to pay $18,000 of the accrued interest.

Accordingly, the court holds that Fannie Mae and/or its counsel have acted in bad faith and have unreasonably delayed a resolution of this foreclosure action. As a result, interest should be tolled on the note and mortgage in the amount over and above 2% annually, for the period from September 30, 2011 (one month after Singers’ filing of their answer in Action No. 1) through the date of this Decision and Order. (10-11, footnotes omitted)

It is hard to really get how crazy the modification process can be in the abstract, so sitting with facts like these is a useful exercise. And this seems like the right result on these facts.

I have blogged before about the Kafkaesque struggles that borrowers face. Some deny that lenders behave this badly in general but the cases and the large scale settlements “belie” this too. What will it take to give borrowers a consistent and reasonable experience with mortgage modifications?

Dodd-Frank and Mortgage Reform at Five

Posted on by

"Seal on United States Department of the Treasury on the Building" by MohitSingh - Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons - https://commons.wikimedia.org/wiki/File:Seal_on_United_States_Department_of_the_Treasury_on_the_Building.JPG#/media/File:Seal_on_United_States_Department_of_the_Treasury_on_the_Building.JPG

The Department of Treasury has issued a report, Dodd-Frank at Five Years: Reforming Wall Street and Protecting Main Street. The report is clearly a political document, trumpeting the achievements of the Obama Administration. It is interesting nonetheless. It opens,

When President Obama took office in January 2009, the U.S. economy was in crisis. The nation was shedding more than 750,000 jobs per month, and confidence in our financial system had been shaken to its core. The worst financial crisis since the Great Depression exposed a toxic mix of excessive risk-taking, shoddy lending practices, inadequate capital levels, unstable funding, and weaknesses in regulatory oversight. A collapsing financial system choked off credit to consumers seeking to purchase a car, a home, groceries, or to finance an education. Nearly 9 million Americans lost their jobs, and over 5 million lost their homes. Nearly $13 trillion of families’ wealth was destroyed, wiping out almost two decades of gains.

In response to the crisis, the Administration released a proposed set of reforms in June 2009. Congress held numerous hearings and crafted legislation based on the Administration’s proposal, incorporating ideas from both Republicans and Democrats throughout the process. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law, a historic and comprehensive set of financial reforms, which put in place critical new protections for consumers, investors, and taxpayers. Five years later—as a result of Dodd-Frank and other Wall Street reforms—our financial system is stronger, safer, more resilient, and more supportive of sustainable economic growth. Regulators also have better tools to deal with financial shocks when they occur, to protect Main Street and taxpayers from Wall Street recklessness.

Critics of reform have claimed that Wall Street Reform would deter lending and choke off the recovery. But, today it is clear that the opposite is true. Reform has served as a building block for economic growth, providing Americans with safe places to invest their savings and enabling banks to lend to individuals, businesses, and communities. Only a financial system strong enough to withstand a major financial shock is capable of promoting sustainable economic growth. Five years after the President signed Wall Street Reform into law, nearly all of the major elements of financial reform are in place. Today, our financial system is safer and stronger as a result of these hard-won reforms, and our economy is in a far better position to continue growing and creating jobs. (1)

I was struck by the fact that the report does not address the biggest financial reform failure of the last five years, the lack of reform of the housing finance system.  Fannie and Freddie remain in conservatorship, putting the housing finance system at risk of another crisis.

I was also struck by the following passage:

In the run-up to the financial crisis, abusive lending practices and unclear underwriting standards resulted in risky mortgages which hurt consumers and ultimately threatened financial stability. Wall Street Reform bans many of the abusive practices in mortgage markets that helped cause the crisis, and requires lenders to determine that borrowers can repay their loans. (2)

My recollection from academic conferences over the course of the last six or seven years is that many leading academics denied the link between abusive lending practices and systemic risk. It seemed pretty clear to me, but I was in the minority on that one. I am glad to see that at least the Treasury agrees with me.