Tag Archives: fannie

Levitin and Wachter’s New History of American Housing Finance

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Adam Levitin and Susan Wachter have released a very interesting paper on The Public Option in Housing Finance.  The paper provides a history of the development of the housing finance infrastructure in the United States.  It concludes that

[t]he experience of the U.S. housing finance market teaches us that public options can only succeed as a regulatory mode in certain circumstances. A public option that coexists with private parties in the market is only effective at shaping the market if all parties in the market have to compete based on the same rules and standards. Otherwise, the result is merely market segmentation. Moreover, without basic standards applicable to all parties, the result can quickly become a race-to-the-bottom that can damage not only private parties, but also public entities.(60)

Personally, I wish they struggled more with the trillion dollar issue that they highlight in the middle of the paper:  “It is not clear how deep of a housing market can be supported if credit risk is borne by private parties rather than by government.”  (30)  As the Obama Administration seeks to impose a new order on the housing finance market that will likely last for generations, we should seek a consensus (or as close to one as we can) among policymakers as to how much credit risk the private sector can take when it comes to mortgages secured by single and multifamily housing.  Personally, I believe it can handle a lot more than we give it credit for.

CRL Issues Report on State of Lending

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The Center for Responsible Lending has issued a new report, The State of Lending in America and its Impact on U.S. Households.  CRL, Cassandra-like, warned of an epidemic of millions of foreclosures at the height of the Subprime Boom, so they have a lot of street cred.  And while they are consumer advocates, their research is solid.

Their policy recommendations include “the following key principles to ensure a robust and secure secondary market:”

• Government Guarantee: The U.S. government should provide an explicit, actuarially sound guarantee for mortgages in a future secondary market structure. This is an appropriate role to for the government to play in the event of a housing-market crash or market disruption. Discussion about the role of private capital in sharing losses is an important part of the conversation, but a catastrophic government guarantee is essential to the future of mortgage finance.

• Duty to Serve Entire Market: Mortgage finance reform should require secondary market entities that benefit from federal guarantees to serve all qualified homeowners, rather than preferred market segments. Without a duty to serve the entire market, lenders could recreate the dual credit market that characterized lending during the subprime crisis.

• Encourage Broad Market Access by All Lenders: The future mortgage finance system should encourage competition and further broad market access to the secondary capital markets for both small and large lenders. These goals should be met by establishing a cooperative secondary market model of one non-lender entity, owned in equal shares by member-users, that is able to issue guaranteed securities. Such a model of aligned interests will correct the shortcomings of Fannie Mae and Freddie Mac’s past and also prevent a further concentrated lending marketplace in the future. (53)

New Affordable Housing Goals Set for Fannie and Freddie

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The FHFA issued a final rule.  The summary is as follows:

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act) requires the Federal Housing Finance Agency (FHFA) to establish annual housing goals for mortgages purchased by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises). FHFA previously established housing goals for the Enterprises through 2011. This final rule establishes new levels for the housing goals for 2012 through 2014, consistent with the requirements of the Safety and Soundness Act.

The new goal levels are lower than those from the last couple of years.  For a taste of the controversy surrounding affordable housing goals see this, this and this on the one hand and see this, this and this on the other.  My own take is that Wallison and Pinto make broad claims about the negative effects of affordable housing goals that attach big effects to long ago events.  Their claims have not been supported empirically and have not gone through a peer review process.  That being said, I think it is valuable to draw attention to the unintended effects of government policies.  Going forward, Congress and the FHFA should be very careful in their program design to ensure that housing policies have their desired effects — no more, no less.

Hurricanes Hitting Underwater Mortgages

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A former colleague, Barry Goldberg, raises an important financial issue relating to the devastation that Hurricane Sandy left in its wake.

Massive flood, storm and fire casualties on homes with underwater mortgages may make for an odd set of incentives for borrower and RMBS investor.

A Fannie/Freddie form of mortgage contains language like this:

“In the event of loss, Borrower shall give prompt notice to the insurance carrier and Lender.   . . .  Unless Lender and Borrower otherwise agree in writing, any insurance proceeds, whether or not the underlying insurance was required by Lender, shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender’s security is not lessened.”

Homeowner has no financial incentive to rebuild — in all likelihood she would still be underwater.  If the owner of the mortgage believes in good faith that restoration is not economically feasible, then it will accelerate the balance of the loan and direct the insurance proceeds to be applied to sums owed pursuant to the mortgage.

Take this example:

Homeowner purchases home for $250,000.

The house is now worth              $150,000.

The mortgage is for                    $200,000.

The insurance policy is for          $200,000.

The homeowner (mortgagor) would be incentivized to abandon the property in a non-recourse jurisdiction and the owner of the mortgage (mortgagee) would be incentivized to take the proceeds from the insurance policy, foreclose and sell the property as a tear down.  It looks, from this simple example, like the mortgageee would be better off financially as a result of the massive casualty.

I would be interested to hear from others who have seen how this plays out in reality, given real players and real documents.