Tag Archives: freddie

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.