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Congressmen Seek to Subpoena FHFA for Principal Reduction Documents
By Michael Kraus on January 18, 2012

In a letter to Rep. Darrell Issa, the Chairman of the Committee on Oversight and Government Reform, Reps. Elijah Cummings and John Tierney asked Issa to subpoena the Federal Housing Finance Agency (FHFA) over documents relating to mortgage principal reductions. The FHFA is the conservator for Fannie Mae and Freddie Mac. The head of the FHFA, Ed DeMarco, has consistently opposed Fannie and Freddie mortgage principal writedowns. DeMarco has opposed them on the grounds that principal reductions would cost taxpayers more money than other alternatives to foreclosure. Cummings and Tierney seek FHFA documents and analysis of potential principal writedowns:

“During a hearing before the Committee on November 16, 2011, the Acting Director of FHFA, Edward DeMarco, committee under oath to provide these materials to the Committee. Despite numerous written and oral follow-up requests, however, Mr. DeMarco has failed to provide them”.

DeMarco’s specific comment during the November hearings was:

“We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer”.

Cummings and Tierney noted that several economists have recently advocated principal reductions as a possible alternative to foreclosure. NY Federal Reserve President William Dudley advocated for “earned principal reduction” in a recent speech. Further, Fed Chairman Ben Bernanke and his staff wrote a white paper that included principal reductions as a possible means of decreasing the probability of default. They also cite similar statements from Neil Barofsky, Mark Zandi and Alan Blinder.

There is about $700 billion worth of negative equity in the housing market. This is one of the biggest obstacles to a housing recovery, and I am in complete agreement with Adam Levitin that any housing plan that does not address negative equity is not really a plan (Levitin is a Georgetown Professor who has testified before Congress on matters of housing, he addresses the matter of negative equity on his blog).

If FHFA has good reasons and sound analysis for not doing principal reductions, they should come forward with that information. Their refusal to do so makes me somewhat suspicious of the quality of their data or the quality of their argument.

I’ll be interested to see if Issa grants the request for a subpoena. My gut instinct tells me that it won’t be. We shall see.

Category: Mortgage Rates
Fannie Mae Predicts a Modest Economic Improvement in 2012
By Michael Kraus on January 17, 2012

Late last week, Fannie Mae released their Economics and Mortgage Market Analysis for 2012. Fannie economists note that the economy appeared to be gathering momentum toward the end of the year, and that consumer confidence appears to be rebounding. Fannie Mae Chief Economist Doug Duncan commented:

“We’re entering 2012 with decent momentum, especially on the employment side, which is fostering positive household and consumer behavior. Unfortunately, we expect this momentum to slow as we move through the first half of the year. 2012 will be replete with policy changes and challenges that involve the global economy, the domestic economy, and the housing sector. We expect the net effect will be a year of moderate growth edging away from the 2011 threat of a double dip.”

Fannie anticipates slow economic growth in the first half of 2012, with things picking up somewhat in the second half of the year. Real GDP growth is expected to hover around 2.0% for the first two quarters of the year, before rising to about 2.5% in the third and fourth quarters. Overall growth is expected to be around 2.3 percent for the year.

Fannie has downgraded the chances of the economy re-entering a recession from 50/50 to about one-third, and notes that the primary risk to the economy is the situation in Europe. Fannie notes with optimish that the ECB has helped to find a temporary solution to debt issues. I am nowhere near this optimistic, as I believe that recent events in Greece demonstrate that some euro countries’ debt burdens are fundamentally untenable.

On the employment front, Fannie notes that the labor market improved at the end of the year, with initial employment claims falling to some of the lowest levels seen since 2008 (although unemployment claims spiked last week). While unemployment is falling, I am not sure that the gains are very significant. The labor force participation rate is sitting near the lowest levels since the early 1980s. We need around +120,000 jobs per month to keep up with population growth. Until we start seeing months where 3oo-400,000 jobs are created, I will not believe we are out of the woods. I suspect that some of the gains in employment recently are largely illusory.

In the housing sector, Fannie notes that there has been some improvement of late. Home prices are still falling, but the rate of decrease has slowed. Foreclosures are down from 2010, but a lot of that is most likely due to increased regulatory and judicial scrutiny on foreclosure. Mortgage rates are predicted to stay low, possibly increasing to just over 4% by the end of 2012. I believe is is worth noting that it is unknowable what will happen in Europe in the near future, but I could easily see a situation where Greece undergoes a disorderly default, which could prompt the Fed to undertake another round of quantitative easing, possibly driving 30 year rates into the mid-3s. On the other hand, if Europe gets its act together, we could see rates in the mid 4s by the end of the year.

Category: Mortgage Rates
Fannie, Freddie Sued by California AG in Ongoing Mortgage Investigation
By Michael Kraus on December 21, 2011

California Attorney General Kamala Harris announced that her office is suing Fannie Mae and Freddie Mac (and their federal conservator, the FHFA) for “frustrating the Attorney General’s efforts to investigate and combat crime, blight and other threats to the health and safety of Californians”.

According to a Bloomberg article “Harris wants to know if drug dealing and prostitution occur in foreclosed homes owned by the companies, whether taxes are being paid on those houses, and whether military families have been illegally evicted by loan servicers”. In total, there are 51 subpoenas in the suit. Harris also wants Fannie and Freddie to identify ever home they foreclosed upon in California. Additionally, the subpoenas will try to determine to what extent the GSEs are in compliance with state tax and securities laws.

There is some question as to whether or not Harris has the ability to issue the subpoenas. If they can issue the subpoenas, it means that state attorney generals have access to Fannie and Freddie information despite their Federal conservatorship, and could prompt other attorney generals to follow suit, which would likely cause an avalanche of other subpoenas. Harris claims that since Fannie and Freddie own properties in California, they are subject to the state’s laws.

Harris has become more aggressive in her mortgage investigation over recent months. She withdrew from the joint 50-state mortgage settlement/”investigation” in October, and joined with Nevada Attorney General Catherine Cortez Masto to investigate mortgage abuses in December.

Fannie and Freddie own approximately 60% of California’s mortgages. There have been nearly 800,000 foreclosures in the state since 2007.

Category: Mortgage Rates
Fannie Mae: Housing Will Experience a “Subdued Recovery” in 2012.
1 By Michael Kraus on December 20, 2011

Today Fannie Mae released it Economics and Mortgage Market Analysis for December. Fannie Mae economist Doug Duncan noted that “fourth-quarter economic activity seem[s] to indicate we will end 2011 on a positive note…however, the U.S. economy continues to face many obstacles, and we expect momentum to slow going into 2012″.

As with everybody else, Fannie’s predictions for 2012 are muddled due to the ongoing European debt crisis. Despite efforts by European authorities to formulate some sort of plan to deal with the problems, a solution has remained elusive, and the specter of sovereign defaults in Europe looms over the markets. Duncan noted that “the global economic recovery appears to be losing steam. We now expect that the Euro Zone has slipped into a recession in the current quarter that will likely last through the first half of 2012″.

Another complicating factor is the uncertainty surrounding U.S. fiscal policy. The ongoing payroll tax extension battle in Congress is emblematic of this. Our elected officials are not very good at compromise, and the direction of U.S. fiscal policy is cloudy to say the least. Duncan notes that “fiscal contraction at all levels of government, including the scheduled increase in payroll taxes and reduction in unemployment benefits, will restrain growth”.

As to housing, Fannie says that there are signs that low mortgage rates are spurring demand, and recent housing numbers (residential home construction and homebuilder confidence) have improved significantly (although by many measures home prices are still falling). Regardless of recent improvements, Fannie predicts a “subdued recovery” for housing in 2012, muted by low household formation and an uncertain job market.

Interestingly, Fannie “do[es] not anticipate that the Fed will engage in another round of quantitative easing” unless the European debt crisis gets worse, in which case the Fed could buy mortgage backed securities in an effort to drive down mortgage rates. Personally, I think it is likely that the situation in Europe will get worse, and that the Fed will engage in QE3.

Category: Mortgage Rates
New Tax Agreement Could Prompt Rise in Mortgage Costs
By Michael Kraus on December 19, 2011

Late last week, a piece of legislation passed the House of Representatives that could cause some mortgage fees to increase. The bill is H.R. 3630, The Middle Class Tax Relief and Job Creation Act. In essence, it is an extension of the payroll tax cut, and the continued cuts would be paid for by raising guarantee fees (g-fees) on Fannie Mae, Freddie Mac, and FHA loans.

If the new legislation becomes law, Fannie, Freddie, and the FHA would have to increase g-fees by at least 10 basis points over the next two years. This would translate to around $300 per year on a $300,000 mortgage. Not a crippling increase, but significant nonetheless.

Predictably, housing and mortgage lobbying groups oppose the increase in fees, while others claim that this will help encourage more private-sector lending. I thought the best take on this legislation was from Georgetown Law Professor Adam Levitin, who says that the whole deal is foolish because any stimulating effect from the payroll tax cut is negated by the increase in g-fees.

In a normal economy, this proposal might make sense. Of course we are not in a normal economy, and anything that hampers the housing market, even marginally, is probably not a good idea since the housing sector is dragging down the economy as a whole.

In any case, the bill has yet to be finalized and will likely be revised before the Senate votes on it. It does seem that the increase in g-fees garnered some bipartisan support, and will likely be in the final law.

Category: Mortgage Rates
Fannie Mae: Sentiment on Housing Market Slowly Improving, but Still Negative
By Michael Kraus on December 7, 2011

Fannie Mae’s Monthly National Housing Survey for the month of November was published this morning. They found that consumer sentiment has improved slightly over the “deeply negative housing market sentiment witnessed this summer”. So while sentiment is improving, our understanding is tempered by the knowledge that it would have been hard for consumer sentiment to be more negative, and it really had no where to go but up.

Doug Duncan, VP and chief economist of Fannie Mae commented:

“Though their home price expectations have become slightly positive, consumers remain concerned about the direction of the economy and continue to view their household finances as being relatively flat. Most Americans expect no improvement in their personal financial situation in the next 12 months and will likely remain wary about undertaking the significant financial obligation with homeownership until their view of the their income, expenses, and job security heads in a more positive direction”.

The survey found that on average, respondents expect home prices to rise 0.2% over the next twelve months, showing a marked improvement from the prior three months when respondents forecast home prices declines. The number of people who expect home prices to rise in the next year is up slightly, from 19 percent to 22 percent, while the number that believe prices will fall dropped from 23 percent to 22 percent.

Despite the expectation of price increases, Americans remain bearish on the housing market. The number of people saying that it is a good time to buy or sell a house remained essentially the same, with 68 percent of people saying now is a good time to buy, and only 10 percent saying now is a good time to sell.

When looking at the economy as a whole, only 16 percent of people believe that the economy is on the right track, a figure which is unchanged from the previous three months. Those that say the economy is on the wrong track fell slightly, from 77 percent to 75 percent.

Clearly, there is still a lot of improvement that has to occur before Americans believe the economy and the housing market are healing.

Category: Mortgage Rates
Obama Likely to Sign off on Increased FHA Loan Limits Today
By Michael Kraus on November 18, 2011

Update 12:30 pm:

The president made the increase in conforming limits official at midday today.

Yesterday, the House of Representatives approved a measure to restore FHA loan limits in high cost areas to $729,750. Initially rejected by many House Republicans, the measure passed when the Senate tied the measure to an increase in spending bills. The new limits (along with the spending bills) are expected to be signed by the President later today.

The FHA, Fannie Mae, and Freddie Mac are statutorily limited as to the maximum size loan that they can purchase, back, or insure. This cap is known as the conforming loan limit. In 2008, conforming loan limits for the GSEs and the FHA were increased to $729,750 in certain high cost areas (such as Boston, New York City, Miami, Aspen, etc.). This increase was supposed to be a temporary measure to spur growth in the housing market. The temporary limits were extended twice, but were allowed to expire on October 1. Since that time, the maximum conforming loan limit has been $625,500.

This increase in the FHA conforming limit comes at an odd time, right on the heels of reports that the FHA may be dangerously under-capitalized. Attempts to increase the conforming limit for Fannie and Freddie were rejected but Republican lawmakers, most likely due to a desire to reduce government involvement in housing finance. It is ponderous (and logically inconsistent) that FHA limits were increased while Fannie and Freddie limits were kept at lower levels, but I guess that is what we should come to expect from government.

Nevertheless, we should have FHA high balance limits of $729,750 starting later today, and lasting through 2013.

Category: Mortgage Rates
Fannie, Freddie Subpoenaed by California AG for Investigation into Mortgage Abuses
By Michael Kraus on November 17, 2011

Yesterday Alejandro Lazo and Jim Puzzanghera of the Los Angeles Times reported that California Attorney General Kamala Harris has subpoenaed government sponsored entities (GSEs) Fannie Mae and Freddie Mac as part of an investigation in mortgage origination, securitization, and foreclosure practices.

Harris announced that she was withdrawing from the proposed 50-state Attorney General mortgage settlement back in October, saying that the settlement was “inadequate for California homeowners”, and that the settlement would “excuse conduct that has not been properly investigated”. Attorneys General from Nevada, Arizona, Massachusetts, Illinois, Delaware, and New York have all indicated that they will conduct independent investigations into mortgage abuses, effectively dooming the broader settlement.

The subpoenas will look into details on the GSEs’ roles in the housing bubble, mortgage originations during the bubble years, mortgage securitizations, as well as their foreclosure practices in subsequent years.

It is believed that these subpoenas could be an effort to create leverage over the GSEs and force them into adopting policies including principal write-downs, which are opposed by Ed DeMarco, the head of the Federal Housing Finance Agency, which has overseen the housing giants since they were seized by the federal government in 2008 in order to prevent them from collapsing.

While the California investigation is only in its infancy, I will be interested to see what details emerge. More as this situation develops.

Category: Mortgage Rates
Ho-Hum: Freddie Mac Loses $6B in Q3
By Michael Kraus on November 4, 2011
Government sponsored entity Freddie Mac lost $6 billion in the third quarter of 2011, and has requested $6 billion from the U.S. Treasury to backstop its losses.

Fannie Mae and Freddie Mac were seized and put into government conservatorship in 2008 in order to prevent their insolvency. Since that time the Obama Administration has pledged unlimited support for the GSEs.

Fannie and Freddie purchased mortgages from loan originators, package and securitize them, and sell the securities to investors. The resulting securities are guaranteed by Fannie and Freddie (and thus the taxpayers), and when mortgages default Fannie and Freddie are on the hook. The GSEs own/guarantee about half of all U.S. mortgages, worth about $5 trillion. Since 2008 the GSEs have drawn nearly $170 billion from the Treasury.

Freddie Mac CEO Charles Haldeman, Jr. commented:

“The weak labor market and fragile economy continue to weigh heavily on the single-family market, causing many potential buyers to sit on the sidelines or opt to rent despite high affordability and record low mortgage rates. While this put a damper on home buying, hundreds of thousands of borrowers were able to refinance into lower mortgage rates or shorter mortgage terms in the third quarter. In fact, the borrowers we helped to refinance will save an average of $2,500 in interest payments during the next year. Looking ahead, we expect the tepid recovery to continue to put downward pressure on house prices into early next year.

“Our financial performance in the third quarter was impacted by the weak housing market, as well as challenging financial market conditions. Freddie Mac was a stabilizing force in the mortgage market, ensuring the continuous flow of funds to lenders and borrowers and helping families avoid foreclosure. We also made further progress this year on becoming a stronger and more efficient company – adding high quality loans to our book and streamlining operations. Taken together, these efforts are maximizing the value of our assets for America’s taxpayers, and reinforcing the housing finance system.”

For better or worse, Fannie and Freddie are keeping the U.S. housing market afloat at this stage. What’s a few billion between friends?
Category: Mortgage Rates
Senate Votes To Restore Higher FHA, Fannie, Freddie Jumbo Loan Limits
2 By Michael Kraus on October 21, 2011

Yesterday the Senate voted to approve a measure that would restore the high-balance conforming loan limit to $729,750 in high cost areas. The limit was temporarily increased in 2008 in response to the housing crisis. After being extended several times, the temporary limits expired on October 1, 2011. For now, the largest loan that can be purchased or guaranteed by Fannie Mae, Freddie Mac, or the FHA is $625,500.

The measure was added to a spending bill by Senator Robert Menendez, a democrat from New Jersey. The measure approved 60-31. If the larger spending bill is approved, the bill would move to the House of Representatives. If enacted, it would then need to be approved by the president. The extension would last through 2013. The risk of funding these larger loans would be hedged by charging a 15 basis point fee on the principal balance of the mortgage.

I see this as a common sense measure to help around the margins of the housing market. This is by no means a panacea for what ails the housing market, but would provide a marginal boost to the housing market in certain areas.

That said, I bet this is unlikely to pass. It flies in the face of the sentiment among many republican lawmakers that the government should be curtailing, rather than expanding its role in the housing market. It seems that our elected officials would have difficulty coming to a consensus on what to order for lunch, let alone issues of spending and housing policy. I’m not holding my breath on this one.

Category: Mortgage Rates