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Fannie, Freddie Bailout Could Run Up to $1 Trillion
By Michael Kraus on June 14, 2010

According to an article on Bloomberg today, the bailout of Fannie Mae and Freddie Mac, could run as high as $1 trillion, and will cost a minimum of $160 billion. The federal government seized the government sponsored entities (GSEs) in 2008 to avoid insolvency.

Lets pause for a minute to consider that number: 1,000,000,000,000. A trillion seconds equals 32,000 years. A stack of $100 bills equaling $1 trillion would measure 789 miles high. A trillion dollar bills laid out end-to-end would reach from the Earth to the Sun and then some. In order to store a trillion worth of dollar bills in copier-paper boxes, you would need 1.4 billion boxes.

After the GSEs were seized, the Obama administration pledged an unlimited line of credit to prop up Fannie and Freddie. Thus far the mortgage giants have needed $145 billion.

Fannie Mae and Freddie Mac purchase mortgages on the secondary market which they in turn securitize and re-sell as mortgage backed securities with the implicit guarantee that the mortgages are protected against default by the government. The GSEs back more than $5.5 trillion worth of mortgages. Together they account for 98 percent of the secondary market, which illustrates just how crucial the GSEs are in providing liquidity to credit markets and keeping mortgage rates in check.

From the Bloomberg article:

The Congressional Budget Office calculated in August 2009 that the companies would need $389 billion in federal subsidies through 2019, based on assumptions about delinquency rates of loans in their securities pools. The White House’s Office of Management and Budget estimated in February that aid could total as little as $160 billion if the economy strengthens. If housing prices drop further, the companies may need more. Barclays Capital Inc. analysts put the price tag as high as $500 billion in a December report on mortgage-backed securities, assuming home prices decline another 20 percent and default rates triple.

The article goes on to suggest that under the worst case scenario, taxpayer costs to bailout the GSEs could run as high as $1 trillion. Most of the losses are due to subprime loans purchased between 2005 and 2007. High unemployment resulting from the subsequent recession is continuing to drive mortgage defaults and losses at Fannie and Freddie.

In Congress there has been much talk and little action regarding the future of the GSEs. Nobody is entirely sure what the best course of action is, and few politicians really want to mess with what is in effect a massive housing subsidy. If Fannie and Freddie were to disappear, credit markets would likely dry up and many Americans would simply not be able to get financing for a home. Few politicians want to be seen as the ones who took the dream of home ownership away from the masses.

What do you think should be done with Fannie and Freddie? Let us know in the comments section below.

Category: Mortgage Rates
First-Time Home Buyer Tax Credit Closing Date To Be Extended?
108 By Michael Kraus on June 11, 2010

Update 6/25/10: The Tax Extenders Bill that the amendment to extend the credit failed to overcome a filibuster by Republicans in the Senate. As of now the closing date for the tax credit is still June 30th.

DEVELOPING STORY UPDATE 6/15/10: This proposal now appears likely to pass in the Senate. See updated article here.

An initiative was introduced in the Senate yesterday that would give home buyers attempting to claim the first-time home buyer tax credit an additional three months to close on their homes.

In order to claim the tax credit, a potential buyer needed to sign a purchase agreement prior to April 30 and had to close on the home prior to June 30. Under the new proposal introduced by Senator Harry Reid, those who signed a purchase agreement by April 30 would now have until September 30 to close their sale.

Along with historically low mortgage rates and low home prices, the tax credits hoped to fuel home sales in the latter part of 2009 and early 2010.

It can take a long time to close on a home because lots of paperwork needs to be completed and filed by the buyer, seller, and various parties attached to the sale. The process has been made somewhat more complicated because of the disclosure requirements of the Good Faith Estimate (GFE) and the Real Estate Settlement Procedures Acts (RESPA), two acts aimed at increasing the transparency of lending process. Additionally, the expiration of the tax credit created a flurry of home sales, which has caused a backlog with lenders and processors.

According to the National Association of Realtors, almost 180,000 potential buyers who signed a purchase agreement before April 30 would fail to close on their home before June 30 because of the delays.

According to an article in today’s Washington Post, Democrats are having difficulty getting enough votes to pass the bill, which has a variety of other tax initiatives attached to it.

Are you attempting to claim the tax credit? Are you having difficulty closing before June 30? Let us know in the comments section.

Category: Mortgage Rates
AIG Bailout had “Poisonous Effect on the Marketplace” Says Congressional Committee
By Michael Kraus on June 10, 2010

“Something is rotten in the state of Denmark New York”

Remember back in April when reports surfaced that indicated AIG might be able to repay its share of the bailout money? Or when Ben Bernanke said on Wednesday that he believed that AIG would be able to repay its bailout money? Don’t hold your breath, because it turns out that this may not be the case.

In a report issued today, the Congressional Oversight Panel, which is a watchdog group that is reviewing the taxpayer bailout of AIG, said that we “remain at risk for severe losses” and that government did not do enough to guard against taxpayer losses during the 2008 bailouts. AIG is 80 percent owned by the government, and the panel said the government is going to “remain a significant shareholder in AIG through 2012″ and “even at this late stage it remains unclear whether taxpayers will ever be repaid in full”.

The Federal Reserve Bank of New York and the Treasury Department have given more than $132 billion to AIG since 2008. The Panel concluded that while some form of relief was necessary to stabilize the economy, “the government failed to exhaust all options before committing $85 billion in taxpayer funds” and that “the government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace”.

Furthermore, the Panel levelled this damning criticism of the bailout:

“Throughout its rescue of AIG, the government failed to address perceived conflicts of interest. People from the same small group of law firms, investment banks, and regulators appeared in the AIG saga in many roles, sometimes representing conflicting interests. The lawyers who represented banks trying to put together a rescue package for AIG became the lawyers to the Federal Reserve, shifting sides within a matter of minutes. Those same banks appeared first as advisors, then potential rescuers, then as counterparties to several different kinds of agreements with AIG, and ultimately as the direct and indirect beneficiaries of the government rescue. The composition of this tightly intertwined group meant that everyone involved in AIG’s rescue had the perspective of either a banker or a banking regulator. These entanglements created the perception that the government was quietly helping banking insiders at the expense of accountability and transparency”.

It is worth reading that section twice. Then take a gander at this piece from Greg Gordon of McClatchy Newspapers. He asserts that “it now appears that Paulson and senior Federal Reserve officials either plunged ahead without understanding AIG’s financial situation and the risks it posed to taxpayers â€” or were less than candid about one of the largest corporate bailouts in U.S. history”.

Of the money the bailout money that went to AIG, more than $90 billion went to its creditors, who would have received far, far less had AIG been allowed to restructure or go into bankruptcy. NPR has a nice breakdown of who got what here. The number one recipient on that list is none other than Goldman Sachs. Guess where Hank Paulson, who was Secretary of the Treasury when the bailout was orchestrated worked before he started at Treasury? You guessed it, Paulson was CEO of Goldman Sachs. Let me be clear: I’m not accusing Paulson of any misdeeds (the awesome Barry Ritholtz does that far better than I ever could) but this could be one of the “perceived conflicts of interest” the Panel was referring to.

Anyway, this whole thing provides some food for thought on a Thursday. What do you think? Let us know in the comments section below.

Category: Mortgage Rates
First Time Home Buyer Tax Credit to be Made Permanent?
1 By Michael Kraus on June 9, 2010

I’m a little late picking up on this story, but on May 25th Congressman Ron Paul introduced legislation that would make the first time home buyer tax credit permanent, and would extend the credit to people whose homes were destroyed by a natural disaster. From the press release:

“Renewing the first-time home buyer’s credit will help Americans purchase a first home with their own money, instead of having to rely on government-funded or backed programs. The other sections of this legislation were inspired by conversations my staff and I had with constituents who had to purchase new homes because Hurricane Ike destroyed their prior homes. The first-time homebuyer’s tax credit could be of tremendous value to these people, yet the law denies them the credit because they are replacing destroyed homes. My bill not only reinstates that first-time homebuyer’s credit, it also corrects that oversight.”

I am not entirely clear as to whether the permanently extending the tax credit would really create significantly greater demand for housing. Home sales really only ramped up in the final months before the expiration of the tax credit. It seems as though it was the transitory nature of the credit, not the existence of the credit that really prompted people to act.

Additionally, the economists at the Brookings Institute estimate that the tax credit cost taxpayers $43,000 for every person who would not have bought a house without the tax break. A very expensive stimulus indeed.

It is also somewhat curious that someone who claims to be against government intervention in financial markets would introduce a bill like this, but I digressâ€¦

As of right now, it is not clear what chances this bill has of getting passed. What do you think about the possible re-institution of the tax credit? Good policy, bad policy, or otherwise? Let us know in the comments section below.

Category: Mortgage Rates
First Time Home Buyer Tax Credit Extended For Military Members
By Michael Kraus on June 7, 2010
The first-time home buyer and repeat tax credits expired on April 30, 2010, but if you have not taken advantage of the credit and you are a member of the military you may be in luck, as Congress has extended the credit for another year for some military personnel. You may still be able to take advantage of historically low mortgage rates and low home prices.

From IRS.gov, here are the guidelines for qualification for the tax credit. For the complete rules, click here:
- Members of the military and certain other federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and qualify for the credit. Thus, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2011. If a binding contract is entered into by that date, the taxpayer has until June 30, 2011, to close on the purchase. Members of the uniformed services, members of the Foreign Service and employees of the intelligence community are eligible for this special rule. It applies to any individual (and, if married, the individual’s spouse) who serves on qualified official extended duty service outside of the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010.
- In many cases, the credit repayment (recapture) requirement is waived for members of the uniformed services, members of the Foreign Service and employees of the intelligence community. This relief applies where a home is sold or stops being the taxpayer’s principal residence after Dec. 31, 2008, in connection with government orders received by the individual (or the individual’s spouse) for qualified official extended duty service. The credit is still allowable even if this happens during the year of purchase. Qualified official extended duty is any period of extended duty while serving at a place of duty at least 50 miles away from the taxpayer’s principal residence (whether inside or outside the U.S.) or while residing under government orders in government quarters. Extended duty is defined as any period of duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period.
So if you are returning home from serving abroad, or are currently abroad and have a spouse at home, you may still be able to save big on a new home purchase. Demand for homes has tailed of substantially since the tax credit expired, so it is definitely a buyer’s market right now, and you have until April 30, 2011 to claim the tax credit. For more information, call one of our mortgage experts at 877-868-2509.
Category: Mortgage Rates
Bernanke Addresses Interest Rates, Europe, and Recovery
By Michael Kraus on June 1, 2010

Federal Reserve Chairman Ben Bernanke addressed a conference sponsored by the Bank of Korea on Sunday and made several telling remarks about the future of the Fed’s monetary policies.

Bernanke emphasized the importance of developing markets to the global economy, saying, “the world economy will depend even more on them [emerging markets] to maintain strong domestic growth and economic and financial stability“.

The Fed Chief also stressed the importance of knowing when to tighten fiscal policy: “in the medium term, like the Federal Reserve and many other central banks, the Bank of Korea will have to manage its exit from accommodative policies. As is typically the case in the early stages of an economic recovery, the Bank will have to weigh the risks of a premature exit against those of leaving expansionary policies in place for too long”.

In response to the economic crisis the Federal Reserve lowered interest rates to almost zero in late 2008, and they have remained there since. Mortgage rates and other borrowing costs have also stayed historically low.

Although Bernanke did not specifically say what the Federal Reserve would do with monetary policy, it does not appear that tightening is imminent. Many economists and analysts believed that the Fed would raise rates prior to the end of 2010. It appears likely that the debt contagion in Europe will delay tightening indefinitely.

As to the future of the economy vis a vis Europe, Charles Evans, President of the Chicago Fed said: “the situation in financial markets in Europe does add uncertainty, but at the moment I look for the recovery in the U.S. to continue to improve and I don’t see any changes in my outlook”. Charles Plosser, President of the Philadelphia Fed added: “I don’t anticipate at this point that the United States in particular will see a double dip”.

How do you think recent events in Europe will affect the U.S. economy? Let us know in the comments section below.

Category: Mortgage Rates
New Fannie Mae Regulations Could Pose Problems For Borrowers and Lenders
By Michael Kraus on May 27, 2010

The trials and tribulations of Fannie Mae have been well documented on this blog and throughout the media. Seized by the federal government in 2009, Fannie Mae has required $84 billion of taxpayer funds to remain solvent.

On June 1, 2010, Fannie Mae’s new Loan Quality Initiative (LQI) becomes effective. The purpose behind the LQI is to detect compliance issues with Fannie Mae mortgages prior to delinquency or foreclosure. Over the last three years loan repurchase requests have increased, which has demonstrated the need for an improvement to the underwriting process. The emphasis is on getting more complete underwriting data that might uncover problems with loans before they are issued.

Part of the LQI requires any lender who wishes to sell mortgages to Fannie Mae to “determine that borrower liabilities incurred up to, and concurrent with, closing are disclosed and evaluated in qualifying the borrower for the loan”. The best way to do this is to run an additional credit report before closing. The LQI does not explicitly require a credit check, but lenders will likely run one to meet the requirements.

Running a second credit check could have big implications. The first issue is if a borrower has undertaken any new debt during the loan process. If they have, the closing could be delayed until the lender is able to look into the issue further.

Let’s take the example of a borrower who submits a loan application, but before closing finds themselves in need of a new vehicle which necessitates an auto loan. Prior to closing, the lender runs an additional credit report, and sees the new debt. The lender finds that the borrower’s Debt-To-Income (DTI) ratio has increased from the original credit check. This could cause the loan to fall through because the new DTI makes the borrower ineligible for the loan.

A second issue will arise if no new debt has been incurred, but there has been a change in credit score between the first and second report. A credit score could change due to a late bill payment, a credit inquiry, opening a new credit card, or a variety of other factors. The LQI requires the lender to resubmit any borrower where “new derogatory information is detected and/or the credit score has materially changed”. The trouble is that Fannie does not specify what constitutes a “material change” to the credit score.

As we can see, the LQI could cause trouble for borrowers and lenders until some of the rules are further clarified. Borrowers would be well advised to not take on additional debt or do anything that would cause negative changes to their credit score prior to final closing on a home.

Category: Mortgage Rates
What is the Solution to the Next Financial Crisis?
By Michael Kraus on May 27, 2010

There was a very interesting article yesterday on CNNMoney.com by Kenneth A. Posner that discusses a possible solution to future banking crises.

Currently the Obama administration and the G-20 are trying to develop new regulatory systems that would ensure that major banks would have adequate capital reserves in the event of an economic catastrophe. During recession, many banks found themselves under-capitalized and over-leveraged, and many of them that were considered “too-big-too-fail” were bailed out at great expense by U.S. taxpayers.

Posner posits that regulations are definitely part of the solution to the next economic crisis, but he suggests that there is a simpler plan that could save taxpayers billions.

The central contention of the article is that speed is of the utmost importance when some sort of shock hits the market. Posner says that financial institutions will eventually restructure on their own, but that management acts slowly for a variety of reasons, delaying important decisions until the damage has been done.

Posner’s idea is to “require systemically important financial institutions to issue so-called “contingent capital”, a kind of shock-absorber that would immediately kick in during a crisis to stabilize the institution and bolster its solvency”.

The idea behind contingent capital is that the company in question pays a commitment fee to another company which agrees to either loan assets or purchase debt from the first company when some sort of pre-determined condition is met. Unlike insurance, this type of transaction doesn’t negatively effect the balance sheet, but provides a source of capital in the event of emergency, and the company doesn’t have to negotiate for funds after the emergency has occurred, when their leverage is greatly lessened.

Posner suggest that the contingent capital “could be a special kind of debt that automatically converts to common stock when the firm’s regulatory capital gets depleted”. This sort of system would allow us to more quickly get past crashes and move to the recovery stage. An additional benefit would be that the plan would not cost the taxpayers anything, it would essentially allow the banks to conduct a self-bailout.

What do you think of Posner’s plans? Let us know in the comments section below.

Category: Mortgage Rates
New Home Sales Spike Due To Tax Credit
By Michael Kraus on May 26, 2010

It still has that new home smell.

The new home sales monthly report from the U.S. Census Bureau came out today, and was more or less in line with expectations. The report found that sales of new one-family homes in April increased nearly 15 percent from March 2010, and almost 48 percent from April of 2009. The median sales prices of new homes was $198,400, while the average sales price was $249,500. 211,000 new homes were for sale by the end of April, a five month supply at the current sales pace.

In order to qualify for the first-time home buyer tax credit, buyers needed to have a binding contract in place prior to April 30. They would then have until June 30 to close on the sale. New home sales are recorded at the time the contract is signed, which accounts for the large surge in April. Expect to see new home sales decline in May as a result.

It will be very intriguing to see what happens to the housing market as the summer rolls on. This morning’s report about declining purchase applications indicates that we can expect home sales to fall off in the second half of the year, if everything remains the same. If substantial job creation occurs, or if the government re-institutes some form of stimulus for the housing market, conditions could change very quickly.

As of this time, many economists are predicting there will be a general slow-down of the economy in the second half of the year. Yesterday’s Case-Shiller House Price Index raised fears of a double dip in the housing market due to a general weakening in prices. At the same time, the industrial sector of the economy is booming, and significant job creation has occurred the last several months. One thing we can be sure of is that it will be an interesting summer for market watchers.

What do you think will happen later this year? Let us know in the comments section.

Category: Mortgage Rates
Low Mortgage Rates Drive Refinance Activity Up 17 Percent
1 By Michael Kraus on May 26, 2010

Today the Mortgage Bankers Association released the Weekly Mortgage Applications Survey for the previous week. The report found that seasonally adjusted mortgage applications were up 11.3 percent from the previous week.

Extraordinarily low mortgage rates fueled refinance applications which surged 17 percent over the previous week. The average mortgage rate on a 30-year fixed rate mortgage was 4.80 percent last week. The European debt crisis has caused investors to flee stock markets and invest in the safety of the bond market. In turn, bond yields have plummeted, and mortgage rates have dropped along with them. Refinance activity is currently at its highest point since October 2009, and made up 72 percent of total mortgage activity last week.

Conversely, purchase applications fell 3.3 percent from the previous week, and are at their lowest point in over 13 years. This is not a good sign, and presages a slowdown in the housing sector in the late summer and early fall. It appears as though the federal tax credits accelerated sales from the summer and fall into the spring. It remains to be seen if the economy will improve enough to rejuvenate housing later in the year.

While it is good to see borrowers lowering their monthly payments by taking advantage of low mortgage rates, the collapse of purchase activity is troubling. A soft housing market will be an anchor on the economy, and along with the troubles in Europe could spur a big slow down in growth for the third and fourth quarters of this year. It will be interesting to see if the government feels compelled to further intervene in the housing market if this does happen.

Where do you think the housing market is headed? Let us know in the comments section below.

Category: Mortgage Rates