The Obama Administration called for the phasing out of Fannie Mae & Freddie Mac last Friday, via a process that will likely last the better part of the next decade. The two agencies, which have received over $153 billion in bailout dollars since the government took them over due to the real estate collapse in 2008, have been rightly criticized by both sides of the aisle for poor management/decision making before and after the collapse.
As someone who has been very outspoken about these two companies, I have mixed feelings about the announcement.
On one hand, I agree with some of the points made in an column posted on The Huffington Post on 2.10.11, discussing why there is a need for organizations that provide mortgages to lower and middle class families, backed by the federal government. The piece goes on to say that by completely privatizing the mortgage market, it would turn the U.S. into “… a nation of renters and [make] home ownership something that only the rich can afford." While renting might be the smart move for the immediate future, it’s not the way to go long term.
Further, privatization would make “too big to fail” banks even larger.
On the other hand, considerable taxpayer money will be saved and frustration spared when Fannie & Freddie are finally put to rest. We see more short sales rejected by Fannie & Freddie than any other lender or investor – deals that are above fair market value, from home owners who have advised not only that they’re going to be forced into foreclosure, but have provided endless documentation showing insolvency. Apparently, taking homes back and spending tens of thousands of dollars to pursue those that have nothing AND are likely candidates for chapter 7 bankruptcy is a better option than working with people, accepting reasonable deals and easing loses.
Moving forward, the three possible options laid out by Treasury Secretary Timothy Geithner, include:
• A private system in which lenders and investors fund new mortgages, with a limited role for existing federal agencies to subsidize home loans for the poor and other special groups, like veterans.
• A system similar to the first, only it includes a government backstop for mortgages during times of market stress. If the market froze, the government would step in and guarantee home loans.
• A much broader government role, where taxpayers would insure securities backed by home loans.
For me, the fix might have been not to shut them down outright, but simply to reform them – have competent people running both entities. I won’t rehash all the problems I’ve seen with them first hand (just go through my past blogs and you’ll find plenty) but I will say that both companies serve a purpose that is beneficial to almost everyone, as long as they’re being run correctly/efficiently.
Obviously, greater details on each approach will go a long way in determining the best course to follow. In my opinion, the middle road would appear to be the correct one – a mix of private funding, with government backing. Of all the bad Fannie & Freddie did, they were vital in securing mortgages for lower and middle class buyers – most of whom aren’t responsible for the real estate crash, nor should they be the ones punished for it. Simply put, the market didn’t crash because a number of people with $50k homes stopped paying their mortgage; it has far more to do with people who bought $500k homes, when they only should have qualified for $250k.
The people that Fannie & Freddie were designed to assist should still be able to own a home and being able to provide each class with sensible mortgages is the way to go. Assisting those in trouble when times are tough is equally important. Part of that is responsible lending, as well as putting better loss mitigation practices in place – those meant to help, not punish.
We will see what rises from the ashes of Fannie and Freddie, whenever the time comes that they’re finally gone. If we are able to keep the government involved in the mortgage market going forward, let’s hope the call for better lending practices is matched with better hiring practices as well…
Friday, February 18, 2011
Saturday, February 5, 2011
Fannie Mae, Freddie Mac & Your Money…
Henry Blodget, blogging for Yahoo Finance, posted an interview with money manager Barry Ritholz on Wednesday, discussing the millions of dollars that tax payers are on the hook for, due to bailout money provided to Fannie Mae & Freddie Mac. The video – as well as the corresponding article – is short, but it speaks volumes about the two mortgage giants. And like most articles about these quasi-government agencies that tend to fly under the radar, it’s certainly worth sharing/commenting on.
As relayed to Blodget by Ritholz, “Fannie and Freddie got a "blank check" from Treasury Secretary Tim Geithner at the end of the financial crisis. This blank check allows the housing giants to lose as much money as they want, with the taxpayer footing the bill.”
He continues, “Fannie and Freddie use much of this money to buy mortgages from Wall Street at what may be grossly inflated prices. This is a super arrangement for the banks, because they get to unload all their terrible mortgages at prices that won't produce losses. And it's fine for Fannie and Freddie because, well, because they have the blank check.”
Enraging, right? Surely there is no irony lost on comments made by Freddie Mac Executive Vice President Don Bisenius, last spring, when he posted a diatribe on the company website about the moral responsibility borrowers have to keep making their payments, in light of the growing numbers choosing to strategically default on their mortgages (a.k.a walk away).
Really Donnie, you’re going to lecture us on moral responsibilities? Consider the following: we have a client who needs to move cross-country, to care for an ailing relative. Our client is a retired schoolteacher, living on a fixed income. She has outstanding credit and has never missed a mortgage payment. Due to the collapse in the market, she can’t cover the deficiency, so she has to do a short sale. We submitted an offer – above fair market value – and received the following response from Fannie Mae:
“[Borrower] is current on their loan, there is no hardship.”
When we contacted Fannie Mae and advised them of the hardship our client had detailed in her “hardship letter”, they simply advised us that if a person is still current, they couldn’t be experiencing a hardship. If we want to move forward, she’ll have to go delinquent.
Imagine that.
The company (I group Fannie & Freddie together as one in the same) that lectures the masses on morality is essentially looking to reward bad behavior – go delinquent and we’ll talk.
Our client was trying to be proactive. She knew she wouldn’t be able to pay rent once she moved, while also covering her mortgage back here in Michigan, so she had the crazy idea that she could honor her obligation to Fannie until her short sale was approved. Truthfully, most of our clients do this and – despite what you might hear out there – most lenders will work with people who are still making their payments.
But not Fannie & Freddie.
So, we’ll fight them. Supposedly, changes to the various government programs out there had been put in place to stop forcing borrowers to go delinquent in order to receive loss mitigation assistance. We’ve been in touch with the congressional representative for the district where the property is located and will work with them – as we have in the past – to right this wrong. This may sound like an isolated story, but it’s not, it happens all the time.
While I’ve made no secret of my disdain for Fannie Mae & Freddie Mac in this blog, anyone who owns a home and pays taxes, needs to know how their hard-earned money can be/is being used against them. Fannie & Freddie are consistently among the most difficult investors to deal with when it comes to loss mitigation issues and no one really seems to notice or do anything about it.
So, I will continue to blog away and hope everyone who diligently reads this blog (yes, both of you!) spreads the word as well...
As relayed to Blodget by Ritholz, “Fannie and Freddie got a "blank check" from Treasury Secretary Tim Geithner at the end of the financial crisis. This blank check allows the housing giants to lose as much money as they want, with the taxpayer footing the bill.”
He continues, “Fannie and Freddie use much of this money to buy mortgages from Wall Street at what may be grossly inflated prices. This is a super arrangement for the banks, because they get to unload all their terrible mortgages at prices that won't produce losses. And it's fine for Fannie and Freddie because, well, because they have the blank check.”
Enraging, right? Surely there is no irony lost on comments made by Freddie Mac Executive Vice President Don Bisenius, last spring, when he posted a diatribe on the company website about the moral responsibility borrowers have to keep making their payments, in light of the growing numbers choosing to strategically default on their mortgages (a.k.a walk away).
Really Donnie, you’re going to lecture us on moral responsibilities? Consider the following: we have a client who needs to move cross-country, to care for an ailing relative. Our client is a retired schoolteacher, living on a fixed income. She has outstanding credit and has never missed a mortgage payment. Due to the collapse in the market, she can’t cover the deficiency, so she has to do a short sale. We submitted an offer – above fair market value – and received the following response from Fannie Mae:
“[Borrower] is current on their loan, there is no hardship.”
When we contacted Fannie Mae and advised them of the hardship our client had detailed in her “hardship letter”, they simply advised us that if a person is still current, they couldn’t be experiencing a hardship. If we want to move forward, she’ll have to go delinquent.
Imagine that.
The company (I group Fannie & Freddie together as one in the same) that lectures the masses on morality is essentially looking to reward bad behavior – go delinquent and we’ll talk.
Our client was trying to be proactive. She knew she wouldn’t be able to pay rent once she moved, while also covering her mortgage back here in Michigan, so she had the crazy idea that she could honor her obligation to Fannie until her short sale was approved. Truthfully, most of our clients do this and – despite what you might hear out there – most lenders will work with people who are still making their payments.
But not Fannie & Freddie.
So, we’ll fight them. Supposedly, changes to the various government programs out there had been put in place to stop forcing borrowers to go delinquent in order to receive loss mitigation assistance. We’ve been in touch with the congressional representative for the district where the property is located and will work with them – as we have in the past – to right this wrong. This may sound like an isolated story, but it’s not, it happens all the time.
While I’ve made no secret of my disdain for Fannie Mae & Freddie Mac in this blog, anyone who owns a home and pays taxes, needs to know how their hard-earned money can be/is being used against them. Fannie & Freddie are consistently among the most difficult investors to deal with when it comes to loss mitigation issues and no one really seems to notice or do anything about it.
So, I will continue to blog away and hope everyone who diligently reads this blog (yes, both of you!) spreads the word as well...
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