Monday Morning Cup of Coffee: What will the end of Fannie and Freddie look like?

Not even the experts agree

Monday Morning Cup of Coffee takes a look at news across HousingWire’s weekend desk, with more coverage to come on bigger issues.

Last week Ed DeMarco, the former acting director of theFederal Housing Finance Agency, wrote in the Wall Street Journal that in his opinion, it is time to put an end to Fannie Mae and Freddie Mac.

Here’s how that might go down:

One reason for the conservatorships in 2008 was that the country lacked a viable secondary market without them. The common securitization platform introduced by FHFA in 2012 will fix that by creating the operational infrastructure for other firms to issue mortgage-backed securities equivalent to Fannie and Freddie’s. That will enable Congress to end the conservatorships and replace the Fannie-Freddie model.

David Stevens doesn’t agree. He’s president and CEO of the Mortgage Bankers Association, but more than that, he worked as an executive at Freddie and served as the Assistant Secretary of Housing and Federal Housing Commissioner in the midst of the housing crisis. He’s also a veteran of the lending business.
Here’s a little of what he says.

The most important element here is to recognize that conservatorship is not a long term solution, and in the current state may be the riskiest position of all….

The role the GSEs play in supporting an affordable and sustainable housing finance system is absolutely critical to this nation….

Some might argue that this function could be replicated by other parties, private capital alone, or some new model. The fact is we need some form of government entity in the mortgage market.  Investors don’t like uncertainty – this why the vast majority of them will not buy any mortgage security that is not explicitly backed by the US Government.

To read the whole blog which includes his recommendations of what should be done to get the GSEs out of conservatorship — and you should read it — click here.

That’s a view of the GSEs’ future. What about the FHFA’s now? Ed Pinto, co-founder of the American Enterprise Institute’s International Center on Housing Risk, says the FHFA’s new mandates for Fannie and Freddie regarding its affordable housing policy initiatives is doubling down on failure.

“For more than 50 years, U.S. housing policy has relied on looser and looser mortgage lending standards in a misguided effort to promote broader home ownership and accomplish wealth accumulation, particularly for low-income households,” Pinto says.

And for nearly half that time, Fannie Mae and Freddie Mac have been required to meet low-income housing mandates.

“These misguided efforts have achieved neither goal—the U.S. home ownership rate is no higher today than it was in the early 1960s and low-income households (those in the 20th to 40th percentile of the income distribution) had a median net worth of only $22,400 in 2013, the lowest inflation-adjusted amount in any of the Fed surveys dating back to 1989,” Pinto says.

He says that simple economics explains why FHFA’s affordable housing mandates are doomed to failure. Research as far back as the 1950s has shown the liberalization of credit terms creates demand pressure that easily becomes capitalized into higher prices when undertaken in a seller’s market.

“As Einstein noted, insanity is defined as doing the same thing over and over again and expecting a different result,” he says.  “The affordable housing mandates should be abandoned.”

Pinto believes that housing finance needs to focus on the twin goals of sustainable lending and wealth building.

“The new Wealth Building Home Loan that Stephen Oliner and I developed does exactly that.  It offers a safer and more secure path to homeownership and financial security than the slowly amortizing, government guaranteed, 30-year mortgage,” Pinto says.

Speaking of the GSEs, how do things look on the mortgage bond investment side? Things are changing.

“Our neutral for securitized products and agency MBS since early May has been a little painful: spreads have widened more than we expected. Looking back, our mistake was to think that the Fed would have dialed back the tightening rhetoric by now and more forcefully maintained its inflation goals,” says Chris Flanagan at Bank of America/Merrill Lynch. “At this point, with real rates higher, breakevens lower, and securitized products spreads wider, it is too late to capitulate and move to an underweight across the board: the damage is largely done.

At a minimum, Flanagan says in a client note, we are a lot closer to the point where theFederal Reserve will once again have to assert itself on its inflation goals. When, or if, that happens, a sharp reversal in risk assets seems likely.

“The bad news, though, is that more pain on long positions in risk assets is probably needed before the Fed takes that step, which may not happen for another month,” Flanagan says. “For that reason, we move to a tactical underweight in securitized products credit exposed to new issue supply pressure, including CMBS, non-agency MBS, lower-rated CLOs and esoteric ABS. We stay neutral on agency MBS, on-the-run ABS and AAA CLOs, which we think will be somewhat more resilient.”

What happen when a columnist for Tribune puts 25% down on a house, but has $300 in unpaid parking tickets?

He doesn’t qualify for a mortgage, that’s what.

Stephen Moore moans about his frustration here:

My situation was doubly frustrating because I’m making a 25% down payment on the house. Researchers have examined huge samples of the portfolio of defaulted loans during the 2007-09 housing crisis. Virtually all the defaulted loans had low down payments, with many having less than 5% down, thanks to government “affordable housing” mandates.

The problem here is that Moore is sticking with big banks to make this loan. What would be really interesting is if he went to one of the nonbank lenders proliferating in the mortgaeg space right now. Or how about the Bank of Internet, crushing it with purchase mortgage originations lately.

Moore then closes with the aforementioned Pinto study and posits that his tax dollars go to helping lower income families get homes, but do little to help him out. It’s a fair point, sure, but talk to us when you’ve paid your parking tickets, pal.

On Tuesday we’ll hear from the FHFA — not on mandates and conservatorship, but on June’s home prices. Analysts expect the FHFA house price index to post a third straight solid gain of 0.4%. This report has been showing some strength in contrast to S&P/Case-Shiller data, which have been soft.

Simultaneously on Tuesday, we’ll get the Case-Shiller home prices for June. Another month of disappointment is expected for Case-Shiller where the adjusted monthly gain for the 20-city index is seen at only 0.1% in June. This, however, would be an improvement from the 0.2% decline in May and no change in April.

No banks closed the week ending Aug. 21, according to the FDIC.


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