Fannie and Freddie, and nationalized housing lending

I think that a great number of people have no earthly idea who or what Fannie Mae and Freddie Mac are, or how that affects our national housing market, the economy, nor the national debt and our economy's relationship to other countries.

"Oh, Fannie Mae was bailed out? What is that.. " and then, cease reading after the first or second paragraph.

Our national debt just doubled.

So, two pieces here - first, a very well written discussion of how Fannie and Freddie got to where they are; compare this to earlier discussions of the housing bubble and how it was created.

A quick excerpt:

The accounting scandal was so large that even Fannie and Freddie didn't know what was in their portfolio. They failed to register with the SEC for at least eight quarters.

If you're at all curious about what that means for you, I recommend you read the article.

What does this move hold for the future, though? My good friend Jillian Sorensen of Franklin American must have arisen before the roosters this morning to put together a marvelous synopsis of what may be coming. It is designed for mortgage professionals to read, but it gives a clear picture of what we don't know but may expect:

As you know, in a truly historic event yesterday, Treasury Secretary Paulson and Federal Housing Finance Agency Director Lockhart announced that “FHFA has placed Fannie Mae and Freddie Mac into conservatorship.” The government (FHFA) will now be managing Fannie Mae and Freddie Mac for the foreseeable future.


Below are some thoughts on this historic event…..


Overview


To stabilize and to stimulate the housing and financial markets, the Federal Government is taking the following key steps.

· The GSEs will be allowed to increase their MBS portfolios through the end of 2009
· Treasury will be initiating a program to purchase GSE mortgage-backed securities (through December 31, 2009)
· Treasury has established a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac and the Federal Home Loan Banks


We believe that Treasury Secretary Paulson and the Bush Administration determined Fannie Mae and Freddie Mac were unable to perform their housing missions at a time when they were most needed because the GSEs were trying (unsuccessfully) to address safety and soundness issues associated with raising capital. As a result of this plan, Treasury has indicated that the GSEs will now not be under any pressure to sell assets.


In the short-term, we expect mortgage liquidity should improve. Rates should decline as the risk spreads built into the GSE pricing (due, in part, to fear of potential GSE failure) should be reduced if not eliminated. The extent of the decline will depend on what happens to Treasury yields in the coming days.


Without capital constraints in the near term and based on Secretary Paulson’s comments (see below), we believe the new Fannie and Freddie will likely rollback at least some of their price increases and loosen underwriting requirements to some extent. It will be curious to see the MI reaction to this government intervention as their tightening of guidelines will now be “front and center” in the effort to expand mortgage financing availability.


We also believe Secretary Paulson’s call to examine the guaranty fee structure could lower those fees across-the-board. It will be interesting to see if the government-controlled GSEs will implement a Ginnie Mae-type flat fee structure and at what level.


On a longer term basis, there will be a “heavyweight” debate next year and beyond about the future size and structure of the GSEs (e.g. public or private entities). That debate will not occur until the new Congress and Administration take office next year.


Why did Treasury/FHFA take this action?


It appears to us that Treasury/FHFA lost confidence in Fannie Mae and Freddie’s Mac’s ability to support the housing recovery while, at the same time, addressing their safety and soundness responsibilities by preserving and raising capital. Below are some of Secretary Paulson and Director Lockhart’s remarks which lead us to this conclusion.


Director Lockhart said:

(bold and italics added)


“Their market share of all new mortgages reached over 80 percent earlier this year, but it is now falling. During the turmoil last year, they (the GSEs) played a very important role in providing liquidity to the conforming mortgage market. That has required a very careful and delicate balance of mission and safety and soundness. A key component of this balance has been their ability to raise and maintain capital. Given recent market conditions, the balance has been lost. Unfortunately, as house prices, earnings and capital have continued to deteriorate, their ability to fulfill their mission has deteriorated. In particular, the capacity of their capital to absorb further losses while supporting new business activity is in doubt. Today’s action addresses safety and soundness concerns. The result has been that they have been unable to provide needed stability to the market. They also find themselves unable to meet their affordable housing mission. Rather than letting these conditions fester and worsen and put our markets in jeopardy, FHFA, after painstaking review, has decided to take action now.“


Secretary Paulson said:


“I attribute the need for today’s action primarily to the inherent conflict and the flawed business model embedded in the GSE structure and the ongoing housing correction”. He added that he has “long said, the housing correction poses the biggest risk to the economy”.


“Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner” and that “the primary mission of these enterprises will now be to proactively work to increase the availability of mortgage finance including by examining the guaranty fee structure with an eye toward mortgage affordability”.

Comment

We have all seen the steps that Fannie Mae and Freddie Mac have taken to preserve and raise capital throughout this year. These measures have included raising prices on mortgages and tightening underwriting guidelines. As everyone is also aware, they have been aggressively trying to put back loans to seller-servicers who, in turn, are going back to originators.


Secretary Paulson in particular appeared to conclude that GSEs cannot serve two masters (i.e. its housing mission and its shareholders) during the housing crisis.


What does this mean?

To state the obvious, we are in uncharted waters. This plan is not a “silver bullet” that will address the underlying problems (i.e. record mortgage delinquency and foreclosures) that caused the need for this unprecedented action. MBA’s National Delinquency Survey last week indicated that over 9% of all mortgages are either delinquent or in the foreclosure process. While the new GSE approach to mortgage availability will increase the number of potentially eligible borrowers, it will likely not have any significant impact on affordability (borrowers must still qualify and make downpayments) in those markets where house prices increased the most during the “housing bubble” until house prices and borrower incomes are in line. With this as a caveat, below are our immediate thoughts.


· Short term goals

Two of the immediate goals of this action are: 1) “to increase the availability of mortgage finance” as Secretary Paulson said and 2) to lower mortgage interest rates through the Government guarantee of GSE debt.

· Long term objectives


On a longer term basis, the Government’s action yesterday raises the fundamental question about the government’s role in housing going forward. Secretary Paulson deferred the discussion of this question and the “flawed GSE business model” ( i.e. serving two masters ---public and private objectives) to the next Administration and Congress.

In this update, we will focus on short-term impact since the debate about the GSEs’ future structure and size will depend on who wins the election and the make-up of the Congress.

Short term Impact

For the housing industry, the short-term impact of the Government takeover appears to be positive.


* Mortgage rates should decline
* Liquidity should be increased
* GSEs should loosen standards (somewhat)
* GSEs should reduce fees including guaranty fees
* Some housing experts feel house price may stabilize sooner and the level of further house price decline will be moderated as a result


Potential Impact

* There could be a mini-refinance boom if the rate decline materializes.
* Hedging of servicing portfolios and pipeline problems will have to be addressed


There are many questions to be answered in the coming days and weeks:
(Here are a couple)

* How will the MIs react (mortgage insurance companies)?
* Their underwriting and pricing policies will be “front and center” if the GSEs take the actions we expect
* What will the new Fannie/Freddie management’s policy be on buybacks? Will they be more reasonable? If so, credit policies may relax!
* On g-fees, will the GSEs pursue the Ginnie Mae approach (uniform g-fees across the board)?
* What will be the new GSEs do with respect to lender relationships (preferential pricing, etc.)?

So, now all loans that aren't held in portfolio are either directly funded or directly guaranteed by the US government.

It CAN be done!!

Contract effective date - August 4, 2008
Full loan application date - August 5, 2008
Contract closing date - September 3, 2008
Actual closing date - August 22, 2008
Actual funding date - August 22, 2008

New construction, inner loop, FHA purchase.

Brickor Mortis

brickor mortis n. Falling house prices have caused property website Rightmove to coin a new phrase. "Brickor mortis" is the paralyzing condition caused by sellers refusing to lower prices as they don't accept their home's value has dropped. Buyers won't buy as they think homes will be cheaper in the future-or because they can't get a loan. -"Revealed: Middle Britain will be hardest hit by falling house prices" by Becky Barrow Mail Online (United Kingdom) July 18, 2008.

Susan's First Rule of Real Estate Sales - "if it hasn't sold in 75 days, it's priced too high."



If you're working mostly in areas where properties get snapped up nearly as quickly as they hit the market - great!

One could call this a schizophrenic marketplace, where lots of "spec" properties that have gone up and sold in the last five years are not selling, and other neighborhoods are like wildfire.

What's the difference?

Well, yes, it's location (location location, I had to do it.) It's also the difference between neighborhood characteristics - how well the neighborhood has been kept, the ethnic diversity in the neighborhood and whether it's primarily new construction.

My Realtor friends are telling me that they are encountering a lot of "brickor mortis" when they consider advising clients about making an offer - properties are listed higher than the comps will support, and yet the listing parties are dead set on the value that they've established. While that strategy may work in the 750,000+ arena, it's a great way to sit on a property for months or longer in markets where homes are just commodities.



How do we deal with this market schizophrenia? By advising more aggressive pricing in lower neighborhoods - offering down payment assistance and closing cost programs in more diverse neighborhoods, and working with clients on understanding that whimsy will inhibit the sale of their property.

In my own experience over the last two weeks, I've seen a well priced house in the Southwest languish in a diverse and transitional neighborhood until a recent sale of a foreclosed property came in nearly 20% lower than the asking price of the subject property. I've talked to a well educated non-real estate professional who was convinced he knew the market and was just dead wrong about all of his assumptions. And, I've seen a friend taking his time thinking about which properties to visit in the neighborhood of his choice, and in less than 24 hours, every single property on his list went from "available" to "option pending."

There is no blanket way to deal with this market. Focusing on your core strengths, educating clients thoroughly, and doing your research and homework are the only things that can be relied on. It may be time to focus on your consulting relationship with the client and speaking to them more in terms of what you're seeing the market doing and how it affects them, than just agreeing to their assumptions and wishes.

Credit where credit is given

Today, we're going to talk in broad terms about credit - business and personal credit. This is a summary for everyone, not a detailed discussion.

First, if you're not aware of it, there is a pending settlement in a lawsuit against TransUnion - if you've had a credit account since 1987, you're entitled to participate in it. You have a month to get in on the settlement. You'll get either nine months of enhanced credit review and access, or six months and the possibility of getting a cash distribution if there is one. Either call the settlement hotline at 866-416-3470 or go to the very easy website at http://www.listclassaction.com.

Second, this is an article you MUST read. Written by a lady who worked for credit card companies for years, it explains how late fees can be assessed when you do everything right, and how to save hundreds each year by being pro-active.

Third, I've been facilitating the Dave Ramsey Financial Peace University course at New Vision now for about a month. If you don't know Dave Ramsey, listen to one of his radio show podcasts here. If you do know Dave Ramsey, but haven't ever thought that you need his methods, you're probably wrong.

I've always thought of myself as a guy who knew how money worked until I took this course. I thought I knew how budgeting worked. Uh, wrong-o. His budgeting techniques make perfect sense not only from a math standpoint, but from a spiritual/metaphysical standpoint (although that's not his focus.)

I can see very clearly how these are skills that would benefit substantially everyone - save for a few friends of mine who have these skills down pat.

So, if you have any lack of peace about money at ALL, click here, find the nearest Financial Peace University course and spend the hundred bucks and thirteen weeks to take it. And, pay attention to it! Maybe take it twice.

Last piece - again, I've been working with small business people who need financing to grow their business and be flexible, and their tax returns are so focused on avoiding paying tax that nothing is available to them.

I've seen someone with terrific credit in this situation, and a bunch of someones with not so terrific credit.

To have business financing (that you'd be attracted to,) you must have provable cash flow AND proof that you pay your obligations on time.

PLEASE don't be fooled by "consultants" who offer to set you up with shelf corporations and existing credit histories to get you hundreds of thousands of unsecured financing.

They want up front fees, and the unsecured financing market is largely gone.

Get with me if you have questions on any of these items.

Who will buy my my sweet red roses??

OLIVER (sings)

Who will buy
This wonderful morning?
Such a sky
You never did see!

Who will tie
It up with a ribbon
And put it in a box for me?

So I could see it at my leisure
Whenever things go wrong
And I would keep it as a treasure
To last my whole life long.

Who will buy
This wonderful feeling?
I'm so high
I swear I could fly.

Speaking of flying high - here in Houston, we have at least five new high rise residential towers in various stages of completion. We have others, such as the heavily attacked Ashby high-rise that have yet to come out of the ground.

Who will buy?

To get a loan, these new restrictions apply -

* All condo loans now require a minimum of 10% down payment
* Investor owned properties now require a minimum of 20% down payment
* Any condo project requires a minimum of 55% owner occupancy
* No non-warrantable condo loans are permitted

Okay, what does that mean?

Condos, especially newly built high-rise condos, cost more money per square foot than do traditional structures. Now, a potential buyer will have to make a significantly larger down payment for a high-rise condo than for a traditional structure.

That limits the appeal of high-rise condos.

There are NO LOANS available in new projects until those projects have met FNMA or FHA standards for owner occupancy and sales.

If the condo developer goes with sales to investors (who can't get loans either) and they don't fill the building up with at least 55% buyers who live in the condo, they'll NEVER get loans in those buildings.

Thinking about the ranks of glittering new high rise condos in Miami, New Jersey, Delaware, Houston, Dallas and other cities .. I keep hearing the plaintive, hopeful song of the vendor as she tries to attract attention across the busy marketplace ...

"Who will buy my sweet red roses?"

UPDATE - Important news about condo and investment property loans

Do you remember when you were in fourth grade, and you confidently volunteered the answer to an important question in class and got it wrong?

That's how I felt all day yesterday.

After having some push-back from other mortgage professionals through the Realtors I've been talking to, I dug in and hauled out the new FNMA guidelines, the release notes to the new underwriting system, and read them. Thought about them, and read them again.

On the face of it, one would think I was wrong in my gallop through the countryside yelling "The British are Coming!" (I really wanted to write "gallop through the Countrywide," but it's a bad pun.)

On the face of it, we frequently take away poor or partial impressions. On the face of it, the Fannie Mae regulations and release notes say that they will make loans to non-owner condo buyers, and to cash out equity from non-owner investors.

However, the regulations suggest that for the first time, Fannie Mae's underwriting system is going to LAYER risk factors - rather than just taking the biggest one. Their announcement notes that condos are an increased risk, cash out loans are an increased risk, duplexes, triplexes and quads are increased risk, and investor loans (meaning, someone who's not going to live in the property) are the biggest risks of all.

So, if they're going to stack risk factors - then, condo + investor is risk plus highest risk. Triplex + investor is risk plus highest risk. Cash out + investor is very high risk plus highest risk. The loans that I was speaking of two days ago are now rated as very high risk, and "compensating factors" will be required for those loans to be approved. Sky high credit scores. Deep reserves (12 months plus.)

As I thought about this, I reflected that the Fannie Mae guidelines now say that they'll accept a "level" approval for these types of loans, but I know of almost no lender who will do them, even with these compensating factors present.

That suggests in addition to the underwriting uncertainty of average borrower + risk + high risk layering, the lenders themselves may choose to not do any of these loans. Which is what we've started to see. Lenders are backing away from anything they are less than certain can be sold to Fannie Mae immediately.

From the perspective of someone thinking of buying, selling or marketing property - what this means is you really have to be associated with a lender who is completely on his or her game. Pre-approval letters are meaningless; closings are all that count.

Think of it like the big car dealer ad in the weekend newspaper. They SAY that they have the loaded Camry for $12,999 ... but when you get there, they never do. That's how you should view pre-approval letters for any transaction that is for an investor purchase of a condo, a 2-3-4 unit property, or what we used to think of as a sub-prime loan (no social security number, etc.)

So, I'm still galloping through the Countrywide (I couldn't help myself, I'm sorry) yelling "The British are coming!" If you have a contract, a scenario or are going to make an offer and you're just not sure whether it will fly, call me. We'll give you our best game.

Condo loans and investment property loans

Loans on condominium properties for persons who will not owner occupy are no longer available at any loan to value.

Equity loans on investor owner (non-owner occupied) are no longer available at any loan to value.


Condominiums that would not be owner occupied have only access to local bank financing on commercial terms. Equity loans on investor owned properties are now only available through local bank financing on commercial terms.

On any residential investment property purchase, a minimum of 20% down payment is now required. On any condominium owner occupant purchase, a minimum of 10% down payment is now required.

Significant changes regarding corporate ownership of investment residential property, number of investment residential properties that are allowed and credit standards for investment residential property loans have also taken effect.

For a brief presentation and "cheat sheet" on these new requirements, please contact Douglas at 713-524-1850 ext. 220 or at dhord@douglashord.com