TR-HNR-June-July-2019

DISTRESSED SALES DROP TO 11-YEAR LOW

TOTAL DISTRESSED SALES

DISTRESSED SALES SHARE OF TOTAL SALES

1,400,000

45%

40%

38.7%

38.6%

1,200,000

36.9%

35%

32.8%

1,000,000

30%

29.3%

24.7%

800,000

25%

21.0%

17.8%

20%

600,000

15.5%

15%

14.0%

12.5%

400,000

12.4%

7.8%

10%

6.6%

200,000

5%

- 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0%

THE MORTGAGE MELTDOWN Under the Home Ownership and Equity Protection Act of 1994 (HO- EPA), Congress gave the Federal Reserve the right to prohibit "unfair and deceptive acts or practices" for any mortgage product. Instead, the Fed created a regulatory envi- ronment after 2000 which allowed lenders to offer a variety of “afford- ability” and “nontraditional” mort- gage products, including inter- est-only mortgages, option ARMs, and excess equity mortgages — say 125 percent LTV financing. Underwriting was not a problem. Lenders could and did accept stated income loan applications (the bor- rower could estimate their income) as well as no-doc, low-doc, and NINJA (no income, no job, no asset) mortgage applications. With incom- plete information, such applications could not be properly underwritten. “American consumers,” then said Federal Reserve Chairman Alan

Fannie Mae and Freddie Mac each had a $2.25 billion line of credit with the Treasury. Such lines of credit – tiny in the context of the $5 trillion in debt they owned or guaranteed before the housing crisis – were seen as an unstated signal to the investment community that Fannie Mae and Fred- die Mac were secure places where money could be safely stashed. In addition, with implied federal backing, Fannie Mae and Freddie Mac had lower borrowing costs, much to their advantage and the benefit of consumers. “We estimate that Freddie Mac and Fannie Mae generate inter- est-cost savings for American consumers ranging from at least $8.4 billion to $23.5 billion per year,” said Freddie Mac in 2008. “In contrast, we estimate that the value Freddie Mac and Fannie Mae indirectly receive from federal spon- sorship in the form of their funding advantage ranges from $2.3 billion

to $7.0 billion annually.” Implied government backing for the GSEs created a huge market- place advantage. It allowed them to borrow at a lower cost than sec- ondary-market competitors. Lower GSE costs, in turn, tamped down mortgage rates. However, would the government lend each GSE even more than $2.25 billion in the event of a financial emergency? Until 2008 the question of further government support was a gray area, a source of debate among investors. “After the financial crisis,” ex- plained USMI President Johnson, “there is bipartisan support against having an implicit government guar- anty as we have seen in the past. The ‘implied’ guaranty was one of the biggest flaws within the housing finance system pre-crisis — allow- ing the pre-crisis GSEs to, what has been referred to over the last several years — ‘privatize gains and socialize losses.’”

38 | think realty housing news report :: june / july 2019

Made with FlippingBook Online newsletter