Greenspan in 2004, “might benefit if lenders provided greater mortgage product alternatives to the tradi- tional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.” Greenspan felt it was safe for lend- ers to offer non-traditional mortgage products because he expected them to act in their own self-interest, to limit risk even as they sought to maximize profits. He was wrong. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told Congress in 2008. To get the market back on track, the Federal Reserve came out with new mortgage requirements in June 2008, a reflection of how lax mortgage lending had become. Lenders would now be “prohibited from coercing a
real estate appraiser to misstate a home's value.” Also, when making higher-priced mortgage loans, lend- ers were banned “from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value.” But the damage was done. According to a 2012 Treasury Department report, the housing meltdown resulted in $19.2 trillion in lost household wealth. ATTOM Data Solutions said there were “2,824,674 U.S. properties receiving a foreclosure filing — default notices, scheduled foreclosure auctions and bank repossessions — in 2009, a 21 percent increase in total properties from 2008 and a 120 percent increase in total properties from 2007.” That’s a lot of foreclosures. Did Fannie Mae and Freddie Mac have the resources to pay investors in the face of mammoth market disruptions?
insurance and guarantee programs to have reserves, enough to assure claims can be paid in tough times. How much should be held in reserve is a debatable question. Today the Fannie Mae and Freddie Mac reserves are limited to $3 bil- lion each, reserves designed to sup- port some $5.4 trillion in mortgage securities they own or guarantee. The GSE reserve limitations were created in 2012 under a “full income sweep of all future Fannie Mae and Freddie Mac earnings.” Every dime in GSE profits above the reserve re- quirement will go to the government. The sweep, said the Treasury, was designed to make sure “every dollar of earnings that Fannie Mae and Freddie Mac generate will be used to benefit taxpayers for their investment in those firms.” Will $6 billion be enough to sup- port Fannie Mae and Freddie Mac guarantees if markets turn down? If not, will the government step in? Or, is the sweep a de facto recognition
RESERVES It’s a normal requirement for
U.S. YEAR-END FORECLOSURE HISTORY
U.S. PROPERTIES WITH FORECLOSURE FILINGS
ANNUAL PERCENTAGE CHANGE
1
$3,500,000
79% 81%
0.8
$3,000,000
0.6
$2,500,000
0.4
35%
$2,000,000
21%
0.2
$1,500,000
-3%
0
-3%
-18%
-8%
-14%
$1,000,000
-27%
-0.2
-26%
2%
$500,000
-0.4
-0.6
$0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
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