FEATURED ARTICLE: GSE REFORM: HOUSING FINANCE SAVIOR OR LOOMING DISASTER?
and Fannie Mae generate inter- est-cost savings for American con- sumers ranging from at least $8.4 billion to $23.5 billion per year,” said Freddie Mac in 2008. “In con- trast, we estimate that the value Freddie Mac and Fannie Mae indi- rectly 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 guaranty as we have seen in the past. The ‘implied’ guaranty was one of the biggest flaws within the housing finance system pre-crisis – allowing the pre-crisis GSEs to, what has been referred to over the last several years – ‘privatize gains and socialize losses.’” 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 environ- ment after 2000 which allowed lenders to offer a variety of “af- fordability” and “nontraditional” mortgage 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 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
lenders 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 insti- tutions 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 mort- gage 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 mort- gage loans, lenders 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.” 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 receiv- ing 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? RESERVES It’s a normal requirement for insurance and guarantee programs to have reserves, enough to assure claims can be paid in tough times. How much should be held in re- But the damage was done. According to a 2012 Treasury
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
For FY 2018, the FHA Mutual Mortgage Insurance Fund had a capital ratio of 2.76 percent.
0.4
35%
$2,000,000
21%
0.2
$1,500,000
In the third quarter, the FDIC’s Deposit Insurance Fund reserve ratio reached 1.36 percent.
-3%
0
-3%
-18%
-8%
-14%
$1,000,000
-27%
-0.2
In 2017 Uncle Sam canceled $16 billion in debt owed to the Treasury by the National Flood Insurance Program (NFIP). The program is set to expire on May 31st, but without the NFIP, mortgaged properties in every state will be without required flood insurance coverage. The result is that Congress is virtually certain to approve a program extension.
-26%
2%
$500,000
-0.4
-0.6
$0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
10 think realty housing news report
april 2019 11
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