Bright Future Unfolding For Fannie & Freddie
While The House, Senate And President Debate The Future Of Fannie And Freddie, In Truth Their Future Is Already Unfolding Right Under Our Noses.
Prior to Fannie and FHA Americans needed as much as 50% down payment to own a home and even then loans matured in a short few years. Roosevelt created Fannie so average Americans could access Homeownership. From that perspective you can easily argue that the plan worked. Over the years Fannie and then Freddie fell into a pattern of "mission creep" as administrations (for example Clinton in 1995 and Bush in 2002), legislators and senior management from within leveraged the organizations for public and personal agendas alike. At the end of the day Fannie and Freddie, though not without issues (as could arguably be the case with any organization that large and political and around for such a long time) got a bad rap. There are a gazillion other pieces to the mess that was ultimately our real estate market; borrowers willing to fudge, originators encouraging them to do so, underwriters looking the other way and rating agencies, pooling, servicing and securitization and foreclosure firm players who, at best, failed to keep up with realities of the changing housing finance world (or many of whom more likely knew exactly what was going on but found the money irresistible). To hear it from some folks, the entire melt down was caused by Fannie and Freddie. But the truth is that Fannie and Freddie were but one piece of this puzzle. Though they were bailed out at the cost of almost $190 billion, the majority of that has been earned back and both are generating profit (in fact Fannie was the third most profitable financial enterprise last year). But more importantly they served as the most important backstop during the recent melt down, mitigating millions of loans and creating loss mitigation standards for banks and servicers to follow suit.
For more info on what banking, Wall Street and our government did to create the United States housing bubble in 2005-2006, read my book Foreclosure Nation: Mortgaging the American Dream
The topic of reforming Fannie and Freddie has been kicked around inside Washington for the decades. For the most part there is agreement on Fannie and Freddie’s fundamental structural flaws; Conflicts between the government favors and public purpose and the private profit nature, obviousness that government guarantees should be explicit or not at all and, if the former, then paid for. And lessons learned from the crises, including that the securitization, pooling and servicing processes lacks transparency, need to be standardized, and are fraught with conflicts. The disagreements, on the other hand, center on how, when and at what pace to implement reform and what role government should ultimately play in housing. Central to this discussion is enticing the private sector in.
There are currently three buckets of proposals;
- In the Senate, the Corker-Warner Housing Finance Reform and Tax Payer Protection Act which proposes (among other things) a five year wind down, creation of a Federal Mortgage Insurance Corporation and a structure in which investors absorb the first 10% of losses
- In the House, the House PATH Act which also proposes (among even more other things) a five year wind down but limits governments eventual role creating a National Mortgage Market Utility
- From the Obama Administration, first a white paper issued in 2011 proposing 3 options and more recently ( as in last week) clarifications of the President’s position which also includes a wind down, enticing the private sector in, and concepts similar to the Senate proposal. The President also stressed rental assistance.
The irony is that while Congress and the President debate the details - for which there is no magic formula anyway - in real life reform is already happening;
- The FHFA (conservator for Fannie and Freddie) began in Feb 2012 with a strategic plan setting out four main goals. FHFA issued a white paper in Oct 2012 outlining a new securitization platform and model agreements. Earlier this year FHFA created a new entity and retained vendors to actually make it happen. This past March FHFA announced that it is consolidating back office functions and Fannie and Freddie (and I can tell you from my personal firsthand experience and relations at Fannie and Freddie that consolidation is happening as we speak as are cultural changes leading the organizations to feel more like a private for-profit company, by definition, has to). In its fifth annual report to Congress a few weeks ago FHFA again restated its goals to standardize, stabilize, build investor confidence, vis a vis platforms that allow risk to be accurately analyzed, priced, monitored and traded. The bottom line? FHFA is creating the new secondary mortgage market platform (in a flexible manner that can be adapted for private, government or utility models) and scaling down Fannie and Freddie, with or with Congress and the President!
- At the same time the market itself is forcing real world reform in housing finance. A few weeks ago FHA began requiring mortgage insurance for the full loan life for low down payment borrowers (prior to that MIP was only required until the loan reached 78% LTV). FHA also raised fees. This will obviously cause many borrowers to seek loans elsewhere. Fannie and Freddie have also raised their own guarantee fees. And closing costs in general are up 6% from last year. Applications for new government purchase loans are down to 29% (historical average is 38%), again with or without Congress and the President!
At the end of the day, for the vast majority of their existence they have done far more good than harm. The fact is the real world and mortgage securitization happened faster than policy, technology and similar elements could coordinate and keep up with it. FHFA is playing catch up now and, when done, Fannie and Freddie will be enterprises Americans can count on to help fulfill their dreams of homeownership and know their taxpayer dollars are not at risk, with or without Congress or the President.