Fannie Mae: What Happened In Vegas Could Impact the Entire Country by Investors Unite
What Happened In Vegas Could Impact the Entire Country
There’s a fine line between making more credit available to homeowners with shaky credit and getting back into the subprime mortgage business. We’re a little concerned about which side of the line FHFA Director Mel Watt will fall down on.
Watt was in Las Vegas the other day speaking to the annual conference of the Mortgage Bankers Association. Our favorite report is from Mortgage Daily News:
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“He acknowledged that fears of being forced to repurchase large numbers of loans after they have been sold to one of the two government sponsored enterprises (GSEs) Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) has created unease among lenders almost from the start of the mortgage crisis.”
We’re sure the bankers found it reassuring that he “acknowledged” concerns. It doesn’t seem to be stopping him from inching toward a really bad idea. The headline on the Vox article said it all: “Obama’s Latest Plan to Boost the Economy? Bring Back Subprime Mortgages.” From their article:
“The significance of the speech is that the FHFA is going to be less of a tight-ass in a number of regards, essentially upping the level of subsidy that is provided to mortgage lenders. This will make it cheaper for some wannabe home buyers to buy homes, it will increase the value of some existing homeowners’ houses, and it will generate plenty of profit-seeking opportunities for realtors and banks.”
“… Watt also wants Fannie Mae and Freddie Mac to start buying riskier loans — loans with down payments as low as 3 percent, a move bolstered by similar action from other regulators.”
“… it’s an awfully odd way to give the economy a short-term boost. If the government wants to subsidize new home purchases, it could offer a $1,000 rebate check to anyone who buys a new home. Even better, we could offer a $1,000 check to everyone and let them buy whatever they want with it. The difference is that cutting checks would require a new spending authorization, while Watt’s actions are ‘free.’”
“But ‘free’ in this case simply means that the costs are hidden. If you let banks pass on the costs of improperly documented or excessively risky loans, that simply means the US government is assuming those costs. In any given year the odds of a giant house price crash are low, so no actual costs will be incurred. But every once in a while these things do blow up, and the bailout bill arrives.”
Another fundamental problem here is that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are not allowed to retain capital built through their profits, and therefore cannot absorb the increased risks this loosening of lending rules will create for the entities.
The legislative proposals in Congress (Corker-Warner-Johnson-Crapo) claim that restructuring Fannie Mae and Freddie Mac under their new rules will be the best solution for protecting the housing market and protecting taxpayers against another financial meltdown. Except that none of the proposals include the fundamental piece of following the rule of law and giving shareholders’ their due before revamping the entire system.
An important, yet overlooked, job in a political organization is the person who scouts out locations for major announcements. Surely that person was on vacation when location was decided for Watt to announce the federal government would be rolling the dice on home mortgages. We like how the Wall Street Journal said it:
“But unlike most of the players around a Mandalay Bay poker table, Mr. Watt is playing with other people’s money. He’s talking about mortgages that will be guaranteed by the same taxpayers who already had to stage a 2008 rescue of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) that eventually added up to $188 billion. Less than a year into the job and a mere six years since Fan and Fred’s meltdown, has he already forgotten that housing prices that rise can also fall?”
That’s an excellent question.
There’s a ton of coverage of Watt’s remarks, and we’ve saved you the legwork of having to track it all down yourself (see below). Happy reading …
New York Times: U.S. Regulators Approve Eased Mortgage Lending Rules
Politico: The Risk Retention Rule’s Winners and Losers
Politico: Regulators Unveil Risk Retention Rule