A Plan To Ease The GSE Burden And Prompt The Public Sector To Act

Whoopsie, Fannie and Freddie’s fees are going up, up, up and their lending limits are going DOWN.
FNM stock is down 24% in the last few hours.
Interest rates are shooting up.
Get ready for the next leg DOWN. The support is about to be RIPPED out from underneath the market.
http://www.marketwatch.com/story/treasury-to-call-for-fannie-freddie-to-hike-fees-2011-02-09

I wouldn’t read anything from FNM’s stock price, tipster. This is a penny stock. A company that swims through 100s of Billions of dollars in mortgages, valued at less than $1B on the stock market. It is highly speculative.

Exactly. Idiots will bid up the price in that sweet spot just before Sept 30 thinking they won’t be able to qualify for the same home the next day, until they go to sell and realize they could have waited and just paid less.
But it doesn’t matter. The support is being removed, one brick at a time. We had zero down, neg am loans and we replaced them with near zero down fully amortizing loans, and prices fell. The interest rates on FHA loans got too high, so the zero down part got stripped away as people moved to 10% and 20% down loans and prices fell more, though interest rates were still low, which propped up prices.
Now interest rates are going up while loan limits are coming down. Anyone buying while the support is being removed needs to have their head examined. Anyone still in should get out now while they can.

Prior to the last time the 729 back to 625 change was supposed to happen the same socketsite overposters said the same sort of things.

This is good news for Freddie and Fannie. I would strongly prefer they go back to $417K as the normal limit, but I will take $625.5K (50% higher) as better than $729K. The higher fees are also a good idea, and numerous economic commentators have been suggesting this in the last few weeks.
Of course, private lenders will still have the implicit guarantee since they will still get bailouts when they screw up.

@lol
Believe cost inflation only helps housing if it leads to wage inflation, no?

What we have learned from these past 10 years is always be on the lookout for the unexpected. Inflation will come at one point.
Simply look at a few facts calling for inflation:
– Increased demand from newcomers on the global consumer market are competing for resources and provoking the increase of such resources
– Inflation in these countries is higher than in the US, and their currencies are appreciating compared to ours. As we have outsourced most of our manufacturing, this means imported goods are going to become more expensive to importers and retailers. How long until they start raising their prices like Sara Lee just did for food?
– QEs are slowly making their way into the US economy. For instance the Fed has been monetizing bad debt. Banks that in return are distributing lavish bonuses like October 2008 had never happened.
– The US is becoming more and more a nation of 2 nations. The have-nots are competing for limited jobs with low pay. The haves are competing for resources (space, goods, food) and jobs with good pay.
Sure housing is much cheaper. But today many houses are cheaper than what it would cost to rebuild them. This means we’re very close to some kind of bottom. I think 2012 will be the actual bottom with many opportunities along the way in the next few years. Once housing bottoms out, salaries will be overdue for a catch-up with cost-of-living inflation. That, or we will actually become poorer which is only logical with the current globalization.

“The have-nots are competing for limited jobs with low pay. The haves are competing for resources (space, goods, food) and jobs with good pay.”
But the number of houses was built for the haves AND the have nots. The have nots could buy as many houses as they want with ZERO down and NO JOB. So we built more houses for them to buy. Now they are out of the market. But the houses we built for them are STILL THERE.
Haves competing for houses? Don’t make me laugh.
As the have nots start to lose their houses (a process just now starting – you can see it right here in SS every week), there won’t be enough haves to take up the slack.
Sorry. We built too many houses. We built too many: enough for the haves and the zero down have nots. Space is not scarce, it is just being occupied temporarily by have nots who won’t be there 5 years from now.
Then, look out.

tipster,
The 2 categories are pretty distinct but can overlap. The upper crust can go into the lower crust territory for investment purposes but the lower crust will never compete there.
I have a few of my friends already investing in the fly-overs, snatching a few good deals (at least based on buy-vs-rent ratios).
And yes, people with good jobs are still competing for limited supply in some choice cities. Most of my friends have a good pay and plenty of assets. I know quite a few lucky guys in the right companies and they’re all doing fine. Many are renting and are very eager to finally buy at 20-to-30% under the 2008 craze.

And so if buying power gets sucked out of the market in some price range is it a fait accompli that contiguous ranges also suffer even if not as much? I’m in a market in (Mill Valley) where (I’m told) lots of people have dry powder hoping to buy in the $1-$1.2MM range.

@Tripp. I’m in Mill Valley, with dry powder. Prices have been dropping for a good six months now, with no end in sight. There are already lots of very nice houses in the 1-1.2MM range – these were houses that were going for 1.4-2.0MM a few years ago. Funnily enough, they still seem too expensive.
I’m waiting for the houses in the 1-1.2MM range to go to 750-900k, which is what they were priced at in 2000, and where they’d be without the Fanny 729k loans and the artificially low interest rates. It’s a funny market – a lot of houses are down to 2003-2004 prices, and the nice ones are selling. But there are still a ton at 2005-2006 prices, and they sit there for months on end. Sales are dead. Interest rates are rising. Unemployment still sucks. Prices are going down.

I am not too worried for SF. It’s still a healthy city in a globalized economy. We’ve been pretty much at the best place at the best time for 15 years now.
About interest rates, one thing for sure is that people are now looking more on how much they owe as opposed to how much what they owe costs them per month.
To simplify, what good is it to pay 2000/month Neg Arm at 5% on 800K if you make only 100K/Year? You can afford your mortgage payment but you’ll probably never manage to pay it off. If prices stay low, your only way out (appreciation) is closed for the foreseeable future.
What you borrow is a liability on your future. Any dollar saved on a purchase price is a dollar that your kids will eventually get, with interest.

“To simplify, what good is it to pay 2000/month Neg Arm at 5% on 800K if you make only 100K/Year? You can afford your mortgage payment but you’ll probably never manage to pay it off. If prices stay low, your only way out (appreciation) is closed for the foreseeable future.
What you borrow is a liability on your future. Any dollar saved on a purchase price is a dollar that your kids will eventually get, with interest.”
lol makes a good point here. This is why purchase price matters to a buyer and why monthly payment shouldn’t matter to a buyer. You need to focus on getting a good deal because you’re going to be paying interest on some of those dollars for 30 years potentially.
It’s stupid to look short-term and say, “oh, I can pay $X a month now. I can afford that.” Instead, you should say, wow, if I saved $100/mo by getting a better price in the first place, that $100/mo becomes almost $23K in 15 years. Maybe I should negotiate a better price instead of focusing on mortgage interest rates.

The Treasury plan is out. Note that this is just a proposal, not the law, although certain actions such as raising fee’s could be taken unilaterally by the administration.
Summary: http://www.treasury.gov/press-center/press-releases/Pages/tg1059.aspx
Full: http://www.treasury.gov/initiatives/Documents/Reforming%20America%27s%20Housing%20Finance%20Market.pdf
From the summary:
“The report recommends using a combination of policy levers to wind down Fannie Mae and Freddie Mac, shrink the government’s footprint in housing finance, and help bring private capital back to the mortgage market. ”
Expected, but good nonetheless.
“Administration recommends that Congress allow the temporary increase in those firms’ conforming loan limits (the maximum size of a loan those firms can guarantee) to reset as scheduled on October 1, 2011 to the levels set in the Housing and Economic Recovery Act (HERA). We will work with Congress on additional changes to conforming limits going forward . ”
Also expected, but wording indicates the limit might be pulled below $625k sometime in the future.
” Phasing in 10 Percent Down Payment Requirement: To help further protect taxpayers, we recommend requiring larger down payments from borrowers. Going forward, we support gradually increasing required down payments so that any mortgage that Fannie Mae and Freddie Mac guarantee eventually has at least a 10 percent down payment.”
It’s not 20%, but at least it’s not 3.5%!
“The Administration recommends that Congress allow the present increase in FHA conforming loan limits to expire as scheduled on October 1, 2011, after which it will explore further reductions. The Administration will also put in place a 25 basis point increase in the price of FHA’s annual mortgage insurance premium, as detailed in the President’s 2012 Budget. ”
No FHA loophole.

Now that the banks have been “saved”, the administration is moving on to help the pension retirement trusts. They need about 10% interest to meet their obligations.
It’s tough to do in a high unemployment environment. If inflation takes hold, then you haven’t helped the retirees by giving them more money that is worth less. So the artificial constraints on mortgage rates will now be relaxed to allow pension funds to get higher rates of interest, without raising borrowing costs generally.
In essence, it’s a transfer of wealth from property owners to union retirees. They had to get the money from somewhere: this is telling you it’s coming from property owners.
Anyone dumb enough to hold real estate over the next two years will learn where you stand in Obama’s pecking order. You really think he’s going to choose rich property owners over union retirees?
Share the wealth, my friends: he told you he was going to do this and it’s starting now.

There is no real estate market without a mortgage market, and there is no mortgage market in this country. Hasn’t been one for a while – just the government borrowing money from China to temporarily inflate real estate prices via loans they know will go bad. This is one of the reasons why I don’t plug in or post much anymore – not very interesting discussing how “resilient” the local “market” is when the game is basically choreographed.
But as many of us have said before, the current nationalized system is unsustainable. The taxpayer bill for Fannie and Freddie dwarfs all other bailouts, and keeps growing. Both the republicrats and the democans agree that it needs to be unwound, just a question of when and how.
I only mention this because a lot of folks now seem convinced that price declines are behind us, and the current condition is a steady state. Obviously not the case. We may not see another 30% price decline, but there will be continued downward pressure as the subsidies are slowly removed.
To fluj’s point, I’m sure the private sector will indeed step back in, but what will that look like? 6% loans with 20% down? What does that do to prices vs. 4.5% loans with 3.5% down?

Even 6% is on the low side, historically, isn’t it? 6-9% is not an uncommon range if we went back towards private markets where people price actual risk.
I’m not yet sure how I feel about the 2nd lien issue that tc_sf flagged. It seems like a big overreaction to the current crisis at first glance and seems to give 1st mortgagees too much power.

The only reason the spreads between agency loans and non agency loans are so low is that 90% of the country gets an agency loan. Not that much competition for the non agency money floating around.
When the much greater number of lower priced homes have to go out and compete for money on the non-agency market, the spreads go up because the demand for the same money goes way up. So not only will interest rates for everyone go up, interest rates for a larger proportion of SF properties go up even more.
And for the same reason that when stock option money comes into the area, prices go up because the wealth of the area goes up, now, much more of that wealth gets transferred out of the area via higher mortgage payments and with less wealth, prices go down.
So you basically have a catastrophe heading here.

Whoops, the less than sign garbled the html.
Again:
The hit that under-$1mm properties take from higher rates and tighter lending standards filters up to more expensive places. It is all a continuum. If a buyer has a budget of $1.5mm and there is a nice 2700sf 4/2 available for that but a nearly-as-nice 2350 sf 3/2 for $700k (formerly 900k), the buyer buys the latter, unless the 4/2 drops its price to, say, $1.2mm. There is no market of one.
$10mm+ homes may be only very indirectly affected by such things.

“But flatly saying that an already twice forestalled return to a former lending limit is a given?”
I’d definatly agree that when government is involved it’s not over till it’s over. But with the Republican takeover, Obama administration support and Pelosi (i.e. high cost CA where many of the super-conforming loans went) losing the speakership, the odds of the high limit being extended have taken a serious hit in my book.
Had she lost the minority leadership, I’d almost be willing to call it, but now we’ll have to wait and see.

All things being equal to three months ago? sure. Things can change greatly if the economy in general turns for the better for even two quarters in a row. There are a lot of stories out there about banks returning, mostly timidly, to mortgage backed securities. It remains to be seen but flatly saying “no chance” ? why?

Freddie Mac and Fannie Mae have always been big players in the loan market. Back in 1996 the CBO stated that 71% of fixed rate conforming mortgages were owned or securitized by them.
http://www.cbo.gov/doc.cfm?index=2841&type=0&sequence=7
So it has been this way for a long time. The private sector insured most home mortgages only during the bubble years and in fact were the primary driver for the bubble. Fannie and Freddie never provided funding for things like neg-am or zero down loans.
It is good that the props put in during the collapse are slowly being withdrawn as the economy recovers, this will not lead to any sudden collapse in home prices but should continue to provide headwinds to any possible recovery in the housing market.

@Brahma — “What gets me is that no one want to make the obvious observation that this situation is a pretty damning indictment of American financial markets.”
Since in hindsight the lending standards of recent years were far too lax and the price charged for risk far too cheap, why is it any sort of indictment that the private market has no interest in revisiting the mistakes of the past decade?
“Markets favor a world in which government takes on most, if not all, mortgage credit risk while investors deal only with things like interest-rate risk. While there is much ire directed at Fannie and Freddie, “many groups benefited from the existing system and want to see a version of it remain,””
Imagine if a large number of houses burned down due to the shoddy work of a few electrical contractors. Perhaps the construction of these homes provided a great deal of work to some architects, plumbers and carpenters. Maybe they did some good work and benefited greatly from it. Doesn’t it seem reasonable to direct your ire not at them, but at the shoddy electricians?
And if one of the shoddy electrical contractors was a quasi-governmental agency commanding between 40% and 70% of the market, someone owning a business who made fine cabinets may perhaps consider this more a damming indictment of government intervention.
Specifically regarding the 30-year FRM’s, lenders are reluctant to do this because this has a large embedded interest rate risk. And since the borrower has the option to pre-pay at any time, they will do so predominantly when it is in their interest, which corresponds to the lenders detriment.
@NVJ — From the Treasury report referenced above:
“Initially, Fannie Mae and Freddie Mac were largely on the sidelines while private markets generated increasingly risky mortgages. Between 2001 and 2005, private-label securitizations of Alt-A and subprime mortgages grew fivefold, yet Fannie Mae and Freddie Mac continued to primarily guarantee fully documented, high-quality mortgages.
But as their combined market share declined – from nearly 70 percent of new originations in 2003 to 40 percent in 2006 – Fannie Mae and Freddie Mac pursued riskier business to raise their market share and increase profits. Not only did they expand their guarantees to new and riskier products, but they also increased their holdings of some of these riskier mortgages on their own balance sheets
Fannie Mae and Freddie Mac strayed farthest from their core business in 2006 and 2007 – the very moment the housing market was extending credit to the riskiest borrowers and home prices were peaking. .”
Far from being voices of reason and prudence, this shows Frannie losing some market share for a few year to exotic products then going on to swim right into the deep end of the risk pool.
Regarding the fate of housing prices were government intervention to be removed, my belief is that this would cause a very significant drop in house prices. But the government has a strong incentive in this not happening so I believe they will expend considerable effort to mitigate any decline, which makes the actual outcome hard to predict.
The political ramifications of house price declines notwithstanding, the Frannie situation causes the government to have a large financial interest in mitigating housing price declines.
From today’s WSJ, “In November, the companies’ chief regulator, the Federal Housing Finance Agency, estimated that propping up Fannie and Freddie would cost taxpayers $154 billion under the most likely scenario for home prices. But the housing agency estimated that the bill could end up as high as $259 billion if the economy slides back into recession and home prices sink substantially.”
http://online.wsj.com/article/SB10001424052748703584804576144160781314264.html
The Obama administration’s rosy case is that all is well with Frannie by 2013 and from then till 2021 they spit out cash which reduces the bill to $73B. The uber bear case is a hole of $685B.
Not that I’m glad that the government got itself into this situation, but if it’s on the hook for up to $685B then spending a few $100B elsewhere to reduce its Frannie loss to $100-200B seems like a reasonable thing to do. This is part of the reason that I don’t consider all of the bank bail-outs money as a gift to the banks since the net effect is to benefit the government.