Freddie Mac

James Lockhart and Ellen Seidman on Fannie, Freddie, and the Conservatorship

Mark Huelsman — Mon, 17 Nov 2008 14:54:00 -0500

James Lockhart, Director and Chairman of the Oversight Board at the Federal Housing Finance Agency (the entity overseeing Fannie Mae and Freddie Mac) joined Ellen Seidman to discuss the conservatorship of Fannie and Freddie. The interview followed an event, "Foreclosures: What are Fannie and Freddie Doing to Stem the Tide?" on November 13.

How to Ruin a Good Announcement

Ellen Seidman — Wed, 12 Nov 2008 16:51:00 -0500

The announcement yesterday of new procedures for streamlined modifications of primarily prime mortgage loans in trouble was a perfect example of a good (albeit overdue) program being drowned by a really inept rollout.

Briefly, Fannie Mae, Freddie Mac, their conservator the Federal Housing Finance Agency, the Hope Now Alliance and a group of large banks announced standard procedures to do quick modifications-involving primarily an appraisal and verification of income-of seriously delinquent loans in either Fannie or Freddie MBS, or in the portfolios of either the GSEs or the banks. There are clear limits on what is involved. The big one is these are largely prime loans, and loans for which the servicer has relatively undivided loyalties. They are not the privately-securitized sub-prime and Alt-A loans that have caused the bulk of the problem to date, especially in lower income communities. That's a big limitation, but the fact is that the prime foreclosure rate is increasing steadily. And as of June 2008, there were about 373,000 Fannie and Freddie owned or guaranteed loans (many of them prime) that were seriously delinquent, and the number was climbing fast. That's Fannie and Freddie alone, not counting loans held in bank portfolios.

A second limit is that the borrower must be 90 days delinquent for the procedure to come into play, thus not helping borrowers who know they're about to get into trouble and want to proactively solve their problem before their credit is shot. Finally, the program doesn't really deal with the situation in which there are second and further junior liens on the property. A 38% housing-debt-to-income ratio may work if that loan is the only housing debt; it will strain any budget where there are additional liens.

The rollout was marred (that's being kind) by the Treasury trying to sell this for far more than it is, intimating that it is a substitute for aggressive action on a broader range of loans, including sub-prime and Alt-A loans and loans not yet seriously delinquent, such as the guarantee program that FDIC Chairman Sheila Bair has been pressing the Treasury to implement. The fact that the Chairman Bair wasn't around for the announcement and the Treasury spokesmen literally ran out of the briefing room to avoid answering questions didn't exactly help the picture.

Nevertheless, there is substantial value in what was announced. First, it may well break a log-jam with respect to Fannie Mae MBS in particular. Lenders have been complaining for some time that Fannie has been reluctant to participate in modifications in any meaningful way. Second, the program applies to all loans in Fannie or Freddie MBS, no matter who owns the MBS. This is a critically important point that the announcement essentially buried. Third, any deferred principal will not earn any interest. While the borrower will still ultimately be on the hook for it, the lender will lose all benefit of that part of the loan being outstanding. In some ways, this isn't really very different than the Hope for Homeowners combination of a big guarantee fee and a requirement that any equity gain be shared between homeowner and the party funding the loan (in that case in effect the government). Finally, if both the GSEs and the banks keep and make public careful records of what happens with these loans, and the program is successful (with limited re-defaults), those who want to apply similar broad standards to securitized loans will have a good case that doing so is in the investors' interest as well as the borrowers' and the country's.

On a related note, all the programs so far have carefully concentrated on owner-occupied primary residences. What that is understandable as a moral matter, especially in the face of substantial evidence of investor fraud in the single family market, it ignores two critical facts. First, each additional foreclosure, no matter who the owner, furthers the downward spiral of house prices, affecting everyone nearby. This is especially a problem in communities where there are a large number of foreclosures. Second, where the investor has rented the property out (common, of course, for 2-4 unit homes), a foreclosure puts the tenants on the street, even if they have been faithfully paying their rent. To some extent this is a matter of changing local laws and lender practices, but if we thought somewhat more broadly about the role played by good owners of small-scale rental housing, which is usually unsubsidized and affordable, we might be able to avoid the trauma in the first place.

*Update*: On Thursday, November 13, as FHFA James Lockhart discussed these and other topics relating to the conservatorship. He was joined by Barry Zigas of the Consumer Federation of America and Gregory Baer of Bank of America. Listen to or view the event.

Asset Building Event: What are Fannie And Freddie Doing to Stem the Tide?

Mark Huelsman — Tue, 11 Nov 2008 21:21:00 -0500

Fannie Mae found itself on the front pages once again this week with the news that i t lost $29 billion in the third quarter of 2008 . Scarier still, Fannie's net worth, which was $44 billion at the end of 2007, now stands at a paltry $9.4 billion.

It has been over two months since Fannie and Freddie were seized by Federal regulators and put into conservatorship. Many of us are wondering, simply, what has happened since? Have they been more active in dealing with the continuing struggles in the housing market? Are regulators upbeat about the future of the mortgage giants?

On Thursday, November 13th from 3:30 pm to 5pm, the Asset Building program looks to find some answers to these questions. We are pleased to welcome Jim Lockhart, Director and Chairman of the Oversight Board, Federal Housing Finance Agency-- the entity that is overseeing Fannie and Freddie-- to discuss this pressing topic. Joining him will be Barry Zigas (Director of Housing Policy, Consumer Federation of America), Gregory Baer (Deputy General Counsel, Regulatory and Public Policy, Bank of America), Ellen Seidman (Director, Financial Services Policy, Asset Building Program), and Maya MacGuineas (President, Committee for a Responsible Federal Budget and Director, Fiscal Policy Program, New America Foundation).

We hope you join us for what certainly will be a lively and informative discussion. Click here to RSVP.

Regulating Fannie and Freddie

Sam Sherraden — Wed, 10 Sep 2008 13:56:00 -0400

What I said is that they were adequately capitalized. And they were adequately capitalized according to the law on June 30th.
-James Lockhart, Federal Housing Finance Agency Director (September 8, 2008)

This was not the case according to Morgan Stanley, which was pulled in by Treasury Secretary Hank Paulson to analyze the health of Fannie and Freddie in early August.

After the Fannie and Freddie bailout, many law makers will try to create independent oversight over these large Government Sponsored Enterprises (GSEs). But Morgan Stanley reported that a bailout would cost upwards of $50bn, while William Poole estimated it may be as high as $300bn. Furthermore, the bailout will not turn around falling house prices, which are more the result of a massive price correction and not of the price of mortgages.

Given that the tax payer will ultimately foot this bill--and the liklihood that home prices, which represent a significant portion of Americans' savings--will continue to fall, removing Fannie and Freddie from the fray of politics will be extremely difficult.

Snapshot asks, given the large financial drain of Fannie and Freddie, will the government be able to create a body with independent oversight?

Ashraf Laidi - GSE Bailout Good for Confidence Not for Fundamentals
BNP Paribas - Market Implications of Conservatorship - Initial Thoughts
James Lockhart - Nightly Business Report
Henry M. Paulson - Statement Sept 7, 2008
New York Times - New Agency Proposed to Oversee Freddie Mac and Fannie Mae

Protecting the Housing Mission at All Times

Ellen Seidman — Mon, 08 Sep 2008 22:51:00 -0400

Barry Zigas, who headed Fannie Mae's community lending operation until 2006, and has a long history in affordable housing, is one of the most astute observers of the GSEs, especially from the perspective of their mission. And he views the mission both from the broad perspective of making a high quality mortgage market (single- and multi-family) work for the vast bulk of Americans and the narrower perspective of supporting sustainable affordable homeownership lending and affordable rental housing.

Barry has written a superb analysis of the government's activities this weekend concerning Fannie and Freddie. It's important reading. He discusses both the positive aspects of the takeover and the issues that are too capable of falling below the radar, including: financing affordable housing--multi- as well as single-family; encouraging, rather than stifling, loan modifications to prevent foreclosures; handling REO to stabilize rather than further harm communities; and the companies' extensive charitable giving (in an environment in which other sources of philanthropy are also drying up).

I agree with it all except for the words "extremely well" in the third of his recommendations. The combination of Wall Street pressures for continually increasing quarterly earnings, an undiversified business, government backing enabling virtually unlimited growth and relatively light mission direction makes for a very tricky business model. The tensions have been there for years, and in general, Wall Street has won. When there were good opportunities to grow with solid loans, there was alignment. But where those opportunities faltered, as true in the late 80s in one way as in the early 2000s in another, the interests became unaligned and trouble ensued. It's an issue we need to face up to going forward. Without discarding 40 years of critically useful experience.

Fannie and Freddie Bailout

Sam Sherraden — Tue, 15 Jul 2008 17:27:00 -0400

Promises by the U.S. Treasury and Federal Reserve to support Fannie Mae and Freddie Mac have not reassured shareholders. By noon Tuesday, shares of Fannie Mae dropped 23.5% and Freddie Mac plunged 24.9%. Given the loss of investor confidence in these mortgage finance companies, it appears that the promised equity investment by the Treasury may be utilized. In addition, Paulson proposed increasing Fannie and Freddie's $2.25bn credit lines to an undetermined amount to ensure "flexibility" and "minimize taxpayer risk."

Snapshot asks, what is the limit of taxpayer responsibility to maintain Fannie and Freddie's share price and help maintain financial stability?

Wall Street Journal - Bernanke, Paulson Aim for Stability with Fannie, Freddie Proposal
U.S. Treasury - Testimony by Secretary Henry M. Paulson, Jr.
Ben Bernanke - Semiannual Monetary Policy Report to the Congress

A Bailout of Fannie Mae and Freddie Mac Would be Costly

Sam Sherraden — Tue, 15 Apr 2008 15:50:00 -0400

If the U.S. enters a deep recession, a bailout to Fannie Mae or Freddie Mac could threaten the United States' AAA credit rating according to a statement from Standard & Poor's. Government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac are large in size, have high common equity, and are highly exposed to a deteriorating housing market, leaving them vulnerable to a deep recession. If they go under and need a large cash infusion from the government, it could cost the country 10% more of GDP to service its debt.

Barron's - Is Fannie Mae the Next Government Bailout?
Wall Street Journal - Fannie, Freddie Could Hurt U.S. Credit
Bloomberg - U.S. Rating Threatened More by Agencies Than Bailouts, S&P Says