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Wednesday, March 3, 2010

Your Tax Dollars At Work

Normal as these things go, the announcement came late Friday afternoon as Washington was empty except for the cleaning crews and crime reporters. Fannie Mae issued a press release announcing it lost $72 billion in 2009. Billion.

Guaranteed by the United States Treasury. Guaranteed.

By comparison the mortgage giant's little brother, Freddie Mac, seems like a slacker in losing only $21 billion in 2009. Also guaranteed.

Fannie and Freddie operated until 2008 as "Government Sponsored Entities," or GSE's. While publicly traded companies with stocks on the NYSE and upper management pulling down the requisite million dollar plus bonuses. But they were also under the supervision of a government regulator to ensure they were following their charters and enabling American families homeownership and investors mortgage backed securities in a safe and fair series of markets.

This relationship changed in 2008 when the government took over both Fannie Mae and Freddie Mac. This was done to prevent them from collapsing and completely wiping out over half of the mortgage financing in America. Since the takeover the Federal Reserve and U.S. Treasury have made moves to try to ensure the flow of mortgage funds to allow Americans to pursue homeownership and refinance or modify their existing mortgages to lower monthly mortgage obligations and perhaps stave off foreclosure.

Now it starts to get a bit expensive for you. Yes, you. You pay taxes? While the media and debates have been clearly focused on the health care debates and how many Trillions of dollars may be shoved, pushed, crammed through Congress to allow President Obama to smile and say, "I did it," while this has been going on, in other sectors of the government billions are being spent with only a handful of Wall Street Journal readers noticing. So far over one Trillion dollars has been spent by the government on Fannie Mae, Freddie Mac and the mortgage markets.

At the time of the GSE takeover the Treasury pledged to back limited losses to ensure Fannie and Freddie could operate with liquidity needed to buy and sell mortgages. In early 2009 the Federal Reserve announced a plan to purchase $1.2 Trillion in mortgage backed securities to ensure liquidity in the mortgage markets and facilitate low mortgage rates to assist current homeowners with refinancing and prospective homeowners with lower payments. The Fed's mortgage purchase plan will end March 31st and on its exit will leave a gaping hole in the mortgage securities market. Or will it?

Now that it will own $1.2 Trillion of mortgages the Fed will need to start to unload those assets. After all wasn't it an overburden of mortgages that unbalanced the balance sheets of brokerage houses and banks? Of the mortgages funded in the past year, almost all of them have been purchased in the form of mortgage backed securities by the Federal Reserve. Not a very diversified portfolio. As the Fed looks to dump the mortgage holdings it will be competing with the new mortgages hitting the market as well as the U.S. Treasury that is issuing another Trillion in U.S. debt in the form of Treasury bills.

Not to worry however because we still have Fannie Mae and Freddie Mac and you are making sure they will be able to operate with business as usual, which means lose money. Remember the movie "Arthur" where Dudley Moore played the trust fund multi-millionaire who walked around drunk all the time? That is about where Fannie and Freddie are today after Christmas Eve.

As businesses closed early on Christmas Eve and Americans scrambled to find that last minute gift for Aunt Caroline or horseradish for the Prime Rib, any news on the radio and television was focused on the Senate and the bare passage of Majority Leader Harry Reid's health care bill. This culmination of months of debate, bribes and arm twisting was the perfect cover for the Treasury Department.

On December 24, 2009 the U.S. Treasury announced that it was covering all of Fannie Mae and Freddie Mac's losses for the next three years--no limit. Lose as much as you want and the United States Treasury (taxpayer) will pick up the losses. Now don't get too excited because after the three years then the Treasury will become very strict and limit loss coverage to $400 billion.

Part of the reason for the loss guarantees are the programs that have been brought forth by the Obama Administration to "help" homeowners in mortgage trouble. The Administration has enacted a mortgage modification program that has gone nowhere as it is ill conceived. Trying to force lenders into cramming down principle balances and interest rates on mortgages, the Administration is essentially forcing billions of dollars of losses on the banks. With the loss guarantees banks have been able to sell billions of dollars of mortgages back to Fannie Mae and Freddie Mac and let them take the losses that federal programs require.

Banks do not have to modify legal contracts. The government wants them to. Borrowers call their lender and say, "what about the Obama modification plan?" Lenders now say, "need to check with the mortgage owner." And it sits for months as the communication goes from borrower to lender to investor. With the loss guarantees the hope is that more mortgages come under direct control of Fannie and Freddie, especially delinquent mortgages, so homeowners can work directly with the investor to modify their mortgages.

With over $3 Trillion in mortgages on Fannie's balance sheet there is an tremendous opportunity for greater losses as unemployment continues to grow and homeowners see the opportunity to lower their mortgage balances and payments by missing a few payments and then negotiating a loan modification. More and more Americans are making their credit card payments and skipping mortgage payments--you can use a credit card to buy your kid a pair of shoes or some hamburger meat but you can't use negative equity.

Already into the Treasury for almost $100 billion the GSEs are on the looking to substantial increase that number in 2010. Between absorbing new mortgages on the market from the exit of the Fed and their purchase program, absorbing delinquent mortgages from lenders, loan losses through modifications and on top of that foreclosures, the losses will mount quickly as the Administration uses taxpayer funds to support the GSEs.

What is happening is the Administration's policy is to try to guarantee as many American homeowners as possible maintain their homes, and if possible see their mortgage payments go down. Regardless of whether their mortgages in default or that are above their homes' values are because of cash-out refinances or where well above common sense qualifying standards, Obama wants you to help these people out and subsidize their mortgages.

Between the mortgage assets held by the Fed, the losses that will rack up through the GSEs and the philosophy of the Administration to subsidize as many mortgages as possible at a loss to the lender (U.S. taxpayer) I feel the final tab to the U.S. taxpayer will surpass two Trillion.

By the way, Treasury Secretary Timothy Geithner has announced that any reform of Fannie and Freddie will not be considered until sometime next year. I can save the Treasury Secretary some time. Put Fannie and Freddie on the auction block and sell to the highest bidder, let the open market take care of them.


1 comment:

Bob Schilling said... seem really mad at Fannie Mae. But then you've been a critic for a while. I'm not close to thinking that Fannie and Freddie were blameless in all this, but I think you're giving them more than their share.

Fannie and Freddie are part of an industry that can charitably be described as in disarray. Looking back, we can see a good many institutions that acted irresponsibly, and a number of people who seem to have placed greed before good business practice. I'm not so sure it was that clear back then, but hindsight is almost always so much better than foresight.

I think the question we should address is what to do now, and I think there are some things the feds can do to help.

They could enact a blanket exemption for loan forgiveness, to encourage borrowers to sell short.

They could provide a refundable tax credit for reasonable relocation expenses.

They could work with rating agencies to ease the penalties on people who default but otherwise pay their debts.

Fannie and/or Freddie might consider offering mortgage workout packages that include shared appreciation, giving both borrowers and lenders an incentive to negotiate.

Banks might consider widening sale/leaseback arrangements that allow borrowers to transfer ownership to their lenders and simultaneously lease the property. This would be of particular interest to homeowners who are "under water," and it would provide at least some income to lenders who aren't getting any now.

The point of all of this is to make it easy to buy and sell property, and to assist in the resolution of defaulted loans. We can't "un-default" them, and it doesn't look like putting off the inevitable reckoning is going to help much.

Or maybe we can just keep yelling at Fannie Mae.....