For generations, affordable homeownership has been a pillar of the American dream and the primary driver of wealth creation and social mobility. While Congress has not yet come to a consensus on how to proceed with housing reform, studies have shown the host of positive externalities that stem from homeownership — ranging from better health and education to safer streets and more vibrant communities.
The affordable housing goals of Fannie Mae and Freddie Mac were established with this in mind — and the mandate has played a significant role in boosting homeownership, particularly among minorities and low-income families. But six years after the crisis, Fannie and Freddie’s future remain in limbo, and the debate over the direction of the mortgage giants has cast uncertainty around the future of affordable housing. The conservatorship of Fannie and Freddie was never meant to be permanent, as my former colleague Rep. Maxine Waters has pointed out. But that’s what it has become. Unwinding the conservatorship and restoring Fannie and Freddie to their historical roles, with a strong regulator, deserves serious conversation, especially in light of the housing market’s growing inequities.
The White House has the authority to end conservatorship on its own, without waiting on Congress. And the statistics on minority homeownership create a compelling reason for it to do so. Limited access to credit among minorities remains a serious problem. Even as communities of color are growing faster than their white counterparts, they still make up a shockingly low percentage of the mortgage market. Of the 1.3 million conventional loans made in 2012, Latinos received just 69,217 loans, and African-Americans received only 29,405. This alarming disparity is unacceptable.
The share of the market made up by first-time homebuyers is similarly distressed, currently hovering at its lowest level since 1987. The decline in new homeowners — and the tight credit conditions precipitating it — impact not only those in search of their first home, but the millions of retiring Americans whose ability to sell their homes is reliant on a consistent flow of new buyers.
The need for affordable housing is likely to grow in importance over the coming years. The U.S. Census Bureau and the Center for American Progress have shown that future borrowers will be less economically secure — this includes 62 million millennials in addition to the millions of families currently struggling with income stagnation and job insecurity. Low-wealth borrowers will also make up a larger share of the market in future years, placing increased significance on the debate over down payment requirements, as well as the need to find affordable solutions.
However, despite an overwhelming bipartisan consensus that our housing finance system is in need of repair, the current proposals provide little reason for optimism among Americans struggling to attain homeownership, as most of them scale back affordability provisions.
The bipartisan Senate legislation advanced this summer by Sen. Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, abandons the affordable mandate in its entirety, moving to a flexible fee structure designed to entice firms to reach out to the underserved — a tepid and untested substitute to the original mandate. Furthermore, experts believe the bill will drive up borrowing costs, potentially shutting more individuals out of the market and exacerbating the already-troublesome wealth gap.
Sweeney’s Court of Claims Redacted Filings
As expected, Fairholme’s discovery is producing documents that are now being used against the government in a court of law.
On November 17, 2014, Plaintiffs Fairholme Funds, Inc., et al. filed their opposition to Defendant’s recent motion to stay all proceedings.1 Because Plaintiffs’ Stay Opposition referenced,attached, and briefly discussed four documents, produced in discovery by Defendant, Fannie Mae, and Freddie Mac, that had been designated by those entities as Protected Information
Specifically, check the bottom of page 16 and you’ll see that discovery has already produced documents showing that the government indeed was cooking the books to justify the sweep.
For example, analyses that were prepared in July 2012 on the basis of the Treasury “scenarios” projected, inexplicably and suspiciously, much lower net income for Fannie in subsequent years-approximately a 50% reduction for most years-than had internal Treasury analyses that had been prepared only a month earlier, in June 2012. Compare T3847 (June analysis) (attached as Ex. C) with T3889 (July 2012 Treasury analysis) (attached as Ex. B). Again, documents produced thus far by the Government do not purport to explain or justify all of the differences between the scenarios. The production of such critically important documents will cause little if any burden to the Government.”
“The Government’s failure thus far to produce many of the financial projection documents discussed above is especially curious in light of the fact that many documents produced in third party discovery (by Fannie, Freddie, and their auditors)
Note that this filing is in response to the government’s motion to stay all proceedings. In my opinion, it’s been too late for the government to get away with staying the proceedings with the discovery well underway. My disclosure here is that I have firsthand experience modeling data flows across hundreds of electronic discoveries. The government’s battleship is sunk, not to mention that Sweeney has herself proclaimed that the government’s defense is “schizophrenic” and that the Plaintiff will have their day in court.
Iowa court case gets rolling
After watching the courtroom videos in the case of Continental Western vs. FHFA that you can watch here, I think that the government is making a better case, even though the law is on the Plaintiff’s side according to someone who wrote the law. See what they say for yourself.
“Treasury cannot simply strip the companies of cash in perpetuity”
Michael H. Krimminger is a partner at Cleary Gottlieb and a former general counsel to the FDIC. He says that “the continuation of the sweeps through the conservatorships is a violation of every principle established in bankruptcy and in the more than 80 years of FDIC bank resolutions. And it has no support in HERA.” He goes on.
The perpetual conservatorships and Treasury sweeps are a violation of every principle of insolvency law. I do not make this statement lightly. After more than twenty years at the Federal Deposit Insurance Corp., and frequent participation in domestic and international efforts to improve insolvency laws, I provided technical advice to Congress on HERA.
If you feel like the conservatorship is less advantageous for equity owners than receivership or liquidation, well, so far it looks like that’s the case
Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) are two government sponsored entities, not government owned entities unless the Third Amendment net worth sweep is used to set a precedent. This precedent, if set, undermines faith in one’s ability to own any American business. Michael H. Krimminger puts it in more specific language.
The continued diversion of Freddie and Fannie’s profits to Treasury misuses HERA as well as ignores the international standards underpinning all insolvency frameworks. This is important because one foundation of corporate finance, and our system of commercial laws, is that insolvency law assures creditors that the remaining value of the company will be paid out under defined priorities. If this standard is ignored, as it has been through the Treasury sweeps, it will undoubtedly affect future investment in housing finance and the financing costs for businesses.
Not to worry! Mr. Krimminger says that HERA imposes duties on the FHFA as conservator. In this role, the FHFA is instructed to return Freddie and Fannie to “a sound and solvent condition” and to “preserve and conserve the assets and property” of the companies.
It’s a long bumpy road ahead, but worth it nonetheless
If you follow headlines, the two enterprises borrowed $187.5B and either has paid back nothing or $225B. According to the Third Amendment, they have paid back nothing because, unlike a liquidation or wind up situation, in this conservatorship the government is not limited to merely getting paid back what was loaned but gets all future profits to infinity and beyond. I’m surprised that senior creditors around America haven’t figured this out and pushed for conservatorship instead of Chapter 11. It’s the wolf in sheep’s clothing.
In the Iowa court room, from what I’ve seen, Charles Cooper for the plaintiffs centers his dialog on points of weakness like he is defending against a government attack, namely that the conservatorship is supposed to conserve and preserve instead in planned response to the government’s focus on the words “wind up.” This is, in my opinion, not a critical perspective. He also spends too much time talking about the history of the GSE’s, also irrelevant to the legal decision from my perspective. Below is the list of things that are relevant to the case that matter if you ask me. I will be referencing HERA, the body of law that governs FHFA.
1. The title conservator is not a misnomer.
12 U.S. Code § 4617
(B) (D) Powers as conservator
The Agency may, as conservator, take such action as may be-
(I) necessary to put the regulated entity in a sound and solvent condition; and
(ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.
2. Whether or not the FHFA can enter into legal contracts, wind up, or end conservatorship is not in question, it can, but Third Amendment is an agreement outside of the powers of conservator as defined in HERA, directly above.
3. Conservatorships run this way are better for creditors than receiverships as infinite cash sweeps that don’t impact liquidation preference are preferable to merely getting paid back what you put in. If the Third Amendment is not declared illegal and reversed or amended, winding up operations through receivership is what will happen as the net worth of the enterprises reaches zero in 2018 per the terms of the amendment, at which point the US Treasury would still have $187.5B of liquidation preference.
Iowa Judge Robert W. Pratt Shows Promise
I’m not confident in the Iowa case. As a shareholder, this is disheartening, but that’s because I would prefer to have at least a million dollars now rather than in a few years in conjunction with a multi-year, multi-court appeals process. I’m no lawyer, but I don’t think you have to be to understand what is happening here. Fortunately, the judge seems to understand that both the Plaintiffs and the defendants agree that for the most part the case should be decided upon a reading of the statute.
The Government’s position is “Read the statute.” The judge paraphrased the plaintiff’s position on behalf of the plaintiff and I concur, “I have read the statute and they’ve violated it,” to which the Plaintiff’s attorney Charles Cooper says, “That’s music to my ears.” Meanwhile, here I am wondering why exactly the judge is the one that has to state the obvious when it would seem that Charles Cooper is in a position to make this beyond self-evident in short order but from what I’ve seen has failed to do so.
The bad news is that Judge Lamberth has already done the dirty work of creating the legal reasoning that gets around what the law was designed to do according to Mr. Krimminger so if Judge Pratt wants to run with that line of reasoning, it’s doable. The good news is that the plaintiff’s attorney Charles Cooper made all of the remarks necessary including but not limited to demonstrating that at this point in the process what he says must be taken as fact by law.
Ackman continues to build position, $20+ valuation
As I’ve previously discussed and Ackman has publicly demonstrated, absent the net worth sweep, Fannie and Freddie are both worth over $20. More recently, he has disclosed that he continues to build his position saying that, “people realize that Fannie and Freddie are more essential today than they were even 5 years ago” and that “of all of the companies that have emerged from the crisis the only ones that are a risk to the taxpayer today are Fannie and Freddie … cause the government every quarter takes the money and it helps the government meet the budget deficit and it’s a false profit because there’s no capital cushion left at Fannie and Freddie. The only way for this business to protect the taxpayer is for it to recapitalize. The only way for that to happen is for it to be returned to the private sector.” So there you have it. Take it how you want to take it.
Editor’s Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in FNMA, FMCC over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More…)
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Recently, Fannie Mae and Freddie Mac announced plans to begin backing home loans with down payments as low as three percent. This move came just days after the mortgage giants implemented less rigid lending standards in order to give Main Street citizens with less-than-perfect credit a better chance at homeownership. According to The Association of Mortgage Professionals (NAMB), it seems the lending industry is opening its arms to the millennial generation, too many of whom have yet to own their first home.
The new programs – Freddie Mac’s Home Possible Advantage and Fannie Mae’s as yet unnamed – are tailored to first-time homebuyers and low- and moderate-income individuals who finance a fixed-rate mortgage. In these cases, they may be approved for a loan without the capital required to make the traditional five percent down payment. In exchange for the lower down payment, the applicants must be able to demonstrate their ability to repay their loan, secure mortgage insurance, and attend pre-purchase counseling.
According to Don Frommeyer, CEO of NAMB, the lower down payment requirements should help drive millennials into their first homes.
“I applauded Fannie and Freddie for loosening the lending standards this month,” says Frommeyer. “This is exactly what our industry needed to propel millennials into homeownership for the first time and to keep Main Street growing and thriving.”
Frommeyer is a big fan of the required loan counseling, as it extends well beyond the scope of educating first-time homeowners what it means to be responsible for a mortgage. Those who attend can expect to learn, among other things, the financial impact of variables such as property taxes, insurance, and upkeep associated with homeownership.
“When you purchase your first home, sure it’s important to understand the terms and your ability to make the monthly payments,” says Frommeyer. “But there are countless factors that young people forget to consider. You need to buy a lawn mower, and bags, and a snow shovel, and a hose. You’re no longer responsible for just the inside of an apartment. And this loan counseling prepares people to look at the bigger picture. I’ve seen people walk away from these seminars with a whole new outlook. It’s really good stuff.”
For more information, visit www.namb.org.
Recent data from Freddie Mac has provided new insights into loan losses across different mortgage types, Fitch Ratings said in a press release Thursday.
The new data, which was released by Freddie Mac on Nov. 24, show patterns in loss severities or loss as a percentage of a loan’s total balance.
Severities on liquidated Freddie Mac mortgages were between 5% and 10% higher than on prime jumbo loans, Fitch said.
Fitch also found that severities on the liquidated Freddie Mac loans were between 15% and 20% lower than on Alt-A loans.
The New York-based rating agency said that the differences were mostly driven by factors such as property values and mortgage insurance.
Additionally, Fitch praised Freddie Mac for releasing the loan-level loss data, saying that it “increased transparency to the market in anticipation of an actual loss credit offering in 2015.”
MCLEAN, VA–(Marketwired – Dec 18, 2014) – Freddie Mac (OTCQB: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates falling to new lows for this year as 10-year Treasury yields closed at their lowest level since May 2013.
- 30-year fixed-rate mortgage (FRM) averaged 3.80 percent with an average 0.6 point for the week ending December 18, 2014, down from last week when it averaged 3.93 percent. A year ago at this time, the 30-year FRM averaged 4.47 percent.
- 15-year FRM this week averaged 3.09 percent with an average 0.6 point, down from last week when it averaged 3.20 percent. A year ago at this time, the 15-year FRM averaged 3.52 percent.
- 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.95 percent this week with an average 0.5 point, down from last week when it averaged 2.98 percent. A year ago, the 5-year ARM averaged 3.00 percent.
- 1-year Treasury-indexed ARM averaged 2.38 percent this week with an average 0.4 point, down from last week when it averaged 2.40 percent. At this time last year, the 1-year ARM averaged 2.56 percent.
Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Visit the following links for the Regional and National Mortgage Rate Details and Definitions. Borrowers may still pay closing costs which are not included in the survey.
Attributed to Frank Nothaft, vice president and chief economist, Freddie Mac.
“The 30-year fixed mortgage rate dropped to its lowest point of 2014 this week. Mortgage rates fell along with 10-year Treasury yields, which closed at their lowest level since May 2013. November housing starts came in at a seasonally adjusted annual rate of 1.028 million starts, down 1.6 percent from an upwardly-revised October value. Housing starts for the calendar year will likely come in around 1.0 million, above the 2013 pace but lower than forecasters had expected at the start of 2014. Consumer prices declined more than expected in November, with CPI contracting 0.3 percent.”
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Today Freddie Mac is making home possible for one in four home borrowers and is one of the largest sources of financing for multifamily housing. Additional information is available at FreddieMac.com, Twitter @FreddieMac and Freddie Mac’s blog FreddieMac.com/blog.
Image Available: http://www2.marketwire.com/mw/frame_mw?attachid=2740316
On Wednesday, the Labor Department will report on jobless claims for the week ended Dec. 20 and economists expect filings to remain below 300,000. This will be the last weekly number that will be free of seasonal adjustment problems. After that, the data will be skewed by state-office closings to observe Christmas, New Year’s Day and Martin Luther King’s Birthday. Extreme weather could also flip the numbers, and that will make it more difficult to see how labor markets are doing as 2014 turns into 2015.
Rate symbol consists of symbols of 2 currencies which represents the price of the first one in terms of the latter.
e.g. EURUSD= 1.5 shows that 1 EURO Dollar is worth 1.5 US Dollars.
C.A.R. Applauds Sen. Barbara Boxer and 17 Colleagues for Asking HUD Secretary Julián Castro to Lower FHA Fees
LOS ANGELES–(BUSINESS WIRE)–
The CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) commends California Sen. Barbara Boxer (D-CA) and 17 other U.S. senators, including California Sen. Dianne Feinstein (D-CA), for writing to Housing and Urban Development (HUD) Secretary Julián Castro asking him to re-examine FHA premium levels to determine whether they can be reasonably and safely lowered.
“We applaud Senator Boxer (D-CA) and the 17 U.S. senators who asked HUD to reduce fees on FHA loans in light of the agency’s improved financial situation,” said C.A.R. President Chris Kutzkey. “These senators understand that lowering FHA fees will serve the agency’s mission to provide a path to homeownership for the many creditworthy families but not hurt its solvency.”
The letter stated, “With the improved outlook of the Mutual Mortgage Insurance Fund (MMIF), we believe now is an appropriate time for the FHA to re-examine its premium levels to determine whether they can be reasonably and safely lowered,” the senators wrote. “While preserving the solid footing of the reserve fund is essential, reducing fees does not necessarily conflict with this goal. As any business knows, just as a price that is set too high will lead to less profit, not more, lowering the premium on qualified borrowers may actually produce greater revenue and fully restore the capital ratio more quickly.”
The NATIONAL ASSOCIATION OF REALTORS® (NAR) estimates that in 2013, nearly 400,000 creditworthy borrowers were priced out of the housing market because of high FHA insurance premiums. By lowering its fees, the FHA could provide greater access to homeownership for historically underserved groups. Over the past four years, the share of first-time home buyers using FHA-backed loans shrank from 56 percent to 39 percent.
C.A.R. and NAR are strong supporters of the FHA and believe a shift in policy would also increase the volume of borrowers acquiring FHA-backed loans and contribute to the solvency of the MMI Fund and make the dream of homeownership a reality for millions more Americans.
The letter was also signed by Sens. Dianne Feinstein (D-CA), Robert Menendez (D-NJ), Charles E. Schumer (D-NY), Jeff Merkley (D-OR), Elizabeth Warren (D-MA), Barbara Mikulski (D-MD), Patty Murray (D-WA), Richard Durbin (D-IL), Ben Cardin (D-MD), Bernie Sanders (I-VT), Jeanne Shaheen (D-NH), Kirsten Gillibrand (D-NY), Richard Blumenthal (D-CT), Chris Murphy (D-CT), Mazie Hirono (D-HI), Edward Markey (D-MA), and Cory Booker (D-NJ).
Leading the way…® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States, with more than 165,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.
- Barbara Boxer
- Dianne Feinstein
- FHA loans
The Federal Housing Finance Agency continues its nationwide campaign to engage with local community leaders and leaders, hosting its fourth Home Affordable Refinance Program outreach event in Miami on Dec. 5.
FHFA Director Mel Watt has made a huge push this year to reach out to the homeowners who still haven’t taken advantage of the HARP as well as the Home Affordable Modification Program before it expires.
While 3.2 million people nationwide have taken advantage of HARP, there are still 800,000 still left out there who may benefit.
But the FHFA has had one huge hurdle to overcome: people think HARP is a scam.
“As it stands now, people don’t trust their lenders and it’s creating uncertainty. All of this research and anthropological evidence contributes to the downturn. Still there are casualties to this war and the industry would do right to honor that,” Watt said in an exclusive interview with HousingWire magazine. “Today, there’s just a lot of people — and no one pays enough attention to it — who got burned.”
This time the FHFA brought in Robert Koller, director of credit risk management with Fannie Mae, to speak on a panel at the Miami event.
Here are his 6 take aways on the two programs that can be used to explain to borrowers that they can benefit from a HARP or HAMP adjustment to their mortgages.
1. There are a lot of myths out there.
“Just because lenders are telling you that they won’t work with you because you are in a condo doesn’t mean you have to go back to that lender. As mentioned before, any lender offering HARP you can go to and work through a HARP refinance.”
2. This is not a scam.
“This is the real deal. And a lot of times people have that misinformation or miscommunication that it could potentially be a scam, so we need to help them overcome those hurdles.”
3. There is not a max LTV.
“At one time, when the program was just rolled out in 2009, there was, but we enhanced the program through the years and there is no max LTV.”
4. HARP and HAMP and not exclusive.
“If your loan has been modified through HAMP you can HARP. Just because you’ve taken advantage of the HAMP program doesn’t mean you are excluded or boxed out.”
5. The program has been enhanced.
“Just because a borrower was turned down in 2009 doesn’t mean they do not qualify.”
6. Time is running out.
“The program is set to expire on Dec. 31, 2015. The $217 in savings each month is based on where interest rates are. So as interest rates go up that savings will go down, so the time to act is now.”
Fast forward to 6:05 to hear Koller speak.
— FHFA (@FHFA) December 18, 2014