The Consumer Financial Protection Bureau Guarantees The Fannie Mae, Freddie Mac, FHA Monopoly

Confounded Interest ^ | 03/31/2013 | Anthony B. Sanders

[whitedog57]

The government mortgage giants Fannie Mae, Freddie Mac and Ginnie Mae (FHA, VA) have a virtual monopoly on the mortgage insurance and securitization business. In an article written by former Freddie Mac employee, Nela Richardson, it is pointed out that Fannie Mae and Freddie Mac will set the benchmark for underwriting standards:

The Consumer Financial Protection Bureau’s Qualified Mortgage rule, which is supposed to standardize underwriting practices across the industry once it takes effect in 2014, will have a negligible effect on the industry as long as Fannie and Freddie continue to dominate the market for mortgage funding. The companies are exempt from the rules for seven years or until their conservatorship ends.

In advance of the QM rule taking effect, BGOV analysis showed that Fannie’s and Freddie’s purchasing activities blunt the rule’s impact. The GSEs have reduced purchases of mortgages with QM-prohibited features by 99 percent since 2007, the beginning of the housing crisis, according to the analysis. Additionally, the companies reduced subprime-quality purchases by 80 percent during the same time period.

The next major regulation that will affect the mortgage industry is the qualified residential mortgage definition, which exempts certain mortgages from the requirement to retain five percent of the credit risk of securitized assets. The more restrictive this standard is made for down payments or other requirements, the greater the ability of Freddie and Fannie to set the benchmark for underwriting standards across the primary and secondary mortgage markets.

Let me see if I have this right. Lenders will fall under the CFPB’s edicts, but the government (Fannie Mae and Freddie Mac) can buy/insure whatever they want (subject to FHFA, their regulator). This will result in lenders selling an even large percentage of their loans to the government than they do now (which is about 90% if we include FHA/VA).

So in addition to having a government monopoly on mortgage insurance and securitization, we also have the Federal Reserve engaging in massive interest rate manipulation through various quantitative easing programs and mortgage-backed securities purchases. Here is a chart of agency MBS purchases by the Fed since Q3 began.

It is quite clear that the Federal government dominates the mortgage market. Can Congress reverse course and get the US back to a free market rather than one dominated by government?

And since Fannie Mae and Freddie Mac were placed into conservatorship on September 6, 2008, mortgage spreads (retail – current coupon for MBS) remain elevated.

Fannie Mae:

Freddie Mac:

Here is a chart of Fannie Mae’s stock price against the Case-Shiller 20 city house price index.

Unless the CFPB is disbanded or changes their rules on qualifying mortgages, we are likely to see a strengthening of the government mortgage monopoly, not the return of the private sector. At least for 7 years.

[whitedog57]

Obama/Dems have made mortgage and healthcare monopolies. Ain't they grand!

[Jacquerie]

Obama illegally appointed Richard Cordray to head the CFPB without consent of the Senate. Any company pushed around by this jerk should sue. He does not have any authority whatsoever.