Several salient points in this communiqué by Richard Bove (equity research analyst at Rafferty Capital Markets) :
Federal Housing Finance Agency (FHFA), the successor of FHA and the agency that regulates Fannie Mae and Freddie Mac, became alarmed at mortgage loans not being made, so they "told mortgage originators to ignore the Consumer Financial Protection Bureau**'s qualified rules and create mortgages with as high as 97% loan-to-value ratios (LTV)." They also "ignored the Treasury Department's mandate to shrink Fannie and Freddie and required these two companies to increase the number of mortgages that they are guaranteeing."
Basically, one regulatory hand of the government ignored and told private sector to ignore what two [out of many] other regulatory hands of the government were doing or mandated to do.
Now that Fannie and Freddie are taking fiscal losses (due to requirements that they pay dividends to the Treasury as part of the bailout plan, and now the dividends began to outstrip their earnings), the politicos are getting concerned that Fannie and Freddie will need another infusion of capital in the event of continued large losses, instead of being eventually phased out of existence as part of the original conservatorship plan. According to Bove, the people who looked at F&F BS (balance sheets) see that "their equity is disappearing in payments to the U.S. Treasury while their guaranteed book of loans is growing." What is happening is that F&F are creating more unqualified mortgage debt obligations [now explicitly] guaranteed by Uncle Sam, while everybody, including the "regulators" and Congress, is whistling Dixie. The problem is that are again accepting the Depression era Rooseveltian philosophy of needing government agency / F&F for creating and backing mortgage loans. So now they feel as in Catch-22: if they stop expansion of F&F, the housing market (which has been pretty weak to date) may stop cold, and if not, F&F will happily go on increasing taxpayers' debt obligations.
What isn't mentioned in the article — because it's a different, though tangential subject — but is worth noting, is that the Treasury has been getting paid substantial dividends by F&F since conservatorship (as well as receiving excess profits annually from the Federal Reserve as it always had - in recent years, somewhere around $100B per annum, on average), which substantially reduced the budget deficit that Obama is so crowing about. In case of Fannie and Freddie, it's one hand getting the money that is visibly applied to the deficit, while the other hand, invisibly, creating more debt, i.e., borrowing LT debt to pay the current deficit.
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** CPFB was the wet dream and the creature of Elizabeth Warren finally enshrined in Dodd-Frank, which embedded the liberal slush fund / regulatory quasi-agency within the Federal Reserve, so it can be self-financed and unaccountable to Congress and/or even future Presidents, and as such, extremely difficult to eradicate.
*** Also related: see today's headlines about JP Morgan starting to charge big customers for large deposits (i.e., negative interest rates, usually signifying disinflation or deflation and odious regulatory environment that are specifically targeting them lest they make a profit):
The economists who designed the liquidity rules "don't have a clue of what they're doing," Whalen said in an interview with "Closing Bell." ..... < snip >
..... Last month, some hedge funds received a letter from JPMorgan stating that they would likely be charged for these deposits. Bank of America has also been targeting the deposits of hedge funds and smaller financial firms.
Banks don't want these clients' cash - CNBC / WSJ, 2014 December 08
Banks charging businesses fees a 'bad idea' - CNBC, by Kayla Tausche, 2014 December 08Recent regulations that are now causing big banks to start charging fees for some business deposits are a really bad idea, and will likely benefit small, regional banks, Chris Whalen, senior managing director at Kroll Bond Rating Agency, told CNBC Monday.
The recordkeeping required for originating mortgates, iinm, requires a small army.
Great report.
So what did Bush and Congress give them 700 billion dollars for back in 2008?
Looks like it all went in their pockets. The American tax payer robbed once again by the banks
“There’s a new mortgage crisis brewing”
The debt shackle, clink, of a body mortgage, on every U.S. citizen, except the exempt...they’re special.
The problem in RE is the overhang of too high mortgages in underperforming, over financed properties.
Had government done nothing then:
1. Housing prices would have fallen.
2. Interest rates would have risen.
3. Smart money would have snapped up real bargains.
4. States and municipalities would have been forced to fix pensions/budgets based on reduced property tax revenues.
5. Market equilibrium would have been established years ago.
6. The economy would be hot, naturally hot.
7. Liberty would have grown.
Thanks to the DC Uniparty none of the above happened, but the stock market is booming.
Good piece. Thanks for posting.
I mentioned (in the weekly market thread that expat_panama runs) last September that I attended the Zelman and Associates Housing Summit in Washington DC (6th year of going). It is the best gathering of builders, suppliers, bankers, regulators, etc. in the US housing market. The number 1 topic from all of the presenters was the lending environment. Everyone was talking about the lenders not reducing the overlays (the restrictions above what the regulators require) that banks were placing on borrowers of all kinds due to the uncertainty of the legal and regulatory environment. They got burned in the financial crisis because the government forced them to lend to people who couldn’t afford it in the name of “housing access” and then were sued for billions by the very same people who forced them to lend. They aren’t about to go through that again.