Freddie Mac ends buying interest-only loans in September
It is surprising Freddie was actually purchasing these loans in the first place. I would automatically assume a interest only mortgage was not used by a first time home buyer and more likely used by a speculator that was assuming appreciation through a refinance or flip on the sale. Maybe I am wrong but that seems pretty close to the case. We do not need to be using taxpayer money to support this type of activity. We need to help people trying to stay in there home that intend to stay there.
Reuters - Freddie Mac, the second largest purchaser of U.S. residential mortgages, said on Friday that it would stop buying and securitizing all interest-only mortgages because of the poor performance of those loans.
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U.S. to Lose $400 Billion on GSEs Fannie and Freddie according Wallison
No surprise should hit you if your reading this. We have already nationalized these two institutions and instead of de-leveraging to get there asset to debt liability ratio to something more reasonable, we have used them to try and support a declining real estate markets. Both GSEs have lowered credit standards and we have even allowed these real estate tax credits towards the down-payment which allows low credit borrowers to not have “skin” in the game with these purchases.
We are just hurting people who are saving money and waiting until they are ready to support a mortgage by trying to keep real estate at these inflated prices. I still feel in the end, deflation in real estate will win out because we do not have the income in the market to support these prices over the long run.
Taxpayer losses from supporting Fannie Mae and Freddie Mac will top $400 billion, according to Peter Wallison, a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute.
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U.S. Treasury to purchase bonds from Freddie and Fannie to increase mortgage lending
The Obama administration release a new program to assist state and local housing finance programs and agencies that focus on first time buyers and developing looking to add apartment rental stock in their market. The plan is for the two largest government sponsored enterprises to issue bonds backed by these mortgages and have them purchased by the U.S. Treasury. This process is similar to the securitization method used to create mortgage-backed securities (MBS).
According to the Associated Press, the volume of tax-exempt bonds that the two GSE’s issue is only 25% of the typical amount sold in a given year. This reflects the reduction in demand for this type of financial instrument. The recent collapse of the U.S. real estate market can be attributed to this drop in demand.
Howard Glaser, a mortgage industry consultant mentioned that this program came at a time when credit is scarce and we are in the middle of a very fragile recovery in the housing market. Treasury Department officials stated any losses from the loan defaults will be 100% covered by the fees paid by the state agencies. ”The expected cost to the federal government is zero,” said Michael Barr, an assistant treasury secretary.
The question I beg to ask is, where are these state agencies going to get the money to provide this financing for new home buyers and rental project developments. Just like the adage said, “There is no free lunch.
Source: AP
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Mark-to-Market Accounting Pushes Freddie Mac to $768 Million Profit in Q2
According to the article this surprise profit was due to a one-time accounting gain rather than an actual turn-around in the business making it actually profitable. The shares did react strongly, increasing a whopping 80% at the time of this writing. These two GSE’s will most likely have to tap the Treasury for more funds and I see Ginnie Mae as the next GSE that will need a substantial taxpayer backstop in the form of more bailout money.
News (Globe St.):
VA-While there are growing signs that the economy and housing markets are hitting bottom–or at least ending the free fall it was in at the beginning of the year–the latest earnings from Freddie Mac do not fall into this category. On Friday the GSE reported–on the heels of dismal earnings from Fannie Mae–that it issued its first profit in two years, with a net income of $768 million for Q2, compared with a $9.9 billion net loss in the previous quarter.
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Fannie Mae & Freddie Mac expand eligibility on home loan refinancing options
Honestly I see what is trying to be accomplished with this expansion of the acceptable loan-to-value amount to 125% of the home’s value. The goal of the program is to allow more people to refinance their home loan to a lower interest rate that will hopefully make it less likely the homeowner will default on the mortgage.
Instead, it is more likely going to set a “floor” in more home prices. This is actually preventing the market from reflecting the actual value of all these homes that are being refinanced through this government sponsored loan program. Yes, foreclosures are hard on the people being affected, there is no doubt in this. But on the other side you have to think about the people who are striving to own their own home. This in effect is artificially keeping prices higher than they would normally be without this intervention. That is counter-productive in the way it punishes people who did not get an regular mortgage over these more exotic loans that had a huge rate hike baked in the formula. Personally I would like to see less intervention and more market forces determining the outcomes of all these private contracts and agreements.
News (Reuters):
Mortgage finance companies Fannie Mae and Freddie Mac will expand efforts to prevent foreclosures by allowing refinancings by borrowers whose outstanding loans exceed the value of their homes by up to 25 percent, the Obama administration said on Wednesday.
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Archive 1999 - Fannie Mae Eases Credit To Aid Mortgage Lending
My friend researched and found this article from the NY Times dated September, 30th 1999. After reading this, it is hard to not see how this would turn bad eventually with these “subprime” borrowers getting charged higher interest rates for their home loans. By definition, if you are “subprime” you have bad credit, I would even assume that their employment might not be of the highest income so why would a lender to get around that risk, charge more interest? Sounds like a losing game unless you had some way to not hold that toxic paper, which we all know now as “securitization”. Separating the lender from the borrower was the worst possible idea, with money being made in fees upfront, there was really no incentive to make good loans that a bank would traditionally hold on their balances sheet for the duration of the loan.
Archive Story:
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
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Fannie Mae and Freddie Mac to buy $40 billion a month of bad assets
Looks like they will be using these two GSEs to purchase these bad mortgages to help stem our real estate crisis. At this point we are so far over the cliff that it really doesn’t matter what they do. We are headed for a severe contraction in the world economy and the era of easy credit has come to an end for the foreseeable future.
News Piece:
Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of under-performing mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.
Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury’s $700 billion Troubled Asset Relief Program.
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