NY Times has posted a scathing piece about how banks are truly dragging their feet when it comes to honoring the buyback agreements the banks entered in when they sold these loans to the GSE’s (Government Sponsored Enterprises). According to the article (I agree), they are holding these mortgages on their balance-sheets are very inflated values but when they are finally bought back by the banks, the loans are written down by a substantial amount.
It is disgusting that they helped fuel the sub-prime mortgage crisis and now they are balking at re-purchasing their obviously shame loans that they never even bothered to verify income or job status. The banks should be forced to honor these agreements and if they fall below their tier 1 capital requirements, they should be forced to raise more or go into receivership. This is the fair and just course of action. Anything less would be going in the direction of less transparency and more corruption of our financial system. There are 3 things that will need to happen to all this debt: 1. Paid off 2. Restructured 3. Defaulted; hiding losses and pretending they are not there is not an option.
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.
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.
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.
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.