(Bloomberg) — Common shares of Fannie Mae and Freddie Mac pared double-digit percentage losses in Tuesday trading as Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell discussed the government’s control over the mortgage giants.
Powell and Mnuchin testified before the Senate Banking Committee
In response to a question from South Dakota Republican Mike Rounds on when the government can end FNMA, FMCC conservatorship, Mnuchin said it’s something that should be done but it takes time, while Powell agreed it’s something that needs to be done “carefully”
Mnuchin said he didn’t think FNMA, FMCC should be let out from conservatorship without appropriate capital
“I would certainly like to see the GSEs return to private hands over time,” Powell said “with a lot of private capital behind it”
Yes Jerome, if there were that much private capital available, we wouldn’t be having this discussion in the first place.
The cure (which no one in the US Senate is really interested in) is for Fannie Mae and Freddie Mac to focus on purchasing 5/1 ARMs (adjustable-rate mortgages) rather than the dreadnought 30Y Fixed-rate mortgage that the affordable housing community is obsessed with. Generally, the 5/1 ARM rate is lower than the 30Y FRM rate.
Or Quicken’s push for 15 year mortgages that enable borrowers to pay down their mortgages much more rapidly. And 50 basis points less expensive the 30Y FRM.
But what does Congress insist on F&F doing? Buying the riskiest mortgage product, the 30Y FRM.
Incoming Treasury Janet Yellen is working with Fed Chairman Jerome Powell to undo Treasury Secretary Mnuchin’s cancellation of Treasury stimulus programs.
After two weeks of decreasing numbers, mortgage applications increased 3.9% last week, according to a report from the Mortgage Bankers Association. Refinance applications climbed even higher.
MBA Mortgage Refi applications continue to rise as mortgage rates continue to fall.
On the hot button topics of US Dollar, Gold, S&P500 index, and Bitcoin, we can see Gold and the US Dollar continuing to fall while Bitcoin continues to soar. The S&P500 continues to “flood-up” with money printing.
Covid-19 has been a disaster TEMPORARILY for the US economy, but the US economy is resilient. According to the Atlanta Fed’s GDPNow real time GDP is now at 3.514%, higher than GDP before the Covid outbreak.
While the US mortgage market saw a rapid increase in mortgage delinquencies thanks to Covid, it did not materialize into a foreclosure wave as did during the financial crisis.
The reason why? Forbearance. And loans in forbearance has been gradually declining.
So if states and cities discontinue their Covid lockdowns, we should see a normalization in mortgage delinquencies.
(Bloomberg) — Pacific Investment Management Co., one of the world’s biggest bond investors, is warning that a regulator’s push to end federal control of Fannie Mae and Freddie Mac could threaten the U.S. housing finance system by forcing the sale of mortgage bonds and boosting loan interest rates.
Pimco executives, in a letter to the Federal Housing Finance Agency, expressed concern that Fannie and Freddie will be freed without congressional legislation, which they said investors would interpret as an abandonment of the government’s guarantee of the companies’ mortgage-backed securities. That would limit some investors’ ability to hold the bonds and force others to drop the securities altogether, the executives wrote in the letter dated Monday.
“Mortgage rates will increase, homeownership will likely suffer and the national mortgage rate will no longer exist,” the executives wrote.
Pimco’s warning came in a comment letter responding to an FHFA proposal that would require Fannie and Freddie to hold hundreds of billions of dollars in capital. The plan, released by the regulator in May, is considered crucial to ending the companies’ conservatorship because FHFA Director Mark Calabria has said it would allow them to absorb losses outside the government’s grip. Calabria has said he plans to release the companies from U.S. control and that they could try to raise money from investors as soon as next year.
Fannie and Freddie don’t make mortgages, but buy them from lenders, wrap them into securities and guarantee to bond investors the repayment of principal and interest. Together, they back nearly half of the $10 trillion mortgage market.
First of all, the implicit guarantee from Treasury kicked in when Fannie Mae and Freddie Mac were placed into conservatorship by FHFA. So demanding an EXPLICIT guarantee is nonsense when the Federal government is inclined to bail out systemically important financial institutions (SIFIs).
Second, The Fed has the housing market’s back. Look at Case-Shiller HPIs for Los Angeles and San Francisco since The Fed’s entrance in late 2008.
Third, would mortgage rates really rise if Fannie and Freddie are privatized? Probably, but The Fed can control that spread.
Fourth, the biggest problem is what Biden/Harris will do. I have already seen bizarre proposals on housing from Biden’s team,
President, Joe Biden will invest $640 billion over 10 years so every American has access to housing that is affordable, stable, safe and healthy, accessible, energy efficient and resilient, and located near good schools and with a reasonable commute to their jobs. Biden will do this by:
Ending redlining and other discriminatory and unfair practices in the housing market. (You mean redlining still exists with the FDIC, The Fed and Warren’s Consumer Financial Protection Bureau watching the banks??)
Providing financial assistance to help hard-working Americans buy or rent safe, quality housing, including down payment assistance through a refundable and advanceable tax credit and fully funding federal rental assistance. (Yes, but The Fed keeps causing home price increases through their policies)
Increasing the supply, lowering the cost, and improving the quality of housing, including through investments in resilience, energy efficiency, and accessibility of homes. (Increasing the supply of housing is a good thing, but easier said than done).
Pursuing a comprehensive approach to ending homelessness. (Noble idea, but this was a key goal of Obama’s HUD under Shaun Donovan … and we still have a terrible homelessness problem).
The Fed hasn’t been able to do anything about the declining existing home sales inventory, but they have helped home prices soaring!
The Federal Reserves is the largest holder of US Treasury debt and it looks like they are here to stay.
Both commercial and residential real estate have benefited from the massive expansion of The Fed’s intervention in financial markets since late 2008. Zero interest rate policies and massive balance sheet expansion ALMOST went away under Powell (2019), but Covid killed their exit plan.
The Midwest and South had the highest zombie foreclosure rates during the third quarter, with rates highest in Iowa (15.5 percent of vacant properties in the foreclosure process), Kentucky (12 percent), Missouri (10.2 percent), Georgia (9.6 percent) and Maryland (9.2 percent).
States with the lowest zombie foreclosure rates were largely in the Northeast and West, including Utah (1.3 percent of vacant properties in the foreclosure process), Colorado (1.6 percent), New Jersey (1.7 percent), Idaho (2.2 percent) and California (2.2 percent).
In terms of number count, states with the highest numbers of zombie properties during Q4 were largely in the Northeast and Midwest in areas hit hard by the pandemic.New York posted the highest number of zombie properties at 2,131, followed by Florida (1,027), Illinois (934), Ohio (836) and New Jersey (346).
“Some of the states with the highest rate of zombie foreclosure properties are also states that have been among the hardest hit by the COVID-19 pandemic,” Rick Sharga, executive vice president for RealtyTrac, said in a statement. “When the government bans on foreclosure activity expire, it wouldn’t be a surprise to see the number of defaults in those states increase more rapidly than in other parts of the country, and the number of zombie foreclosure properties rise more dramatically in those states as well.”
Here is a chart I did yesterday pointing to the perils ahead if the shutdowns continue and Federal stimulus abates. Forbearance has prevented a spike in defaults (and potential zombie properties), but we will find out in January.
The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 5.7% annual gain in August, up from 4.8% in the previous month. The 10-City Composite annual increase came in at 4.7%, up from 3.5% in the previous month. The 20-City Composite posted a 5.2% year-over-year gain, up from 4.1% in the previous month.
Phoenix, Seattle and San Diego reported the highest year-over-year gains among the 19 cities (excluding Detroit) in August. Phoenix led the way with a 9.9% year-over-year price increase, followed by Seattle with an 8.5% increase and San Diego with a 7.6% increase. All 19 cities reported higher price increases in the year ending August 2020 versus the year ending July 2020.
The National Index posted a 1.1% month-over-month increase, while the 10-City and 20-City Composites both posted increases of 1.1% before seasonal adjustment in August. After seasonal adjustment, the National Index posted a month-over-month increase of 1.0%, while the 10-City and 20- City Composites both posted increases of 0.5%. In August, all 19 cities (excluding Detroit) reported increases before seasonal adjustment, while 17 of the 19 cities reported increases after seasonal adjustment.
Once again, home price growth is exceeding average hourly earnings (5.71% versus 4.60%).
Phoenix AZ leads the Case-Shiller 20 in year-over-year home price growth at 9.85% followed by Seattle at 8.49% YoY. On a 3-month basis (annualized), San Diego leads at 15.30% with Portland at 14.52%. In last place on a YoY basis is, no surprise, Chicago at 1.22% followed by (no surprise either) New York City at 2.82%.
Of course, the primary driver of home prices is … The Federal Reserve.
“As Keynes noted, a small difference in interest rates can compound to a large number. A new study by the GCFP’s Executive Director, Ed Golding, and two co-authors, Michelle Aronowitz and Jung Choi, demonstrate that Black homeowners on average will pay $67,320 more for their houses because each month Black homeowners pay slightly higher mortgage rates, mortgage insurance premiums, and property taxes. If we eliminate these extra costs paid by African Americans, the $130,000 black-white gap in liquid savings at retirement would drop by half. This report will soon appear in the National Association of Real Estate Brokers 2020 Report on State of Housing in Black America.”
Then, on the other hand, black homeownership rates are at an all-time high as is black median weekly real earnings growth.
But Golding et al refer in their paper to “Black homeowners pay higher mortgage rates at origination.”
Why? How about the 16% mortgage denial rate for blacks compared to 9% for whites and Asians?
How about Fannie Mae’s and Freddie Mac’s average credit score of loans acquired? They rose over 25 basis points.
Thanks to my GMU FNAN 421 students for using Python to download and analysis Fannie and Freddie on-lined data.
While it is easy to blame Fannie Mae and Freddie Mac for increasing credit standards versus 2006, there are other mitigating factors … like the CFPB’s Qualified Mortgage (QM) ruling.
All qualified mortgages should generally meet the following mandatory requirements:
1.The loan cannot have negative amortization, interest-only payments, or balloon payments.
2.Total points and fees cannot exceed 3 percent of the loan amount.
3.The mortgage term must be 30 years or less.
Qualified mortgages must also satisfy at least one of the following three criteria:
1.The borrower’s total monthly debt-to-income (DTI) ratio must be 43 percent or less.
2.The loan must be eligible for purchase by Fannie Mae or Freddie Mac (the government-sponsored enterprises,or GSEs) or insured by the Federal Housing Administration (FHA), the US Department of Veterans Affairs (VA),or the US Department of Agriculture Rural Development (USDA), regardless of DTI ratio.
3.The loan must be originated by insured depositories with total assets less than $10 billion but only if the mortgage is held in portfolio.
DTI of 43% or less?
Lenders have increased lending standards and that has been problematic for black households. In that respect, Senator Warren’s Consumer Financial Protection Bureau (CFPB) and The Federal Reserve have differentially-impacted black households given that black households have lower average incomes and lower credit scores than white households.
Lenders deny mortgages for Black applicants at a rate 80% higher than that of white applicants. And values of homes owned by Blacks are still 17.6% below the typical U.S. home.
So, making the financial market “safer” negatively impacts black households. We need to rethink QM and bank capital rules.