In spite of calls for restraint on the part of the OFHEO, it looks like Fannie Mae and Freddie Mac will be called on to do more- and possibly do it with less capital:
Amid the worst housing crisis in a generation, pressures are mounting for an expanded role by the two mortgage finance companies, even as lawmakers also call for a tightening of the reins on them in the wake of multibillion-dollar accounting scandals.
At a hearing of the Senate Banking Committee, its chairman, Sen. Christopher Dodd, D-Conn., said the two companies need to do more to help homeowners with high-priced loans refinance into more affordable mortgages. Lenders also stand to benefit from the fees generated by this increased activity.
The economic stimulus package passed by the Senate Thursday and speeding toward President Bush‘s desk includes a provision raising for one year the cap on mortgages that Fannie and Freddie may buy in high-cost areas from $417,000 up to $729,750, a move intended to stimulate new loans and refinancing activity in markets such as California and the Northeast.
The proposal raised red flags among some Republican senators, who said it would drain large amounts of capital from Fannie and Freddie that could otherwise go into lower-priced mortgages. Raising the cap, they warned, to include so-called ‘jumbo’ mortgages just raises the potential for bigger losses.
And since half the affected mortgages are in California, the risk would be ‘very concentrated,’ said James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight — the agency that oversees Fannie and Freddie.
Lockhart told the panel that the loan cap should not be raised without also providing stricter government regulation of the companies.
But Dodd insisted, ‘We’re in a major economic crisis. … We’ve got to act.’
In return for allowing Fannie and Freddie to buy the higher-priced mortgages, Sen. Charles Schumer, D-N.Y., said the companies should agree to refinance more troubled lower-income borrowers.And Dodd and Schumer floated a new idea. The 30 percent cushion of extra capital that Fannie and Freddie are required to hold by the regulatory agency — representing nearly $20 billion for the two — could be reduced and some of the freed-up funds put into buying mortgages of struggling borrowers.
Lockhart said it’s too soon to deflate that cushion. ‘We need to be very careful,’ he said.
Sadly Dodd and Schumer don’t seem to understand the doctrine of "First, do no harm." They would do well to head the warning given by Lockhart:
The GSEs have become the dominant funding mechanism for the entire mortgage system in these troubling times. They are fulfilling their missions of providing liquidity, stability, and affordability to the mortgage markets. In doing so, they have been reducing risks in the market, but concentrating mortgage risks on themselves. Fannie Mae and Freddie Mac support their missions by guaranteeing and issuing mortgage backed securities (MBS), which represents approximately 70 percent of their business in 2007. Their other business activity is buying mortgages and MBS for their retained mortgage portfolios.
The risks are beginning to take their toll. Public disclosures indicate that Freddie Mac will report annual losses for the first time in its history and Fannie Mae for the first time in 22 years. Their missions, as well as Congressional and many other pressures, are demanding that they do more and take on more risks in areas new to them – subprime and jumbo mortgages.As the safety and soundness regulator of Fannie Mae and Freddie Mac, I have to tell you that expansion of their activities would be imprudent unless the regulator has significantly more powers and more flexibility to use those powers. Given the tremendous stresses on the mortgage markets, the American people cannot afford to have Fannie Mae, Freddie Mac, or the 12 FHLBanks incapable of serving their mission.
It seems likely that even with the regulator having "more powers and flexibility", to have the GSEs take on more more risks at this point is imprudent.
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Off topic, but I just had to share. As brief as I can make it. I am in the process of paying my only Credit Card balance off…one more payment and NO CC debt. The last 3 payments were mailed 10 days in advance and each time I got hit with a late fee. I called and pitched a fit. I have already told them with the last I will close the account and they can go wiggle their tail somewhere else. The last payment will be sent certified mail….lets see them tell me they did not receive it on time now.
Today I am reading the news and I find this neat little story about CC companies jacking up rates and squeezing their customers like juicing oranges in one of those fancy juicing machines, you know the ones…they only leave the skin and get all that good juice out.
Well the thought occurred to me….what if they hit 25% of their customers with unjustified late fees? Considering the MILLIONS of people out there running balances on their cards how much money could a scam like this net. Dang easy way to prop up the bottom line…money for nothing…..
http://www.usatoday.com/money/perfi/basics/2008-02-06-consumer-credit-charges_N.htm?ref=patrick.net
forgot the link and sorry for the size of it and sorry about making the first post off topic
Entropy-
Hey, when I started Doom, my intent was to focus on prices in the Phoenix SE Valley. I kind of got distracted along the way.
You won’t get complaints about being off-topic from me. : )
“We might hope to see the finances of the Union as clear and intelligible as a merchant’s books, so that every member of Congress and every man of any mind in the Union should be able to comprehend them, to investigate abuses and consequently to control them.”
President Thomas Jefferson 1802
Laugh or cry
Prudence is toast.
Hutch-
Jefferson must be rolling in his grave.
We need more statesman, and fewer politicians.
Part of me is dumbfounded. So, now we’re gonna make (force?) normally financially sound, grounded Freddie and Fannie to take on interest only jumbos?
But then I realize, that in orderto actually get the loan, people are gonna have to come up with 20% down, i.e 145K.
When I realized that fact, I could sleep easy. This expansion of FM&FM will do nothing, since it will only affect a small amount of people.
Just more window dressing in an election year
Well Freddie and Fannie may take on the jumbos but how many are they going to actually finance given the tightenning of qualifying credit. I came across this at CNN, I think it’s on topic.
Refinancing: Only for the privileged few:
http://money.cnn.com/2008/02/08/real_estate/who_can_refi/index.htm?cnn=yes
Founders of bankrupt mortgage company starting (you guessed it) another mortgage company:
http://www.azstarnet.com/sn/biz-topheadlines/224169
Even more on this story at:
http://www.azstarnet.com/sn/firstmagnus/
Igor’s word is especially appropriate: vultures
I don’t get it… is Fannie and Freddie some rich uncle who just gives away money for FREE???
Look at this, there’s a reason why there is a credit crunch.. because investors are not buying loans BECAUSE home values are going down and they don’t want to be holding on to collateral that is worth less than the loan.
Now tell me why if buying loans are so risky that Fannie should step in and buy these loans?? Its like you have a truckload of rotten vegetables and nobody’s buying and farmers are losing money… and the nice guys in Capitol Hill say.. OH! Its ok, Fannie will buy it.
If Fannie is an arm of the govt of Saudi Arabia, then fine, let them buy the rotten vegetables, but ultimately the US govt is going to have to bail Fannie out and its going to come out of my freakin tax money.
Bruce-
That’s one of the few comforts, isn’t it? There just aren’t a lot of people who qualify for these jumbos- so I guess we wait and see what looney government program they come up with to try and overcome that one–
What are the chapter titles and processes in the “Politics for Idiotic Dummies” book?
borrow a good, strong, healthy cow from someone who trusts you
ride the cow
milk the cow
cut chunks off the cow one at time as desired for consumption
use the cow to pull ever increasing loads & burdens
don’t feed the cow
don’t water the cow
don’t let the cow rest
give away the cow’s production (milk, meat, strength, etc) to your buddies
neglect and abuse the cow at every turn
don’t let the people who own the cow check up on it
keep the cow hidden from all and do this in secret
declare your own brilliance at animal husbandry at whim
tell the cow and it’s owner that “you’re doing something to help”
when the cow is on it’s last possible leg, give what’s left of the cow back to the owners, and demand that they (or their children / grandchildren) provide you with 2 new cows immediately so you can “do more good”
~~~
This just came pouring out of my head when I read yet another article about the government “doing something to help.”
I’m not sure if the cow best represents our dollar, our economy, our consumers, our current & future generations of taxpayers, our international goodwill, our economic sanity… or all of the above.
I’d better call Dr. Phil! (or Dr. Freud)
Asset Hunter-
Now I’m picturing the following request:
The question is, who do we send to Dr. Phil? The “shake-a-holic” or the uncle?
It’s not a good prime time show unless they both appear…
and scream a lot while pointing fingers and blaming each other.
Bring on the free bread and circus!
twist (# 3) -
As the guilty party that started this off-topic thread (on July 5th 2006!) I can’t help but comment. About a year ago Congress tried and failed to pass legislation that, among other things, would have provided a basis for Fannie and Freddie to be declared bankrupt. Not only are the big GSEs too big to fail, there is no legal mechanism to recognize they’ve failed
Remember F&F between them have over $1.4 trillion in off-balance-sheet deals with counterparties who by now have plenty of their own problems. The Fed’s Bill Poole has been trying to shed this financial albatross for years, but it would seem to be too late now.
Since Fannie and Freddie already enjoy defacto nationalization, it only remains for Congress to recognize that agency debt is full-faith-and-credit US sovereign debt and plug into their spreadsheets the additional trillions of unrecognized (since about 1972 when Freddie’s charter was changed) debt.
That might end the war at least.
And just the other day we learn that FASB wants to end QSPEs altogether. Guess I got that one right
Ambrose at The Telegraph reports both the UK and Spain are in worse shape than the US with their unwinding housing markets.
In about 5 weeks when Fannie reports its ’07 10-K (or doesn’t) we should learn how at least some of the final details of this story will play out.
Congratulations on your continued success keeping this site up. You’re certainly providing a valuable service.
Anything said by James Lockhart needs to be taken with a strong grain of salt. Lockhart is a Bush flunky. There were room mates together at Yale. Lockhart had a very unsuccessful career prior to being appointed at his current position by Bush. Bush told him to shut down and harrass the GSE’s. Lockhart’s puppet comments are ideologically motivated and not by sound regulation or safety and soundness concerns.
mortgageman99 -
What you say is true as far as it goes, but I wish this particularly virulent strain of American Manichaeism wasn’t blinding you and nearly everyone else to the terrible existential risks arising out of this situation. It’s not just you and people like Bill Maloni who think that George W. Bush and all his acolytes are the spawn of Satan out to get Fannie because of their tilt towards the Democratic party; some of the best banking analysts in and around the American Enterprise Institute feel that all would be well if only the GSEs weren’t distorting Adam Smith’s invisible hand.
Sometimes I think that Bill Poole may be the last grownup in the whole country. At least he is trying to nudge the Fed away from the implicit guarantee before the avalanche of trillions of dollars worth of Fannie and Freddie obligatinos comes crashing down on Congress.
The reserve currency status of the US dollar is yours to lose if you don’t lay aside partisanship right now, wake up and smell the systemic risk.