Fannie, Freddie prove too big for government to shirk
The government’s Christmas Eve pledge of unlimited financial aid to mortgage giants Fannie Mae and Freddie Mac is to make sure the housing market doesn’t deteriorate further, but it will cost taxpayers much more.

By ALAN ZIBEL

The Associated Press

PREV 1 of 2 NEXT

AP

These file photos show Freddie Mac’s headquarters in McLean, Va., and Fannie Mae’s headquarters in Washington, D.C. The Treasury Department has pledged unlimited aid to the mortgage giants to prevent the housing market from deteriorating further.

WASHINGTON — The government’s Christmas Eve pledge of unlimited financial aid to mortgage giants Fannie Mae and Freddie Mac is aimed at making sure the housing market doesn’t take another turn for the worse and cause the economic recovery to unravel.

This insurance policy taken out by the Treasury Department will help keep mortgage rates low, and may wind up being a gift of sorts to struggling homeowners and banks. But there’s a catch: the housing crisis is likely to cost taxpayers much more.

The Obama administration’s latest lifeline to Fannie and Freddie will cover unlimited losses through 2012, lifting an earlier cap of $400 billion. It also eases restrictions on the size of the companies’ investment portfolios.

That’s a reversal of the Bush administration’s September 2008 plan to shrink the size of the companies’ holdings of mortgage-backed securities.

The action, which needed no congressional approval, could position Fannie and Freddie to be more aggressive in dealing with the housing crisis, perhaps taking troubled mortgage investments off banks’ books.

“They’ve cleared the decks to use Fannie and Freddie as a vessel for whatever they want,” says Edward Pinto, a housing consultant who served as Fannie’s chief credit officer in the late 1980s.

Treasury could also lean harder on Fannie and Freddie to help troubled homeowners avoid foreclosures — and by extension the banks and other investors who own their mortgages. Many experts say an existing $75 billion government program to prevent foreclosures isn’t working fast enough, threatening the emerging signs of home-price stability in many cities.

Boosting the firepower of Fannie and Freddie, which finance three quarters of all new mortgages, also should help keep rates on home loans low as the Federal Reserve starts dialing back its separate $1.25 trillion program aimed at doing just that.

That’s good news for the banking industry, which has benefited this year from homeowners refinancing their mortgages, says Jason O’Donnell, senior research analyst at Boenning & Scattergood. “This is an initiative that spreads far beyond just Fannie Mae and Freddie Mac,” he says.

But the trade-off is the Treasury will have to cover much more than the $111 billion in losses at Fannie and Freddie it already has funded. Barclays Capital predicts the losses will range from $230 billion to $300 billion.

Vital money source

Both companies provide vital funding for home loans, buying mortgages from lenders, pooling them into bonds and selling them to investors with a guarantee against default.

While they historically backed loans to relatively safe buyers, they dramatically lowered their standards during the housing boom, and those loans are defaulting in higher numbers.

If the administration does lean on Fannie and Freddie to expand its foreclosure-prevention program, it would be pricey. If Fannie and Freddie were, hypothetically, to start forgiving a quarter of borrowers’ mortgage debt, that would cost $125 billion more to help about 2.5 million to 3 million borrowers, estimates Barclays analyst Ajay Rajadhyaksha.

The Treasury Department says its only motivation is to make sure investors remain confident Fannie and Freddie can keep doing their jobs of buying the bulk of mortgages made in the U.S. and turning them into investments.

“These measures bring broad benefits to American homeowners and our economy,” says Andrew Williams, a Treasury spokesman.

Fannie and Freddie must persuade everyone from the Chinese central bank to individual investors that it is still safe to buy their debt securities, which they sell partly through weekly auctions. The two companies have sold $2.7 trillion in debt this year, according to Credit Suisse calculations.

Still, by making the change before year-end, Treasury sidestepped the need for an OK from a bailout-weary Congress, infuriating Republicans on Capitol Hill.

The Treasury Department gave Fannie and Freddie a bigger lifeline “without any involvement, notice (or) dialogue with Congress,” says Rep. Scott Garrett, R-N.J., a member of the House Financial Services committee, who called Wednesday for an investigation into the actions.

Fannie Mae was born in 1938 in the aftermath of the Great Depression. It was privatized 30 years later to limit budget deficits during the Vietnam War. In 1970, the government created a rival, Freddie Mac.

After the housing market started to unravel in 2006, mortgage defaults soared, and the companies’ losses mounted. By summer 2008, the companies weren’t able to raise money, and their shares plunged.

The Bush administration’s hand was forced. It wound up taking over the pair a week before the collapse of investment bank Lehman Brothers.

The government now has a 79.9 percent stake in each company, the maximum amount possible to still keep the companies off the federal budget.

Up against the wall

Bush administration officials envisioned Fannie and Freddie would ultimately be able to scale back their mortgage holdings by 10 percent a year, starting next year.

But the housing market remains shaky, with 11 out of 20 major cities showing price declines in October. Private investors remain wary of U.S. mortgage investments.

So Obama officials decided last week to give Fannie and Freddie more leeway, effectively allowing them to build up their portfolios next year, then start cutting back in 2011.

Without this change, Fannie and Freddie would be forced to start selling mortgages from its portfolio early next year, just as the Federal Reserve begins to retreat from that market. That would push up mortgage rates and threaten the housing recovery.

Now they will be able to hold a combined $1.62 trillion in mortgage investments by the end of next year, compared with $1.36 trillion under the old rules. The result: Fannie and Freddie will have an additional $260 billion to invest next year, Credit Suisse calculates.

“They didn’t want Fannie and Freddie to be out there selling mortgages when the future of housing is uncertain,” says Credit Suisse mortgage strategist Mahesh Swaminathan.

Associated Press reporter Sara Lepro contributed.

Seattle Real Estate Tyler Freed

Standardized short-sale plan may relieve big headache

By Kenneth R. Harney

Syndicated columnist

WASHINGTON — If you’re in trouble on your mortgage and can’t get a loan modification, check out the Obama administration’s new standardized short-sale plan scheduled to roll out during the coming months.

The program, outlined Dec. 1 by the Treasury Department, is an attempt to streamline what has been a contentious, time-consuming process by requiring lenders and others to use nationally uniform documents, timelines and financial incentives.

A short sale involves a lender or investor agreeing to collect less than the balance owed on a mortgage debt out of the proceeds of a negotiated sale of the property.

Often a short sale is the last alternative to foreclosure. Say you’ve lost your job and fallen behind on your mortgage payments. With little or no income, you can’t qualify for a modification program.

In this situation — grim as it is — your best move may be to see if your lender will accept a short sale. Though the idea sounds straightforward, in practice it is not.

First, the bank needs to be convinced a short sale will yield it more money at the bottom line than a foreclosure.

This usually means you need to bring in a real-estate agent who knows the ropes and can pull together the key information needed by the bank: recent comparables on closed sales, local market trends and the likely selling price of your house.

Plus you’ll need to have a buyer for the house, one who’ll pay a price acceptable to the bank and has financing to close the deal. If you happen to have a second mortgage or home-equity credit line on the property, you’ll also need to negotiate how much that lender will receive from the sale proceeds.

That can be tricky. In depressed real-estate markets, the second-lien lender may be holding a note that’s worthless in a foreclosure because plummeting property values have wiped out the collateral.

Yet that same bank is in a pivotal position: It has the legal power to block the short sale by refusing to sign on to the deal.

Equally troublesome is the fact banks, mortgage servicers and bond investors often have conflicting requirements for documentation and financial yields that can complicate and drag out the haggling for months.

Enter the Obama administration’s new streamlining plan.

Besides requiring lenders and servicers to use uniform documentation, preapproved short sale terms and accelerated turnaround times, the plan also provides financial incentives for key players:

• Homeowners who successfully complete a short sale under the program receive $1,500 to defray relocation costs.

• Mortgage servicers can receive $1,000 per case.

• Investors get $1,000.

• Second-lien holders receive up to $3,000 from the sale proceeds.

Even real-estate agents get something: The rules prohibit banks from forcing them to cut their commissions from the listing agreement as part of the final deal.

Sounds like a formula for encouraging a lot more short sales, right? The jury will be out on that for months, and most major lenders are still studying the fine print of the Obama program. But early reactions from big banks appear to be positive.

Dave Sunlin, a senior vice president for Bank of America, said, “We’re very pleased. We welcome any effort to reach standardization for all parties” in short sales.

Faith Schwartz, executive director of Hope Now — a Washington, D.C.-based group representing the country’s largest banks, mortgage servicers, bond investors and consumer-counseling organizations — said the plan should bring “uniformity and standards” to a process usually characterized by “mayhem” among the negotiating parties.

Scott Brinkley, a senior vice president for First American, a firm that provides market data for banks, said “you’re going to see a lot of cooperation” by lenders and investors.

But there could be a major pothole: The Obama plan tilts to consumers by requiring second-lien holders to drop all financial claims against short-selling borrowers beyond the $3,000 they take out of the deal.

Travis Hamel Olsen, chief operating officer of Loan Resolution, a Scottsdale, Ariz., consulting firm, says the $3,000 payment won’t be enough for many second-mortgage lenders.

Today they frequently get additional short-sale compensation from sellers as the price of their participation — in cash or through promissory notes — far beyond $3,000.

“I’m concerned that that could limit participation” by second-lien holders, Olsen said.

Bottom line for homeowners: Don’t have wild expectations, but definitely ask your servicer whether it plans to participate and whether the forthcoming standardized plan for short sales just might work for you.

Kenneth R. Harney: kenharney@earthlink.net

Seattle Real Estate Tyler Freed

Home Buyer Tax Credit Official

The home buyer tax credit bill that was recently passed by both the House of Representatives and the Senate has been signed by President Obama and is now official. Given the dissension in the House and Senate over so many other things, the bill slid through relatively easily. The Senate vote was a stunning unanimous vote of 98 in favor to 0 opposed. And the President didn’t delay signing to the bill to make it official.

How will this tax credit bill affect home sales, and what exactly does it do?

The current home buyer tax credit can be as high as $8,000 on the purchase of a home by a first time buyer. The credit allows for 10% of the purchase price, up to $8,000. That credit has been extended and is now good through April 30, 2010. As long as a contract is signed and closed before July 1, 2010, the buyer can claim the credit. For members of the Armed Forces who have been deployed outside the U.S. for at least 90 days at some point between Dec 31, 2008, and the cut-off date for the credit (May 1, 2010), the dates that end the period where they can claim the credit are extended to May 1 and July 1, 2011.

A change to the home buyer tax credit over the current credit is a new bonus for people who have lived in their previous residence for 5 years or more. Anyone who has lived in the same home for 5 consecutive years during the 8 years before the purchase of their next home will be treated as if they’re a first-time home buyer and allowed a credit, though a slightly smaller one than a true first time buyer. These buyers can get up to 10% of the purchase price of their new home, but only up to $6,500.

So now not only will first buyers have added incentive to purchase within the next several months, but people who’ve been in one residence for 5 years or more anytime during the previous 8 years will have a $6,500 incentive to go ahead and make that change.

Another change to the home buyer tax credit is the income cap. Before this bill was signed, a single person could only claim the credit if they made less than $75,000 a year, and a married couple could only claim it if their income was less than $150,000 yearly. Those limits have been raised to extend the credit to more people. Now, single people can make up to $125,000 and married couples can bring in a combined $225,000, and still take the $8,000 first time home buyer tax credit.

This credit still applies only to a primary residence, and can’t be claimed for a second home or investment property. And it also can’t be applied to any residence that sells for over $800,000. The first time home buyer tax credit has also been improved with advanced fraud protection, like clear rules on how to claim the credit with the proper paperwork, and a minimum age of 18 to claim it.

About the Author

For more information on the tax credit and to learn how to benefit in today’s market visit http://www.tylerfreed.com.

Seattle Real Estate Tyler Freed

November 5th article from the Washington Post on the Congress passing the tax credit and unemployment credit. The Congress appeared to be the most challenging vote versus the Senate’s quick approval.

Congress Passes Bill Extending Unemployment Insurance, Home Buyer Tax Credit

By Perry Bacon Jr. and Dina ElBoghdadyCongress on Thursday completed final approval of a bill that includes several measures designed to spur the economy and help people who have lost their jobs, representing its latest intervention as the country suffers through its worst recession in decades.

The $24 billion bill, which the White House said President Obama will sign on Friday, would provide unemployment benefits of least 14 weeks for people out of work. Those in the more than two dozen states with unemployment rates above 8.5 percent would receive up to 20 weeks of the benefits. The legislation would also extend through April 30 a $8,000 first-time home buyer tax credit that was passed earlier this year.

Another provision allows businesses that had operating losses in 2008 and 2009 to seek refunds for taxes paid on profits over the past five years. It passed in the House on Thursday 403-12 after the Senate approved it Wednesday by a 90-0 vote.

“It’s hard to think of any other initiative we can name that is as beneficial to job creation,” House Speaker Nancy Pelosi (D-Calif.) said of the unemployment benefits provision. “Its original purpose is fairness to those workers who have paid into the insurance system,
and now they are getting insurance benefits, but it also has an impact as a stimulant. ”

Under the housing program, people seeking to own a home for the first time in three years would receive an $8,000 tax credit if they sign a contract by April 30 and close on it by June 30. Current homeowners who are buying a new primary residence would be eligible for a $6,500 tax credit starting Dec. 1 if they owned their home for five consecutive years in the previous eight.

The timing is more lenient for military families who have been deployed overseas for 90 days or more in 2008 or 2009. They would have until April 30, 2011 to sign a contract.

But the measure limits the purchase price of the home to $800,000. It also imposes income caps so that people who make more than $125,000 annually and couples who make more than $225,000 would not be eligible for a refund. Anyone who collects the tax credit but sells their home within three years of buying it must return the refund.

The program is estimated to cost $10.8 billion.

The passage of the tax credit provision was a huge win for the real estate industry, which has been lobbying aggressively to extend and expand the program. They say the tax credit has helped boost sales and clear out a glut of lower-priced homes, especially foreclosures, and that ending it would be a blow to the housing market’s recovery.

But critics of the program, including some economists, say the program is far too expensive. They say that most people who used it would have bought homes anyway. They attribute the uptick in home sales in recent months more to low prices and
record low interest rates.

The bill is part of a series of proposals Democrats are considering to help boost the economy and aid Americans out of work. While they are weary of casting the policies as a “second stimulus” because the $787 billion bill passed earlier this year remains controversial because of its cost even as unemployment remains high, all the provisions in the bill were in the original stimulus legislation but set to expire.

Seattle Real Estate Tyler Freed

Quick passage by the House last week of a bill extending the $8,000 home buyer tax credit next year for military, diplomatic and intelligence personnel serving overseas increases the odds that Congress will agree to an extension, maybe even an expansion, of the entire credit program well into 2010.

The White House is also signaling that it sees the overall tax credit program — currently set to expire November 30 — as an important element in cutting the unemployment rolls and stimulating new jobs next year.

After an economic policy strategy meeting last week in the Oval Office involving President Obama, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, congressional aides said Democrats generally support an extension of the housing credit.

Reid already has made clear he wants an extension. He is co-sponsoring a Senate bill that would do so for six months.

Congressman Charles Rangel, chairman of the tax-writing House Ways and Means Committee, sponsored the one-year extension of the credit for military and other personnel serving overseas, and is reported by aides as favoring an extension for the entire program.

The White House has not publicly committed to an extension, but has confirmed that the President is seriously examining that option.

An unexpected development that emerged following last week’s White House meeting was the possibility of opening up the credit to a broader group of buyers next year – people who sell their current homes and buy a replacement home.

Though details were scanty, Capitol Hill sources said one option on the table would be to provide a tax credit — most likely at the $8,000 level — to replacement home buyers whose incomes do not exceed some limit.

The current credit phases out for single taxpayers with incomes above $75,000, and married purchasers earning $150,000.

A politically sensitive issue hovering over the entire debate on extending the housing tax credit is its cost – what it would add to the federal budgetary deficit. Mark Zandi, chief economist of Moody’s Economy.com, estimates that widening the credit to all buyers through next August could cost the government upwards of $30 billion.

Rangel’s 12-month extension of the credit for service personnel is estimated to cost more than $300 million, but it’s mainly being paid for through an increase in penalties levied by the IRS on taxpayers who fail to file corporate or partnership returns.

The New York Times reported that one possible solution to the cost problem would be to divert money not yet spent out of 2009′s $800 billion stimulus legislation.

Article Credits:
Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board’s Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation.

He served as a member of the U.S. Department of Housing and Urban Development’s Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation’s journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.

Seattle Real Estate Tyler Freed