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The Fannie and Freddie Government Makeover

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Conventional Wisdom

Conventional wisdom would seem to indicate that Fannie Mae and Freddie Mac being put into conservatorship by the government is an ominous sign and ‘bad’ for shareholders, taxpayers and the overall economy.

Lets see, Fannie and Freddie’s (remaining) shareholders now own stock that is worth as much as a copy of the New York Times Sunday edition (check) and the American tax-payer will foot the bill to the tune of tens of billions of dollars (check, although this appears to be far less expensive than letting the two GSE’s and the industry spiral downward). The overall housing economy is now doomed…not necessarily.

Could You See it Coming?

First things first, I believe this was all a bit contrived and foreseeable if one read between the lines and canceled out most of the sensational mainstream media noise surrounding the two mortgage giants fall from historic highs.

It started here with a ‘butterfly flapping its wings half-way across the world’ in late January…


…Alison Utermohlen, senior director of government affairs for the Mortgage Bankers Association, asked FASB
(Financial Accounting Standards Board) to cut lenders some slack on the accounting for impaired mortgage loans that they hold on their balance sheets. She asked the board for guidance that would permit lenders to use an easier accounting standard to measure the losses on loans that they are likely to modify to avoid default and foreclosure…

…Based on detailed questions posed by FASB (Financial Accounting Standards Board) to Ms. Utermohlen (to which she was responding), the board seems skeptical. For one thing, the simpler FAS 5 analysis would result in smaller impairments for the lenders. Under that standard, unless lenders expect not to recover the loan principal from borrowers, they don’t have to book an impairment. The more detailed cash flow analysis involved in FAS 114 would result in losses from interest rate modifications on the loans that many banks are expected to make. Accounting analysts favor the more detailed analysis. “This situation is what FAS 114 was written for,” said Marc Siegel, head of financial research and analysis at RiskMetrics and a member of the Investors Technical Advisory Committee to FASB. “Investors deserve the right information.”

What Does That Mean??

Interpretation:  Lenders, including the GSE’s, were/are now subject to more conventional accounting practices…not good for the quarterly reports that Wall Street investors read and act on like annointed scripture.  Prior to this change lenders could effectively bury certain losses that other entities must report to their shareholders.  Going forward with conventional accounting guidelines, financial reports from lenders went from looking OK to insolvent almost overnight.

On July 10th 2008 William Poole, former St. Louis Federal Reserve President told Bloomberg in an interview:

Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae’s assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

Fannie and Freddie stock was now akin to Enron 2.0; value evaporated almost overnight as ‘the real numbers’ surfaced and brokers began dumping the paper.  On July 11th, one day after Mr Pooles comments, trading volume of Freddie Mac and Fannie Mae stock exceeded 800,000,000 shares…almost 100x normal activity…and their value plummeted.

The Options Become Clear

It quickly became apparent that the mortgage GSE’s were going to have to consider raising substantial money or entertain a government bailout.   The prospect of raising money meant further stock dilution to remaining share holder, not too appetizing, and the sell off continued.  So, it’s a mess and the fallout must be cauterized…

Here we are, almost 9 months after the butterfly flapped its wings, The Government is stepping in.  Bad news right?  Maybe, maybe not.  It’s a radical move to say the least, yet could pull the housing and mortgage market out of the credit crunch and alleviate alot of downward pressure points.

“Government Takeover”

Strip away the language of ‘Government Takeover’ (that’s normally bad, mmmkay) and look closer at what now becomes possible in the short and long term for the housing sector in general and the individual homeowner.

There are potential benefits:

  • Lender balance sheets will be cleaned up and thinned out.
  • Mortgage rates and fees should get cheaper as a result.
  • Mortgage paper will be turned into Federal paper, establishing much needed confidence from foreign investors.  Its a global market, keeping foreign investment money flowing through our economy is vital to its existence in 2008 (and going forward).
  • Federal paper will allow borrowers to potentially ‘work out’ their delinquent loans with far more flexibility than they could with lender owned mortgage paper.

Loan ‘work-outs’ were/are generally not in the interest of lenders, especially those who’ve retained mortgage servicing companies or run the divisions internally, since these profit centers are paid to keep homeowners in their current situation and/or handle the foreclosure process.  If the business model is to keep borrowers making payments they can’t afford and/or pushing them into foreclosure, well its easy to see where the misalignment of objects and conflict of interests arise.

The government can effectively work with homeowners to restructure payment terms any way they see fit, keeping more people in their homes, substantially reducing the number foreclosures that have fostered the rapid depreciation in many housing markets around the country.

  • Reduction of Wall Street volatility in what has historically been a stable segment of the bond market.  Consumer confidence needs to be restored to the mortgage market, volatility and consumer confidence usually don’t coincide with each other.

Many speculators made a lot of money by short selling Fannie and Freddie’s stock, accelerating their devaluation.  The SEC put a stop to this in mid July 08, by then the damage (or rewards) had been realized.  Months late and billions short(ed)

Contrived?

There of course is potential downside as well, most notably the governments propensity to weild its power in the direction of the lobbyist with the biggest check book.  As stated above, this all appears to be contrived and am so looking forward to seeing the details of how this all plays out.

How does this effect the wholesale market and the small to mid size broker or banker businesses?  Hrmmmm…

Its the end of an era for Fannie Mae and Freddie Mac, au revoir…

Jeff started TheXBroker.com in August of 2006 to express his industry knowledge and provocative opinion. He’s been an adversary of traditional real estate and mortgage business since running his own brokerages. Formally educated in the biological sciences at Syracuse University and Barton College, once Jeff discovered how little entry level research science paid, he started his post collegiate career working for Branch Banking and Trust in The Triad area of North Carolina. He learned about the worlds of finance and real estate and began to personally purchase property at the courthouse steps. Today, Jeff is VP Operations and Business Development of ActiveRain Corp and still The XBroker

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25 Comments

25 Comments

  1. Matt Kelly

    September 8, 2008 at 7:43 am

    Great post Jeff! There is a silver lining in this for everyone! These are the most important points in your post that I hope everyone pays close attention to:

    Lender balance sheets will be cleaned up and thinned out.
    Mortgage rates and fees should get cheaper as a result.
    Mortgage paper will be turned into Federal paper, establishing much needed confidence from foreign investors. Its a global market, keeping foreign investment money flowing through our economy is vital to its existence in 2008 (and going forward).
    Federal paper will allow borrowers to potentially ‘work out’ their delinquent loans with far more flexibility than they could with lender owned mortgage paper.

    Remember when the government bailed out Chrysler? That worked out ok didn’t it? And Bear Sterns?

  2. Mack

    September 8, 2008 at 7:46 am

    First we had “Extreme Makeover”. Pretty good show. Then we had “Extreme Makeover – Home Edition”. Pretty good show and people were helped. Now we have “Extreme Makeover – Fannie/Freddie Edition”. Hopefully many people will be helped. It is time to get the lobbyist out of the mortgage market, I just don’t know that it will happen with government, lawmakers with their hands out, in control.

  3. Jonathan Washburn

    September 8, 2008 at 9:47 am

    I haven’t read this anywhere else, but it is almost exactly my gut reaction to the news. I was explaining it to my father in law yesterday, because he is about to put his home on the market, and I was hoping I wasn’t steering him in the dead wrong direction.
    Thanks for your insight Jeff!

  4. Kaye Thomas

    September 8, 2008 at 10:47 am

    Jeff.. I think you have read the situation correctly. People forget that Fannie started out as government entity in the late ’30’s to work with homeowners in trouble because of the Depression. It became a quasi government operation in the ’60s when it was sorta… kinda… privatized and Freddie was created sometime thereafter.

  5. Mike Parker

    September 8, 2008 at 3:43 pm

    My take on this is simple: the “full faith and credit of the United States” is more of a comfort than a reality, but it will assure insured mortgages for American home buyers. Without such guarantees, it is conceivable there would be none.

    Our economy is far worse off than the government will admit. I don’t think we could have sustained a complete collapse of a permanent nature in housing and mortgage lending without economic upheaval the likes of which has not been seen since the 1930’s.

    No one believes that any investment is safe, anymore. However, everyone believes that we will print as much money as needed to assure our own survival, and that is the belief that makes the financing world go round, today. This takeover is gutsy and correct: better to risk billions in subsidies than our national health, and believe me, without guaranteed mortgages, the pain seen in the past two years would correlate to “2” on a scale of “10;” there simply wasn’t a choice.

    .

  6. JeffX

    September 9, 2008 at 10:35 am

    As an aside, here’s hoping the underwriting approval (quagmire) process improves as well. Many mortgage professionals were (are) ready to go postal on underwriters for ridiculous stip sheets.

    Rates have substantially improved since this announcement, so expect delays when loans go into underwriting, my guess is lenders aren’t equipped to handle a significant uptick in business.

  7. Bob

    September 9, 2008 at 10:57 am

    Excellent overview and analysis.

    Many speculators made a lot of money by short selling Fannie and Freddie’s stock

    By far, the easiest way to make money this year that I didn’t do.

  8. Matthew Rathbun

    September 9, 2008 at 7:18 pm

    I’ve read a score of these posts and opinions. Your post is by far the best and most comprehensive I’ve seen. As well balanced as this is, I still wish that the Government would take some of their new found “bailout” money and put it into in-house supervision for the lenders. In our area we could sell more houses if it wasn’t taking MONTHS to hear back from the lenders on Short Sale approvals….

  9. media kingdom

    September 19, 2008 at 7:10 pm

    from a historical standpoint it’s hard to object to the government’s mass bailouts since similar debt-producing methods were put into action to save the U.S. from the Depression; maybe we’ve been headed for socialism this entire time…

  10. Nashville Grant

    February 23, 2010 at 5:54 pm

    Jeff,

    I love going back and reading these articles a few real estate cylces after they have been written. How are you feeling about Fannie and Freddie now that they are adjusting their lending requirement, their foreclosure ratios and HUD’s FHA standards?

    • Jeff Corbett

      February 23, 2010 at 7:13 pm

      I think they’re done in their current iteration, either being abolished or totally overhauled in 12 to 18 mos.
      The adjustments you mention are just the tip, considering the Fed has decided its time to stop backstopping the MBS market en masse at the end of March…turning the market back to the private sector, oh my…

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Austin

Austin tops the list of best places to buy a home

When looking to buy a home, taking the long view is important before making such a huge investment – where are the best places to make that commitment?

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Looking at the bigger picture

(REALUOSO.COM) – Let us first express that although we are completely biased about Texas (we’re headquartered here, I personally grew up here), the data is not – Texas is the best. That’s a scientific fact. There’s a running joke in Austin that if there is a list of “best places to [anything],” we’re on it, and the joke causes eye rolls instead of humility (we’re sore winners and sore losers in this town).

That said, SelfStorage.com dug into the data and determined that the top 12 places to buy a home are currently Texas and North Carolina (and Portland, I guess you’re okay too or whatever).

They examined the nerdiest of numbers from the compound annual growth rate in inflation-adjusted GDP to cost premium, affordability, taxes, job growth, and housing availability.

“Buying a house is a big decision and a big commitment,” the company notes. “Although U.S. home prices have risen in the long term, the last decade has shown that path is sometimes full of twists, turns, dizzying heights and steep, abrupt falls. Today, home prices are stabilizing and increasing in most areas of the U.S.”

Click here to continue reading the list of the 12 best places to buy a home…

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Average age of houses on the rise, so is it now better or worse to buy new?

With aging housing in America, are first-time buyers better off buying new or existing homes? The average age of a home is rising, as is the price of new housing, so a shift could be upon us.

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aging housing inventory

The average home age is higher than ever

(REALUOSO.COM) – In a survey from the Department of Housing and Urban Development American Housing Survey (AHS), the median age of homes in the United States was 35 years old. In Texas, homes are a bit younger with the median age between 19 – 29 years. The northeast has the oldest homes, with the median age between 50 – 61 years. In 1985, the median age of a home was only 23 years.

With more houses around 40 years old, the National Association of Realtors asserts that homeowners will have to undertake remodeling and renovation projects before selling unless the home is sold as-is, in which case the buyer will be responsible to update their new residence. Even homeowners who aren’t selling will need to consider remodeling for structural and aesthetic reasons.

Prices of new homes on the rise

Newer homes cost more than they used to. The price differential between new homes and older homes has increased from 10 percent traditionally to around 37 percent in 2014. This is due to rising construction costs, scarcity of lots, and a low inventory of new homes that doesn’t meet the demand.

Click here to continue reading this story…

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Housing News

Are Realtors the real loser in the fight between Zillow Group and Move, Inc.?

The last year has been one of dramatic and rapid change in the real estate tech sector, but Realtors are vulnerable, and we’re worried.

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Why Realtors are vulnerable to these rapid changes

(REALUOSO.COM) – Corporate warfare demands headlines in every industry, but in the real estate tech sector, a storm has been brewing for years, which in the last year has come to a head. Zillow Group and Move, Inc. (which is owned by News Corp. and operates ListHub, Realtor.com, TopProducer, and other brands) have been competing for a decade now, and the race has appeared to be an aggressive yet polite boxing match. Last year, the gloves came off, and now, they’ve drawn swords and appear to want blood.

Note: We’ll let you decide which company plays which role in the image above.

So how then, does any of this make Realtors the victims of this sword fight? Let’s get everyone up to speed, and then we’ll discuss.

1. Zillow poaches top talent, Move/NAR sues

It all started last year when the gloves came off – Move’s Chief Strategy Officer (who was also Realtor.com’s President), Errol Samuelson jumped ship and joined Zillow on the same day he phoned in his resignation without notice. He left under questionable circumstances, which has led to a lengthy legal battle (wherein Move and NAR have sued Zillow and Samuelson over allegations of breach of contract, breach of fiduciary duty, and misappropriation of trade secrets), with the most recent motion being for contempt, which a judge granted to Move/NAR after the mysterious “Samuelson Memo” surfaced.

Salt was added to the wound when Move awarded Samuelson’s job to Move veteran, Curt Beardsley, who days after Samuelson left, also defected to Zillow. This too led to a lawsuit, with allegations including breach of contract, violation of corporations code, illegal dumping of stocks, and Move has sought restitution. These charges are extremely serious, but demanded slightly less attention than the ongoing lawsuit against Samuelson.

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Last fall, the News Corp. acquisition of Move, Inc. was given the green light by the feds, and this month, Zillow finalized their acquisition of Trulia.

…Click here to continue reading this story…

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