by Nancy Deane, Colorado Express Mortgage
As you know, in a truly historic event yesterday, Treasury Secretary Paulson and Federal Housing Finance Agency Director Lockhart announced that “FHFA has placed Fannie Mae and Freddie Mac into conservatorship.” The government (FHFA) will now be managing Fannie Mae and Freddie Mac for the foreseeable future. What does mean to you?
To stabilize and to stimulate the housing and financial markets, the Federal Government is taking the following key steps.
- The GSEs will be allowed to increase their MBS (Mortgage Backed Securities) portfolios through the end of 2009
- Treasury will be initiating a program to purchase GSE mortgage-backed securities (through December 31, 2009)
- Treasury has established a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac and the Federal Home Loan Banks
We believe that Treasury Secretary Paulson and the Bush Administration determined Fannie Mae and Freddie Mac were unable to perform their housing missions at a time when they were most needed because the GSEs were trying (unsuccessfully) to address safety and soundness issues associated with raising capital. As a result of this plan, Treasury has indicated that the GSEs will now not be under any pressure to sell assets.
In the short-term, we expect mortgage liquidity should improve. Rates should decline as the risk spreads built into the GSE pricing (due, in part, to fear of potential GSE failure) should be reduced if not eliminated. The extent of the decline will depend on what happens to Treasury yields in the coming days.
Without capital constraints in the near term and based on Secretary Paulson’s comments (see below) , we believe the new Fannie and Freddie will likely rollback at least some of their price increases and loosen underwriting requirements to some extent. It will be curious to see the MI reaction to this government intervention as their tightening of guidelines will now be “front and center” in the effort to expand mortgage financing availability.
We also believe Secretary Paulson’s call to examine the guaranty fee structure could lower those fees across-the-board. It will be interesting to see if the government-controlled GSEs will implement a Ginnie Mae-type flat fee structure and at what level.
On a longer term basis, there will be a “heavyweight” debate next year and beyond about the future size and structure of the GSEs (e.g. public or private entities). That debate will not occur until the new Congress and Administration take office next year.
Why did Treasury/FHFA take this action?
It appears to us that Treasury/FHFA lost confidence in Fannie Mae and Freddie’s Mac’s ability to support the housing recovery while, at the same time, addressing their safety and soundness responsibilities by preserving and raising capital. Below are some of Secretary Paulson and Director Lockhart’s remarks which lead us to this conclusion.
Director Lockhart said:
“Their market share of all new mortgages reached over 80 percent earlier this year, but it is now falling. During the turmoil last year, they (the GSEs) played a very important role in providing liquidity to the conforming mortgage market. That has required a very careful and delicate balance of mission and safety and soundness. A key component of this balance has been their ability to raise and maintain capital. Given recent market conditions, the balance has been lost. Unfortunately, as house prices, earnings and capital have continued to deteriorate, their ability to fulfill their mission has deteriorated. In particular, the capacity of their capital to absorb further losses while supporting new business activity is in doubt. Today’s action addresses safety and soundness concerns. … The result has been that they have been unable to provide needed stability to the market. They also find themselves unable to meet their affordable housing mission. Rather than letting these conditions fester and worsen and put our markets in jeopardy, FHFA, after painstaking review, has decided to take action now. ”
Secretary Paulson said:
“I attribute the need for today’s action primarily to the inherent conflict and the flawed business model imbedded in the GSE structure and the ongoing housing correction”. He added that he has “long said, the housing correction poses the biggest risk to the economy”.
“Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner” and that “the primary mission of these enterprises will now be to proactively work to increase the availability of mortgage finance including by examining the guaranty fee structure with an eye toward mortgage affordability”.
We have all seen the steps that Fannie Mae and Freddie Mac have taken to preserve and raise capital throughout this year. These measures have included raising prices on mortgages and tightening underwriting guidelines. As everyone is also aware, they have been aggressively trying to put back loans to seller-servicers who, in turn, are going back to originators.
Secretary Paulson in particular appeared to conclude that GSEs cannot serve two masters (i.e. its housing mission and its shareholders) during the housing crisis.
What does this mean?
To state the obvious, we are in uncharted waters. This plan is not a “silver bullet” that will address the underlying problems (i.e. record mortgage delinquency and foreclosures) that caused the need for this unprecedented action. MBA’s National Delinquency Survey last week indicated that over 9% of all mortgages are either delinquent or in the foreclosure process. While the new GSE approach to mortgage availability will increase the number of potentially eligible borrowers, it will likely not have any significant impact on affordability (borrowers must still qualify and make down payments) in those markets where house prices increased the most during the “housing bubble” until house prices and borrower incomes are in line. With this as a caveat, below are our immediate thoughts.
Short term goals
Two of the immediate goals of this action are: 1) “to increase the availability of mortgage finance” as Secretary Paulson said and 2) to lower mortgage interest rates through the Government guarantee of GSE debt.
Long term objectives
On a longer term basis, the Government’s action yesterday raises the fundamental question about the government’s role in housing going forward.
Secretary Paulson deferred the discussion of this question and the “flawed GSE business model” ( i.e. serving two masters —public and private objectives) to the next Administration and Congress.
In this update, we will focus on short-term impact since the debate about the GSEs’ future structure and size will depend on who wins the election and the make-up of the Congress.
Short term Impact
For the housing industry, the short-term impact of the Government takeover appears to be positive.
- – Mortgage rates should decline
- – Liquidity should be increased
- – GSEs should loosen standards (somewhat)
- – GSEs should reduce fees including guaranty fees
- – Some housing experts feel house price may stabilize sooner and the level of further house price decline will be moderated as a result
- – There could be a mini-refinance boom if the rate decline materializes.
- – Hedging of servicing portfolios and pipeline problems will have to be addressed
- – More aggressive GSEs could slow down FHA’s growth
- – FHA appeared on the way to 50% market share later this year.
- – What will be the impact on margins?
There are many questions to be answered in the coming days and weeks:
(Here are a couple)
– How will the MI companies react?
- Their underwriting and pricing policies will be “front and center” if the GSEs take the actions we expect
- What will the new Fannie/Freddie management’s policy be on buybacks? Will they be more reasonable?
- On g-fees, will the GSEs pursue the Ginnie Mae approach (uniform g-fees across the board)?
- What will be the new GSEs do with respect to lender relationships (preferential pricing, etc.)?
We can expect some interesting times ahead . . .
Another resource on the “nationalization” of FNMY and Freddie.
(For questions about this or any loan questions, contact Nancy here)