Posts Tagged ‘Fannie Mae’

The financial sector has had a tough slog in recent years, but the billions of dollars in losses that played out during and after the 2008 crisis have largely passed. That is, of course, except for Fannie Mae and Freddie Mac.

The mortgage finance giants have taken on a greater share of supporting the U.S. housing market as private players pared back their exposure in recent years, and the result has been billions of losses on the taxpayer dime. Fannie Mae reported the latest of those Wednesday, booking a $16.9 billion 2011 loss capped off by the loss of $2.4 billion in the fourth quarter.

Could repeal Obama’s healthcare law and eliminate Department of Education and HUD

By PAUL BEDARD
October 18, 2011 RSS Feed Print
The Tea Party would go much further than the House Republicans, the Simpson-Bowles Commission and the congressional super-committee with its new deficit cutting plan, pushing reductions of $9 trillion over 10 years by eliminating several major programs and agencies.

[Check out political cartoons about the Tea Party.]

Previewing its plan set for a mid-November release, FreedomWorks today reported that most Tea Party supporters want to kill Obamacare, close the doors on the Departments of Education and Housing and Urban Development, and privatize financial giants Fannie Mae and Freddie Mac.

“There’s a real hunger for bold, principled solutions and an end to bipartisan ‘kicking the can down the road.’ As we know only too well, many regular citizens out there have pretty much given up on Washington insiders ever listening to their concerns,” said the preview provided to Whispers.

Disappointed by the size of the cuts made in July’s debt ceiling deal, FreedomWorks created a Tea Party Debt Commission with a goal of cutting $9 trillion over 10 years. It encouraged Tea Party supporters to help and set up a Web page and poll to help sift through potential budget cutting targets.

[Check out political cartoons about the budget and deficit.]

The top 10 suggested cuts by Tea Party members total $6 trillion over 10 years, more than the cuts proposed by House Budget Committee Chairman Paul Ryan, the president’s Simpson-Bowles Commission, and the totals being sought by the congressional “super committee.”

The Tea Party’s top 10 preferred cuts:

1. Repeal Obamacare (93%)

2. Reduce duplicative purchases of Pentagon Supplies (90%)

3. Eliminate Department of Education (81%)

4. Privatize Fannie Mae & Freddie Mac (81%)

5. Reduce discretionary spending to 2008 levels (76%)

6. Block grant Medicaid (74%)

7. End ethanol tax credits (71%)

8. Sell needless federal buildings (71%)

9. Eliminate HUD (70%)

10. Reduce Medicare teaching subsidies (68%)

See the full preliminary report here.

Read: Tea Party: Stop Comparing Occupy Wall Street To Us.
Check out political cartoons about the Tea Party.
See editorial cartoons about the budget and deficit.

The Wall Street Journal   MARCH 31, 2011
Republicans miss a chance to put the toxic twins out of business.

Democrats like to paint House Republicans as “extreme” ideologues held captive by the Tea Party. But after reviewing the House GOP’s new plan to reform the housing market, we wish the Tea Party had grabbed a few more hostages.

On Tuesday Republicans on the House Financial Services Committee introduced eight bills to reform Fannie Mae and Freddie Mac, the government-created mortgage giants at the heart of the financial crisis. These toxic twins have already gobbled up $156 billion of taxpayer money. But not one of the eight bills would shut down Fannie or Freddie—even on a delayed fuse.

You could argue that the House GOP has rolled out a less aggressive reform plan than one of the options recently floated by Treasury Secretary Timothy Geithner. Yes, the same Secretary Geithner who quietly gave Fan and Fred an unlimited call on taxpayer cash on Christmas Eve of 2009. Can he really be among the Beltway’s boldest voices for reform only five months after a bailout-weary electorate turned the House over to Republicans?

Those Republicans seem to have decided that fundamental reform isn’t possible with a Democratic Senate. At least that’s the charitable view. Another is that Financial Services Chairman Spencer Bachus, a longtime friend of the mortgage twins, still can’t liberate himself from the housing lobby that wants Fan and Fred to rise again. Whatever the reasons, taxpayers hoping for a clean break from Washington’s housing folly are being offered merely incremental enhancements.

This is not to say that the incremental moves aren’t positive. They would represent a great first step if this wasn’t a once-in-a-Congressional-career chance to slay these beasts before they live to start another financial crisis. History shows that, once the memories of 2008 begin to fade, Fan and Fred will be extremely persuasive in convincing politicians that allowing them to grow is a boon to homeowners.

For now, the Republican plan would begin to cut them down to size. Texas Representative Jeb Hensarling’s bill would reduce the size of the mortgage portfolios held by Fannie and Freddie over five years. Each of these “government-sponsored enterprises” would be limited to holding $700 billion in mortgages in year one and no more than $250 billion by year five.

These loans and pools of loans that Fan and Fred own outright are a key source of risk. But remember that the much larger potential liabilities are all of the mortgages owned by others but guaranteed by Fan and Fred, and therefore by taxpayers. Fan and Fred could continue issuing those guarantees indefinitely.

Californian Ed Royce’s bill would abolish Fan and Fred’s affordable housing goals. Former Fannie Mae executive Ed Pinto has shown how increases in these goals mandated by the Clinton and Bush Administrations led to catastrophic declines in the quality of underwriting at the companies. Mr. Royce said this week that as a result Fan and Fred had purchased more than $1 trillion in “junk loans” from the likes of Countrywide Financial, and his bill would also reduce taxpayer risk.

A third bill, by Texan Randy Neugebauer, would direct federal regulators to slowly raise the fees Fan and Fred charge to guarantee mortgages against default. The idea is to gradually price this insurance in line with Fan and Fed’s private competitors. This could be significant, if taxpayers can count on regulators to execute the policy.

Another useful reform is New Jersey Representative Scott Garrett’s plan to strip Fan and Fred’s exemption from new mortgage rules mandated by the Dodd-Frank law. The Obama Administration this week rolled out new risk-retention rules, but they affect only private issuers of mortgage-backed securities. Absent reform, this will freeze in place the dominant share of the mortgage market now enjoyed by Fannie, Freddie and the Federal Housing Administration.

The House GOP thinking seems to be that throwing out several reforms will increase the chances that one or more will stick in the Senate. Perhaps that will turn out to be shrewd, but offering so many bills could also let the Senate’s Fan and Fred backers pick the least important and claim to support “reform” that is no such thing.

Senator John McCain will roll out a better plan today that would force Fan and Fred to shut down or go private within five years. His proposal also includes the crucial reform of shrinking the size of the loans that Fan and Fred can guarantee, which is now $729,750 for homes in the most expensive areas and is set to decline to $625,500 at the end of September. Bringing this so-called conforming loan limit down to zero over a few years, and then setting a date for the liquidation of Fan and Fred, is the reform that taxpayers need.

The Wall Street Journal

OPINION FEBRUARY 1, 2011
By Peter J. Wallison

There’s nothing wrong with these loans, but there’s no good policy reason why taxpayers should subsidize them.

One remarkable feature of the current debate in Washington about the future of Fannie Mae and Freddie Mac is the prominence given to one kind of mortgage—the 30-year, fixed-rate loan. The proponents of a continuing role for government in housing finance are going from office to office on Capitol Hill arguing that, without government backing, American homeowners will not have access to this particular loan. Many legislators believe that the 30-year, fixed-rate mortgage is good for homeowners and good for the government to support as a matter of policy.

There are two questions to ask. Is it true that this loan will only be made to homeowners if the government stands behind it? And is government support for this particular kind of loan good policy?

The idea that government backing is required for a 30-year, fixed-rate loan has some surface plausibility. Many people who don’t follow the financial markets might assume that lending money for that long a period at a fixed rate would be too risky for the private sector.

Peter Wallison of the Financial Crisis Inquiry Commission blames federal housing policies. Also, Global View Columnist Bret Stephens and Matthew Kaminski of the editorial board on the protests in Cairo and around the region.
Anyone can prove this assumption is wrong, however, simply by going to Google and typing in “30-year jumbo fixed rate mortgage.” The word “jumbo” is mortgage market jargon for loans that are too large to be bought by Fannie or Freddie, or insured by the Federal Housing Administration. That means a jumbo mortgage is not backed in any way by the government. But a Google search will return dozens of offers. In other words, government backing is not necessary in order to make this loan available to homeowners.

When confronted with this fact, proponents of government mortgage guarantees will argue that these jumbo fixed-rate mortgages—because they don’t have government backing—are more expensive than those available from Fannie and Freddie.

This is true. The 30-year, fixed-rate mortgages offered by Fannie and Freddie are somewhat less expensive (recently about .5%) than those offered by banks and others without government backing. But that is only because the taxpayers are subsidizing this loan. That subsidy is hidden most of the time, except when—as now—Fannie and Freddie become insolvent and the taxpayers’ subsidy becomes all too visible.

So, one might ask: Is this kind of mortgage loan such a good deal for homeowners that it makes policy sense to have the taxpayers take the losses that inevitably seem to flow from government guarantees? The answer is clearly no.

Analyses of the 2008 financial crisis almost uniformly note that housing price declines were particularly destructive because so few homeowners had substantial equity in their homes. This gave rise to many foreclosures and to strategic defaults, where homeowners walked away from homes that were worth less than the mortgage—i.e., when they were “underwater.”

This brings us to the 30-year, fixed-rate mortgage. This loan amortizes principal very slowly. It is popular because it maximizes the benefits of the mortgage interest tax deduction and keeps the homeowner’s monthly payment low. But it also means that homeowners accumulate equity in their homes very slowly. Most of the monthly payments are interest (very little is principal) for many years.

Following the enactment of affordable housing standards for Fannie and Freddie in 1992, mortgage underwriting standards deteriorated in this country. As I argued in my dissent from the recent report of the Financial Crisis Inquiry Commission, it seems to have been a deliberate policy of the Department of Housing and Urban Development to reduce mortgage standards and down payments in order to assure that mortgage credit was available to a wider section of the U.S population. By the late 2000s, more than one-third of all new mortgages had down payments of 3% or less. Here, too, homeowners have very little equity in their houses at the outset. And building equity takes longer in the case of 30-year, fixed-rate mortgages.

We should have no objection, of course, if homeowners want this type of loan. That’s certainly their right. The question is whether the taxpayers should subsidize them.

Mr. Wallison is a senior fellow at the American Enterprise Institute.

The Wall Street Journal

JANUARY 22, 2011 By NICK TIMIRAOS
The Obama administration is likely to miss a deadline for issuing a long-awaited report about the future of mortgage giants Fannie Mae and Freddie Mac, and what might replace them.

The Dodd-Frank law enacted last year to overhaul financial-industry regulations didn’t address how to reshape the troubled mortgage concerns, which have cost taxpayers a combined $134 billion since they were taken over by the government in 2008. But the law did require the Treasury Department to report recommendations for Fannie and Freddie by Jan. 31.

The administration now plans to release the report by mid-February. Officials say the delay is needed to accommodate other major policy initiatives, including next month’s release of the annual budget and the president’s State of the Union address next Tuesday.

People familiar with the matter say a final proposal has also been stymied by turnover of senior staff that had been heavily involved in drafting the report. There have also been policy disagreements between Treasury and White House officials, which has complicated efforts to reach consensus, these people said.

Due to the lack of agreement, once a final report is released it is likely to contain two or three proposals for what should replace Fannie and Freddie, and discussions of the merits and drawbacks of the different approaches, according to people familiar with the plans.

One of the proposals will outline a way for the government to continue backing certain mortgage-backed securities, while another will discuss how to structure a market with no government guarantees. The report also is likely to include a detailed road map for the short-term steps that can be taken to prepare for a transition to either model.

Offering multiple proposals could help the administration build support from different stakeholders and frame the coming debate with Congress. Republicans may face their own divisions over whether to embrace a fully private market, a goal of many conservative lawmakers.

Republicans were sharply critical of the absence of Fannie and Freddie in the Dodd-Frank bill and missing the deadline is almost certain to spark further criticism from GOP lawmakers.

Officials have spent months researching proposed structures, with a particular focus on whether there is enough capacity in capital markets to finance mortgages without some type of government backstop. The administration still hasn’t reached accord on that key point.

Fannie Mae and Freddie Mac own or guarantee around half of the $10.6 trillion in U.S. home loans outstanding. The firms buy mortgages from lenders and sell them as securities to investors, guaranteeing to make investors whole if borrowers default. Without any government guarantee, some investors are likely to demand higher rates. Others won’t invest at all.

Top administration officials have spoken favorably in public about the merits of a limited but explicit government guarantee of securities backed by certain types of mortgages. Supporters of this approach worry that without a guarantee, mortgage markets won’t function well in times of stress, potentially exacerbating financial shocks.

Under such a model, bank-owned cooperatives or companies run like heavily regulated utilities would take over some of the market-backstop functions of Fannie and Freddie, and the mortgage securities they issue would be explicitly guaranteed by the U.S. government.

That explicit guarantee would differ from the existing model, where investors merely assumed the government would bail out Fannie and Freddie if they became insolvent. That implied guarantee lowered borrowing costs for the companies.

But others in the administration worry the government won’t charge sufficient fees from mortgage originators to cover the true cost of any guarantee, setting up the same hazard that led to Fannie and Freddie’s collapse.

A separate concern is that allowing bank-owned cooperatives to issue government-backed mortgage bonds could concentrate more power among the largest U.S. banks, according to a December report from analysts at Barclays Capital. Further consolidation “would seem to be at cross-purposes with the legislative reform efforts to end the ‘too big to fail’ paradigm,” the report said.

Most analysts don’t expect legislation this year, and any transition period could take between 15 and 20 years, according to Barclays.

At a minimum, the Treasury is likely to take steps to begin encouraging private capital to return to the market, both by allowing Fannie and Freddie to raise fees they charge lenders and by reducing the maximum loan limits for mortgages the companies can purchase. The administration will have to do so carefully, however, because steps that limit the cost or availability of mortgages could hurt still-fragile housing markets.

Any proposal that includes a government guarantee of mortgages would need to spell out other key issues, including which mortgage products would be eligible for government backing and how the government would price those guarantees.

A report to be issued next week by the Center for American Progress, a liberal think tank with close ties to the Obama administration, provides one of the most detailed road maps yet for how to create that structure.

Under the proposal, the firms that issue government-guaranteed securities wouldn’t be controlled by banks and would be chartered by regulators. Multiple firms would issue the same security, allowing for mortgage bonds to continue trading even if one issuer became insolvent. The loan limits would restrict the companies to serving middle-class homeowners.

Thursday, January 20, 2011 02:30 PM
By: David A. Patten

Buoyed by their successful vote to repeal healthcare reform, conservative House Republicans on Thursday rolled out plans for a massive, $2.5 trillion cut in federal spending over the next 10 years.

Rep. Jim Jordan, R-Ohio

The proposal, to be contained in the Spending Reduction Act of 2011, would reset non-security discretionary spending to 2008 levels, affecting everything from state stimulus money to federal involvement in mortgage giants Fannie Mae and Freddie Mac, to foreign aid, education, transportation, scientific research and over 100 other federal programs.

“Whether Americans realize it or not, we are all running together in a race against time. Unless Washington takes swift action to cut spending, we will chain our children to debt and rob them of the opportunity to reach for the American Dream,” declared Sen. Jim DeMint, R-S.C., Rep. Jim Jordan, R-Ohio, and Rep. Scott Garrett, R-N.J. in an op-ed published in the Washington Examiner Wednesday.

DeMint has announced he will introduce a companion bill in the Senate mirroring the House proposals.

Jordan, the chairman of the conservative Republican Study Committee, unveiled the budget-austerity package on Thursday at the conservative, D.C.-based Heritage Foundation think tank.

House Minority Leader Eric Cantor pledged the RSC proposals will be allowed to come up for an up-or-down vote on the floor of the House.

“I applaud the Republican Study Committee for proposing cuts in federal spending, and I look forward to the discussion on reducing spending that our country so desperately needs to have,” said Cantor. “As promised, we will have an open process when it comes to spending bills. I look forward to these cuts and others being brought to the floor for an up-or-down vote during consideration of the continuing resolution [for funding the federal government], and I support that effort.”

Among the committee’s proposals:

Automatic pay increases for civilian federal workers would be eliminated for the next five years.
The civilian workforce would be cut by 15 percent through attrition.
All stimulus funding not already spent would be “clawed back” and eliminated. This would further aggravate the near-desperate fiscal conditions of several states that are facing massive deficits.
Funding for the controversial Corporation for Public Broadcasting would be eliminated, saving $445 million per year.
Funding for the National Endowment for the Arts and the National Endowment for the Humanities would be eliminated, saving over $320 million annually.
Some $1.56 billion would be saved by eliminating all federal subsidies to Amtrak.
Some 68 duplicative education programs would be eliminated, saving $1.3 billion annually.
$1 billion would be gained through requiring the collection of unpaid taxes by federal employees.
$900 million would be saved by eliminating funds for the administrative cost of setting up Obamacare.
Republicans know that by getting specific on what they want to cut from the budget, they open themselves up to a constant drubbing from Democrats who will say their ruthless proposals will cost jobs and endanger the fragile economic recovery.

But as indicated by warnings from bond-rating agencies about the soundness of U.S. debt, especially in the municipal bond market, Republicans will make the case that the greater danger lies failing to address a national debt that has ballooned alarmingly from $8.6 trillion to $14 trillion since Democrats took over control of the House of Representatives in January 2007. And they point to the power of the tea-party movement, saying it will help them transform their objectives into reality, despite the heavy political opposition that is expected.

Adam Brandon, a spokesman for the FreedomWorks organization that helps facilitate the grass-roots conservative movement, tells Newsmax that the emergence of the tea parties has permanently changed what he called “the old-school playbook,” in which any politician proposing budget cuts used to be bludgeoned politically.

“The tea party is not going anywhere,” he says. “It’s this new player on the field that is setting the debate. These are the folks that are showing up in an office and they’re actually saying: ‘We want less.” Which is something that you haven’t had happen, especially to this magnitude. So I believe what we have is an opportunity, where the discourse has been changed where people are actually going to support people who stick their necks out and want less.”

Grass-roots conservatives welcomed the initiatives rolled out Thursday, but noted they do not address the major entitlement programs that consume most of the federal budget: Medicare, Medicaid, and Social Security.

They also emphasized that they do not accept recent signals from the GOP leadership suggesting Republicans will back away from cutting $100 billion in the current-year budget, as promised in the Pledge to America platform that helped propel the GOP to a record landslide in November. That outcome, they say, would not be acceptable.

Everett Wilkinson, the Florida Tea Party Patriots leader who sits on the organization’s national leadership council, tells Newsmax that the $2.5 trillion proposal is a “great first step,” although he says much more needs to be done to rein in federal spending.

But he also warned that grass-roots conservatives will not accept any proposal that backs off of the $100 billion pledge.

“That’s why they got elected,” he said. “They have a tough job. We understand that. We support them in that. But again, they made that deal to get elected, so we’re going to hold them accountable.”

FreedomWorks’ Brandon says the general thrust of Jordan’s proposals deserve strong support, but not at the cost of failing to make the cuts that were promised this year.

“The [$100 billion] pledge was put together by Republican leadership,” he told Newsmax. “It’s a very dangerous thing to get into if you throw something out there, and then you back away from it. To me they absolutely have to honor that commitment.”

The RSC plan is but one of several GOP proposals for austerity, which are meant to answer the months-long Democratic meme charging that Republicans had promised sharp budget cuts without identifying specific programs they would be willing to cut.

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