The end of the 30 year mortgage?

Without Loan Giants, 30-Year Mortgage May Fade Away

Excerpt:

How might home buying change if the federal government shuts down the housing finance giants Fannie Mae and Freddie Mac?

The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say.

Interest rates would rise for most borrowers, but urban and rural residents could see sharper increases than the coveted customers in the suburbs.

Lenders could charge fees for popular features now taken for granted, like the ability to “lock in” an interest rate weeks or months before taking out a loan.

Life without Fannie and Freddie is the rare goal shared by the Obama administration and House Republicans, although it will not happen soon. Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide.

The reasons by now are well understood. Fannie and Freddie, created to increase the availability of mortgage loans, misused the government’s support to enrich shareholders and executives by backing millions of shoddy loans. Taxpayers so far have spent more than $135 billion on the cleanup.

The much more divisive question is whether the government should preserve the benefits that the companies provide to middle-class borrowers, including lower interest rates, lenient terms and the ability to get a mortgage even when banks are not making other kinds of loans.

Comment: Ending Fannie Mae and Freddie Mac would be a good thing. Years ago 15 and 20 year loans were the norm. A close family member in her mid-20's bought a home with a 15 year loan. We just paid off a 15 year loan ourselves. Cheap credit fueled the housing bubble. 6 years ago I was talking to a mortgage broker and he was telling me that he was selling 40 year mortgages ... my view then ... CRAZY

92% — The share of new mortgage loans backed by the U.S. government

Government’s Overwhelming Role in Mortgages

Excerpt:

Fannie alone ranks as the world’s largest bank by assets, while Freddie is in the top ten. The firms’ subsidized mortgages encourage Americans to take on a lot of debt. Their balance sheets, consisting of long-term investments financed with short-term borrowing, make them highly susceptible to sudden credit freezes. Their government ownership means taxpayers stand to lose tens of billions of dollars if the firms get into trouble again.

...

On Friday, the U.S. Treasury published a “white paper” with some ideas on how to handle the behemoths. Fannie and Freddie can curb borrowers’ ability to get too deep into debt by requiring larger down payments and lowering loan limits. They can increase the fees they charge for mortgage guarantees to bring those fees more in line with the risk they’re taking on. And they can gradually wind down their businesses, ceding the market to private lenders who must have ample capital to protect them from bankruptcy in the event of losses. All that can help remove market distortions and save taxpayers’ money.

Comment: Time to phase Fannie Mae and Freddie Mac out of the Mortgage business. Begin to close the doors now and fully shutter them in 5-7 years! Click through to the WSJ article for a helpful chart.

Fannie Mae's divining rod

Pressured to Take on Risk, Fannie Hit a Tipping Point

Excerpt:

Between 2005 and 2008, Fannie purchased or guaranteed $311 billion in loans to risky borrowers — more than five times as much as in all its earlier years combined, according to company filings and industry data.

“We didn’t really know what we were buying,” said Marc Gott, a former director in Fannie’s loan servicing department. “This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.”

Last month, the White House was forced to orchestrate a $200 billion rescue of Fannie and its corporate cousin, Freddie Mac. On Sept. 26, the companies disclosed that federal prosecutors and the Securities and Exchange Commission were investigating potential accounting and governance problems.

...

Fannie never actually made loans. It was essentially a mortgage insurance company, buying mortgages, keeping some but reselling most to investors and, for a fee, promising to pay off a loan if the borrower defaulted. The only real danger was that the company might guarantee questionable mortgages and lose out when large numbers of borrowers walked away from their obligations.

So Fannie constructed a vast network of computer programs and mathematical formulas that analyzed its millions of daily transactions and ranked borrowers according to their risk.

Those computer programs seemingly turned Fannie into a divining rod, capable of separating pools of similar-seeming borrowers into safe and risky bets. The riskier the loan, the more Fannie charged to handle it. In theory, those high fees would offset any losses.

With that self-assurance, the company announced in 2000 that it would buy $2 trillion in loans from low-income, minority and risky borrowers by 2010.

Comment: A sad tale that has brought our country to our financial knees!

Fannie, Freddie and You

Fannie, Freddie and You

Excerpt:

The case against Fannie and Freddie begins with their peculiar status: although they’re private companies with stockholders and profits, they’re “government-sponsored enterprises” established by federal law, which means that they receive special privileges.

The most important of these privileges is implicit: it’s the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.

This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.

...
Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.

Comment: I confess that I don't understand the depth or breadth of this credit crisis. There's a lot that that I don't understand about these GSE's too. More below (be sure to view graphics!):

U.S. Weighs Takeover of Two Mortgage Giants

Under a 1992 law, Fannie or Freddie could be put into conservatorship if their top regulator found that either one is “critically undercapitalized.” A conservator would have sweeping powers to overhaul them, but would not have the authority to close them.

The markets showed fresh signs on Thursday of being nervous about the future of the companies. Their stock prices continued a weeklong slide, hitting their lowest level in 17 years. The debt markets, meanwhile, pushed up the two companies’ cost of borrowing — their lifeblood for buying mortgages.

The companies are by far the biggest providers of financing for domestic home loans. If they are unable to borrow, they will not be able to buy mortgages from commercial lenders. In turn, that would make it more expensive and difficult, if not impossible, for home buyers to obtain credit, freezing the United States housing market. Even healthy banks are reluctant to tie up scarce capital by offering mortgages to low-risk home buyers without Fannie and Freddie taking the loans off their books.

Together the two companies touch more than half of the nation’s $12 trillion in mortgages by either owning them or backing them. They hold more than $1.5 trillion of the mortgages as securities. Others are sold to investors in the form of mortgage-backed bonds.