Realty Views By Terry Ross
Will Finance Reform Survive?
August 27th, 2013 – One of the hottest topics in real estate right now is the debate in Washington, D.C., about the fate of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) – the two government-sponsored enterprises (GSEs) that backstop 90 percent of the mortgage loans in the United States.
A bipartisan bill introduced in June by Senators Bob Corker (R-Tennessee) and Mark R. Warner (D-Virginia) would eliminate these two private firms backed by the United States government within five years and replace them with something called the Protecting American Taxpayers and Homeowners Act (PATH). This would establish a new government agency called the Public Guarantor with a lesser role in the mortgage industry, with the aim of private investors taking up the space now mostly occupied by Freddie and Fannie.
President Obama came out widely in support of the new legislation recently during an Arizona speech when he proclaimed that Americans need the 30-year loan, that is “. . . something that families should be able to rely on when making the most important purchase of their lives.”
However good this legislation sounds, along with the President’s speech, as is usually the case in Washington the problem is in the details. And in this case, there are a lot of details that legislators and the Administration are overlooking.
For starters, many banking people believe that this legislation would be the death of the 30-year mortgage as we know it. According to PIMCO founder Bill Gross, home loan interest rates would be three points higher if it weren’t for the guarantees that banks currently get from Fannie and Freddie. Three percent over 30 years is an enormous amount of money, which will price many would-be buyers out of the housing market.
Of course not everyone believes that this is necessarily a bad thing. Part of the sub-prime failure was that people who had to stretch to get a home loan got a mortgage with escalating and balloon payments and all sorts of gimmicks to make up for inadequate income and reserves to qualify. Take away government guarantees, and this type of lending – which for years artificially compensated for the stagnation in wages – should dry up pretty quickly. That’s almost a sure loss unless the government steps in again as it did five years ago. But it also means a smaller housing market for the foreseeable future, probably along with resulting slower economic growth.
According to Katie Eichten, the senior vice president of capital markets for Western Bancorp, it will take some time for private capital to fill the void for fixed-rate loans in the absence of our current system. She feels that it could take many years for the president’s scenario to be enacted and to be successfully implemented – if it is even possible at all.
“Think how long it takes lawmakers to pass the U.S. budget every year,” she noted. “Restructuring the largest driver of the U.S. economy and the largest asset most Americans hold will take much longer. Housing has been the biggest driver of the economy’s slow recovery. Without it we would still be worrying about whether the banks are going to be healthy enough to spit $20 out of the ATM.”
In a perfect recovering economy, more and higher-paying jobs would fuel a housing recovery that did not need financing gimmicks underwritten by the current agencies. But that is not the reality. According to the Heritage Foundation, one in seven Americans – 45 million people – received food stamps in 2011. That is a 70 percent increase from 2007. There probably won’t be a huge change in the jobs picture to fuel housing.
And there might not be much appetite for Congress to actually make this change, despite all the rhetoric about saving taxpayers from a future bailout.
Although Fannie Mae received $117 billion from the federal government during the bailout in 2008-2011, it has turned the corner and is paying back the Fed in record dividends. It paid back $10 billion in dividends during the second quarter after paying a record $17 billion in the first three months of the year – and has now paid a total of $105 billion back. Freddie Mac has paid $41 billion in dividends after borrowing $72 billion since 2008. These payments are dividends and do not reduce the principal amount still owed to the taxpayers – so this is shaping up as a windfall for the federal government.
Because of this and the daunting task of dismantling a system that has been in place for decades and replacing it with a new agency that might actually not work as well for the general health of the housing market, this proposed legislation looks to be in for tough sledding.
(Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at firstname.lastname@example.org or call 562/498-1049.)
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