The question on the minds of both investors and mortgage banking executives as this week comes to a close is one they never thought they’d ask: what if Fannie and Freddie aren’t the answer?
It’s a scary thought. The two government-sponsored entities have been charged with ensuring liquidity in the secondary market for mortgages, a mission that has become critical to the U.S. housing market as the country endures its worst housing slump since the era of the Great Depression. It’s a role the GSEs have played before, but never on such a grand scale — and never with so much of the nation’s economy riding on their collective backs.
And, up until now, theirs has been the only part of the mortgage market that’s still working. Which explains why everyone is running headlong into orginating for the conforming market, or attempting to expand the definition of what conforming loans should be.
This week, Housing Wire was among the media that reported yield spreads on agency-backed mortgage bonds had reached levels not seen in more than 20 years, as the prices of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac plunged.
Regardless of the myriad of reasons likely driving the price drop, one fact remains crystal clear: the GSEs’ collective ability to keep the mortgage market moving has diminished, even if only for the short term and even if just the result of frenzied deleveraging by hedge funds and other investors on Wall Street. The result? Higher mortgage rates.
One industry source, with more than 25 years in mortgage banking, told Housing Wire yesterday that borrowers should get accustomed to higher-rate mortgages.
“We’re headed back to 10 percent,” the source said, who asked not to be named. “And that’s going to change the complexion of this industry dramatically.”
Both Fannie Mae and Freddie Mac accounted for a record 76.1 percent of new mortgage-backed securities issued in the fourth quarter, a number than industry sources say is likely to reach well above 80 percent to start 2008. Some have even suggested that the GSEs may end up owning as much as 90 percent of the lending market before this year is out.
But what if Fannie and Freddie fall victim to the same sort of crisis of confidence that has utterly paralyzed the private-party market? What if losses continue to mount, and the GSEs are forced by Congress to take on riskier and riskier loans? The idea that the GSEs might not be enough seemed almost laughable even one month ago; yet now, it’s that thought that most often sits in the back of nearly every industry participant’s mind.
“The implications are quite onerous because this was the one market that was functioning, and moreover, this is the market that the administration was counting on to maintain its liquidity so that it could help all these troubled homeowners,” said Douglas A. Dachille, chief executive of First Principles Capital Management.
“If this continues, this is going to be very bad for home prices,” Dachille said.
Not that is isn’t already very bad for home prices, of course. But the thought that things could actually get worse? Not many in the industry want to go there.
“Imagine a sinking ship with only two lifeboats, and that the sinking ship would need closer to 50 lifeboats for everyone on board,” said one source, a manager at a large independent lender who asked not to be named. “Those two lifeboats may be the best on the planet, but it won’t matter much if everyone tries to pile onto them, which is exactly what’s happening right now.”
The mortgage industry as Titanic? Now that’s a scary thought, indeed.
“very bad for home prices”
Prices will go down. Saying this is “bad” belies a value judgement that biases in favor of sellers, the same bias that led to inflated prices (a bubble) in the first place. If prices come down on any other good, government and consumer advocates say this is a good thing. Since there is an exchange, there will always be some benefit, so “bad” is just biased and wrong. If housing becomes more affordable, in the long run, the economy benefits, since high home prices sap income that could otherwise be spent on consumables, or better yet in saving. Stop perpetuating the fiction.
Rational -
I try to respond to most comments directed at me on this blog, but I don’t know how to respond to you beyond to say that I wasn’t using the word “bad” perjoratively. Re-reading the story, I still think that much is clear.
Things are, in fact, unquestionably “bad” in the housing market right now. Doesn’t mean it’s not a needed correction.
Thanks for reading,
PJ
Investors are reasonably expecting house prices to decline as a majority of experts have publically predicted, and so they have done the very simple logic to conclude that Fannie and Freddie are taking not simply a lot of risk, but evidently heading for bigger and bigger losses.
Or so many investors think.
As we know, as a large group, the wisdom of the market is often correct in predicting vs individuals.
I expect the predictions the market is making to be correct, or that they are very likely.
What should congress do?
Allow the excesses to be undone, and not try to shift the increasing losses onto taxpayers.
What should Fannie and Freddie do?
Get even more conservative in their lending requirements.
More info on your html display problems.
The “everything shifted too far left” problem seems to occur after the first quote ends.
So - you have
Regular Text
Indented quote
ular Text
Some Guy -
Thanks for pointing it out. We didn’t test on IE 6 heavily before launching, and we’ve just completed doing so now. The errors you mentioned should be fixed.
Please email feedback@housingwire.com with anything further regarding the Web site. Thanks!
Thanks for reading,
PJ
No, “bad” is a pejorative, it is not objective. Personally, I’m rejoicing at the fall in housing prices. Things are VERY GOOD! I’ve been renting and paying taxes for years and waiting for things to become affordable again so I can buy a home and start a family. I thought I was going crazy for awhile– after all, there has ALWAYS been a relationship between incomes and housing prices and it was clearly broken in 2005. I think there’s easily another 30% downside (although inflation will mask some of the fall).
Paul, I wrote about this very issue back in November. Check it out.
http://activerain.com/blogsview/281272/Fannie-Freddie-and-the
Doesn’t do you very much good for housing prices to drop 10%-20% if no one can get you a mortgage anymore. Also a $300,000 house at 5.5% is more affordable then a $200,000 home at 10%. Lower prices are not a good thing if it destroys the mortgage industry and causes rates to increase.
“a $300,000 house at 5.5% is more affordable then a $200,000 home at 10%. ”
No, it’s actually not.
Why? Because you can always refi the $200k loan into a lower rate. You can never refi the $300k loan into lower principal.
Remember, interest is never owed, it’s just paid as a loan repayment schedule progresses. You owe the principal, and no magic tricks will reduce that (unless congress has their way).
Right you are Mark— it’s amazing to me how many of these real estate / mortgage brokers are still trying to ’sell payments’ to mask the inflationary price of a home.
When the bond market FINALLY wakes up to the swath of inflation we have in the country (and investors see what a suckers bet bonds really are), interest rates will soar, putting further downward pressure on home prices. The conundrum Alan Greenspan spoke of in the earlier 2000’s, is now going in reverse.
The more congress attempts to enact legislation to re-write / re-work these toxic loan programs, the more Wall Streets securitization scam comes to light. Much to the chagrin of congress, lenders don’t hold the paper to re-work much of anything. This paper was sold with the bogus blessings of the ratings agencies all over the world.
Contaminating Fannie and Freddie - who are already on shaky ground, is simply a bad idea, and puts the country as a whole at risk for the actions of shady lenders and dopey borrowers.
K
If you believe home prices should be lower, and rates higher the only thing that will happen is home prices would CRASH, your payment would be the same, and NOBODY would build new homes, since the reason prices are higher is because consruction,permits infastructure all cost A LOT. If intrest rates increase IT WILL COST MORE> fucking idot.
one more thing, you will still be a RENTER at any interest rate or price. Here’s why.
1. Rates on adustable mortgages are currently causing the foreclosures owners are paying 12-13%. Banks are unloading them, and your still not buying.
2. You didn’t buy 7 years ago when prices were low AND rates were low.
3. IF rates go to 10% on secured real estate how high do you think credit card rates and car loans are going to be?
4. Builders will STOP building across the nation decreasing supply of homes.
5. Noboby will be able to sell, if they can keep making the payments they will keep the house. Everyone else will go in foreclosure and it will be impossible to get mortgages(risk will be too high), downpayments will be 50%. so areas with massive foreclosures will sit vacant, inturn reducing RENTAL units.
6. Rents will go up.
If you believe builders can sell for much less than they’re selling for right now, why would they be going out of business instead of reducing the price?
Real estate IS a ponzi scheme, but it’s a requirement for a stable owners society.
Even better yet. If rates go that high on real estate most likely the whole economy will grind to a halt. credit will be impossible, your job will be gone. You’d be better off living in a house the bank doesn’t want back.
the more i think about how stupid this guy is…. or how stupid he wants current owners to be. He wants everyone with a $300k house to sell it to him for $200k with high interest rates, SO….. when rates go DOWN he can REFI to a lower rate & payment. BECAUSE he EXPECTS rates to go down in the future, which inevetably will lead to people being able to afford a $300k house when rates go down. Inturn making the value of his $200k house go up? Or since he doesn’t think prices should ever be 300k and if everyone believed the way he does the value of his 200k house would never go up beyond $200k, either way if rates stay high his house will be worth 200k in 30 years, and paid basically the same amount as a person with a 300k house at 6%. Also, since he thinks 300k is too high, and 200k is a reasonable price, maybe in 5 years the next guy will think 200k is too high and he should also lose 100K making the house worth 100k.
Pay in prinipal, pay in Interest either way you have to become a first time home buyer, you can’t just want $500k house for $250k in normal market conditions. The current market is an exception. EVERYTHING IS EXPENSIVE why do you think housing is expensive? INFLATION now or later 5 years or 10 years, the price of EVERYTHING is going to go up(including your pay). How do you propose materials and labor etc. are going to decrease?
200k at 10% would pay $18,382.26 in interest over 10 years and only pay $17,651 in principal.
$1,755.14
Monthly Payment $631,851.53
Total of 360 Payments
$431,851.53
Total Interest Paid Feb, 2038
Pay-off Date
OR
$300k at 6% $15,333.15 would pay $15,333.15 in interest over 10 years and paid $47,865 in principal
$1,798.65
Monthly Payment $647,514.57
Total of 360 Payments
$347,514.57
Total Interest Paid Feb, 2038
Pay-off Date
Does anyone out there see either Home Depot or Lowes going under in the next year or so??
Very few people are remodeling, builders are not building…
Yet they are still expanding in my area…
The only businesses doing OK are Wal Mart & Costco…
Of course the stores think they’ll go on forever - I dunno - actually I do know that one or both are done!!
Can anyone explain to me why the Financials & the Builder stocks still have any investors? Up one day, down more the next and then on & on similarly…
And does anyone believe a word Mozillo (Countrywide CEO) says?? Do you think B of A would ever consumate their purchase of C Wide??
And of course Heli Ben said 17 months ago that RE will come storming back to appreciation by spring ‘07!! How could someone with the most available economic info in the world be that wrong??
Why isn’t the Fed stipulating that the $100 billion “given” to the big banks must be lent on mortgages instead of the banks shoring up their reserves to (somewhat) cover their ass(ets)??
Why, why ………………….
In south FL, refinancing out of adjustable rate utilized between 2005 & 2007, FHA is probably the only solution. FHA will play a larger role and I expect an RTC like entity to develop soon. FNMA/FHLMC are not options for high end LTV troubled loan solutions.
Mark you can not just assume you can always refinance into a lower rate. There are thousands of people losing their home right now because they assumed they could always refinance their home.
Why is it that people who “bet” on the price of a stock,
commodity, index, horse, sport outcome, or whatever are
required to take their loss if they are wrong, or get to
brag/rejoice if they are correct, yet now that most of
the people who turned a basic necessity into a commodity
for gambling purposes, cry unfair and demand help when
they finally see that any “bet” has “risk” of winning and
losing
A house was, and really should be, just a place to protect
you and your family from the elements, which also requires
expensive continuous maintenance and upkeep, and may or
may not be worth more or less than one paid for it at
any given time in the future.
Those who are financially astute or just plain lucky, have
made a ton on RE in the past 37+ yrs, but please tell me
what “investment” can ever sustain an exponential increase
in price indefinitely? It seems clear, when the mothers of
America chose to have a bigger house at any price even if
it meant her working full time to get it, even at the cost
of the breakdown of the family unit, there was a social
price to pay and also a built-in price spiral as a result.
When the government agreed to easy money and the mortgage
machine conspired to let anyone purchase a home regardless of
capacity to repay out of pure greed and with the knowledge
that they could sell the paper to the GSE’s or as structured
“investment” vehicles and have their profits basically
risk-free, you turned the house into a “speculative commodity”,
with the benefits of large profits as well as the potential
for large losses. Now that the irrational price increases
have exceeded the ability of most all home buyers to afford,
is it any wonder that the real market price of housing will
adjust downward as it has in every RE cycle since day one?
A 20-25% drop in prices would have been all most would
have experienced if greed had not been allowed into the
housing/finance sectors. Now prices are everywhere at least
50% or more overpriced and will need to adjust downward to
“where the rubber meets the road”. If the FED interferes
with the normal repricing process this price correction
may exceed -50% and hit -70% to -80%, and the “Great
Depression” will look like a cake walk. Price reversion is
never a fun time, but it is clearly not abnormal for
speculative prices to return to the mean, and overshoot
to the downside if there is government meddling.
The lesson to be learned here for any prospective home
buyer is that the seller does not have full control of the
price unless the buyer is stupid and will pay anything,
then you have a runaway price bubble. Younger would-be
buyers are lucky, they can now see that the act of merely
not responding to ridiculous prices ends the price spiral,
only ignorant/greedy folks who believe in the “greater fool
theory” will be hurt in the next few years, as prices
will fall much more and likely for a much longer period of
time than most believe is possible. Speculative tops and
bottoms are very difficult to predict with absolute
certainty, and usually last longer than thought possible.
Sadly, some ignorant and innocent borrowers were lulled into
this government-sanctioned ponzi scheme and will lose their
life savings. Hopefully the moneymen will not completely
destroy the US financial system, and they will have a chance
for a better life in the future..
If you must buy a home now, and can’t see that it is
much cheaper to be a payer of rent$ than a payer of a loan$
on an asset that is declining, and likely will decline for
quite some time, at least take the precaution of always
bidding lower than the existing market price, you may
discover you just saved yourself $30k-$200k+ or more
on your “dream home”. In normal times it would be rational
to offer 10%-20% less, right now however, it seems one needs
to offer 30% less or even more depending on how long you
intend (or are able) to make payments on the note. If you
are relying on your current job as a lifetime job, or your
current income from your business as the current minimum
you will earn in the future, you may find yourself losing
your home in the future, as recessions generally lower
all consumption in all sectors of the economy, even your
business will likely suffer reduced revenues.
If you pay the asking price in a declining market, you most
likely will find at some point in the near future that you
now are another home “owner” whose mortgage exceeds the
true value of their home, and will be faced with walking
away from the burden of 25-30yrs of excessive loan payments.
IMHO, best strategy for most would-be owners is to let the
market settle out, even if it takes 2-5 or more years from
now, and rent in the meanwhile a smaller but adequately sized
home for your needs, as utility costs will likely also increase
wildly over the next few years to a point that it may make
no sense to buy a home that is not of the most efficient
“green” design. I heard a financial pundit say that
real estate may be the worst investment over the next decade,
and from what I see right now, it seems he may be right.
The FED is now wildly panicing and throwing money at the
banking system at the rate of over a $1 Trillion/yr through
it’s newly created TAF window…this is not even close to
enough to fix the problem and in fact will make the problem
far worse than had they not done anything. Gold may soar to
$22,000 per ounce if they keep printing money like this, and
then the USA will crumble into a third world country…what
ever happened to rational financial management and protective
controls in the banking system…oh yeah, they threw them
all away because the wall street banks cried they were no longer
competitive and couldn’t make RE loans, and the protective rules
were not needed as “it was different this time.” Really?
seems to me it was pretty smart to keep wall street and mortgage
lenders very much apart.
Folks you are missing the sheer size of this.
20 million US households are in NOW in trouble (upside down) and more to follow. This is currently 43% of ALL US mortgages.
This is a systemic problem because the system encouraged it and let it happen because the Federal Reserve policies and the US governments defticits did not protect our currency. These leaders have inflated the dollar WAY too much and distortions or bubbles have occurred. It is just that simple.
Please read Gary North’s column today to understand the scope of the problem. More is available at the web site listed. Of course, the solution is simple. However, the pain is NOT minor. Stop inflating. To do otherwise will continue and MAXIMIZE the pain times 50. It would take a great leader to do this, unfortunately we only have a “hell of a leader” today AND the same will be true after November.
Upside-Down Mortgages and Sinking Home Prices
by Gary North
http://www.lewrockwell.com/north/north612.html
An upside-down mortgage is a mortgage for which the home owner owes more on the mortgage than the home is worth.
According to a report on the CBS TV “Early Morning Show” on March 10, if house prices fall another 10% nationally, 20 million households will be in an upside-down condition.
As of the year 2000, at the last census, there were 83 million residential properties. Almost 68 million were owner-occupied. Of these 68 million properties, 67% had a first mortgage. So, about 45 million homes had mortgages.
If the 20 million figure is correct, then about 43% of all mortgage-owing households would be stuck with underwater mortgages. But this assumes conditions of 2000, before the really maniacal phase of the bubble took place.
The source of this estimate was not identified on the broadcast. It may be wildly pessimistic, but I doubt it. Millions of home owners have borrowed on their home equity since 2000. When people have sold their homes at a profit, they have moved up – more expensive homes, more debt.