Freddie Mac losses mount, warns of foreclosures

Freddie Mac’s losses keep mounting, but mortgage giant avoids requesting more taxpayer aid

 WASHINGTON (AP) — Freddie Mac lost almost $26 billion last year, ominous news for taxpayers who are footing the bill to rescue the mortgage finance company and its sibling Fannie Mae.

Freddie Mac, which has lost a total of almost $80 billion since the housing crisis started in 2007, is bracing for more pain. The McLean, Va.-based company said a record 4 percent of its borrowers are at least three months behind on their payments and facing foreclosure.

Its chief executive, Charles Haldeman, warned Wednesday of a “potential large wave of foreclosures” still to come.

This is a major problem for the federal government, which seized control of Freddie and Fannie in September 2008. The two companies have already siphoned $111 billion from the government to stay afloat. That number is expected to hit $188 billion by fall 2011.

And while Freddie Mac didn’t ask for any more bailout money last quarter, the company said it will likely need more financial aid and might never repay it.

“We now have unlimited taxpayer exposure to the bailout of Fannie and Freddie, a bailout nation where the big get bigger, the small get smaller and the taxpayer gets poorer,” Rep. Jeb Hensarling, R-Texas, said at a House hearing Wednesday.

Fannie and Freddie dominate the mortgage market, backing about 70 percent of the loans made last year. The two companies purchase mortgages from lenders and package them into securities. Investors are willing to buy the securities because they are effectively guaranteed by the U.S. government. That puts American taxpayers at risk.

But the fragile housing sector is so dependent on the government that officials say they won’t have a detailed exit strategy until next year. Underscoring the market’s weakness, the Commerce Department said Wednesday that sales of new homes unexpectedly plunged 11 percent from December to January to the lowest level on record.

Treasury Secretary Timothy Geithner told lawmakers Wednesday that the Obama administration will “make sure we bring about fundamental change in the housing market and get ourselves in a position where the government is playing a less risky, but more constructive role in supporting housing markets in the future.”

Separately, Freddie Mac warned there is “significant uncertainty as to whether or when we will emerge” from government control.

For taxpayers, stabilizing Freddie and Fannie Mae has been one of the costliest consequences of the financial meltdown. Freddie Mac has received about $51 billion from Treasury to date, and the Obama administration has pledged to cover unlimited losses through 2012.

Freddie Mac said Wednesday it lost $25.7 billion, or $7.89 a share, for all of 2009. Of those losses, $4.1 billion went to dividends paid to the Treasury Department, which holds a nearly 80 percent stake in the company.

In the final three months of last year, Freddie Mac posted a loss of $7.8 billion, or $2.39 a share. The results, however, were a marked improvement over the fourth quarter 2008 when Freddie lost $23.9 billion, or $7.37 a share.

During the most recent quarter, Freddie suffered $7.1 billion in credit losses and a $3.4 billion write-down in low income tax credit investments. Also Wednesday Fannie Mae said in a regulatory filing that it plans to take a $5 billion charge when it reports its fourth quarter results later this week.

Fed Planning Exit…higher rates coming?

The Federal Reserve yesterday released an outline of their plan to remove the financial marketplace from the supportive influences of accomodative policy. Part of this outline included a statement on the fate of the Agency MBS Purchase Program.

Here are the comments:

“The Federal Reserve purchased $300 billion of Treasury securities and currently anticipates concluding purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March”

Plain and Simple: NO CHANGE IN TONE FROM BERNANKE ON THE END OF THE MBS PURCHASE PROGRAM. Funds are still on schedule to run out at the end of March.

While this is a necessary step in the overall recovery process, there will still be consequences to manage.

Even though we have been reminded that the Treasury is providing confidence boosting, the general “up in the air” condition of Fannie and Freddie combined with the loss of Federal Reserve MBS funding are expected to push mortgage rates higher. 

The timing of this move has increased nervousness about the outlook for housing. The Fed will be exiting the mortgage market just as the spring/summer home buying season is expected to pick up steam. Naturally, the question everyone wants addressed is:

HOW MUCH WILL RATES RISE?

Without going into servicing valuations and best executions options, mortgage rates are dependent upon the mortgage basis. The mortgage basis can be generally thought of as a guidance giver for mortgage rates. Rates will generally be a factor of:

1. The direction and movement of benchmark Treasury yields
2. The perception of risk in holding mortgage-backed securities as an investment (loss of principal investment)
3. Supply and Demand in the agency MBS market

Plain and Simple: the Fed’s asset purchases reduced interest rate volatility.  Lenders do not like interest rate volatility….less of it helps keep mortgage rates low relative to Treasury yields. Because the Fed is not planning on offloading their holdings anytime soon, interest rate volatility should remain low.

But do mortgage rates even matter ?

Yes they matter, but not as much as most think. Rates are low right now and many analysts are calling for higher rates in the near future…that should be boosting home buyer demand right now, before rates rise. Yet purchase demand continues to put along near 12 year lows. Low rates are not helping right now…will they make much of a difference in two months? While mortgage rates are easy to pin the blame on, the problem runs much deeper than borrowing costs. 

Housing needs qualified borrowers, its all about JOBS JOBS JOBS!

Mortgage Rates in ’10

After hitting an all-time low in early December, the average rate on a 30-year, fixed-rate mortgage rose to 5.05 percent this week and could climb to 6 percent by the end of 2010, if not sooner.

The key catalyst for interest rates going forward will be the end of a Federal Reserve program that buys a sizable chunk of mortgage-backed securities issued by firms such as Fannie Mae and Freddie Mac. That program succeeded in immediately pushing mortgage rates well below the 6 percent mark when it was announced last year.

But the Fed has committed to winding down the program by March. Interest rates are bound to rise to 6 percent by the end of 2010 because private buyers will demand a higher rate of return on the securities than the Fed did. Lenders may have to raise the rates they charge to consumers in order to make that happen.

Short Sales…will they become less of a headache?

The biggest mystery to me over the last eighteen months was why banks weren’t more receptive to the ‘short sale’ process. Studies have shown that it costs the bank more money if a property was foreclosed upon than if they accepted a ‘short sale’. For homeowners, a ‘short sale’ makes much more sense for several reasons:

• There is a much higher chance that the deficiency judgment could be negotiated in a short sale versus a foreclosure.

 • A short sale would have less of a negative impact on the homeowner’s credit rating.

• The homeowner would have at least some control over the timing of their relocation to new living arrangements.

• A ‘short sale’ would allow the homeowner to leave with dignity.

So, if it would be better for both the bank and the homeowner, why were more ‘short sales’ not completed? A recent research study by The National Consumer Law Center (NCLC) has uncovered the mystery behind this dilemma. In order to understand it, we must first look at the differences in the banking industry over the last ten years.

In the past, the banks used to process the loan (take the application, put together the file, etc.), lend you the money, and also service the loan (send the bills, make collection calls, follow-up, etc.). Over the last eight to ten years, the lending of mortgage money has shifted. First Wall Street and then the federal government became the primary lender in the mortgage sector. But, neither Wall Street nor the government had any interest in processing or servicing the mortgage. Mortgage companies continued to process the loans, but a new industry was created to fill the need for the servicing of these loans. So now, a separate and independent entity is servicing a tremendous portion of existing mortgages.

Just ten years ago, 37.4 percent of all mortgage loans were securitized (thus requiring a servicing company). Today, that number is 79.3 percent. The NCLC study shows that the reason more houses are not available for ‘short sales’ is because these servicing companies actually collected more fees for a foreclosure than they did for a ‘short sale’. Actually, the servicing company would lose money if they did a ‘short sale’. Since they were now in charge of making that decision, it was obvious why foreclosure was the alternative of choice.

The federal government realizing that modifications were not the answer and banks realizing that the foreclosure process was too expensive, have agreed to change the fee structure to make it more profitable for the servicing companies to lean toward ‘short sales’.

It’s always about the money. This situation was no different. Now that the money will flow to the companies that choose the ‘short sale’ alternative, watch how much easier the ‘short sale’ process will become.

The Future of the 8K Tax Credit

Will the $8,000 homebuyer tax credit be extended, or possibly even expanded?

Maybe… Or maybe not. It’s politics after all.

Currently there are FIVE bills flitting about Washington, D.C. that would, assuming they are signed into law, either extend or expand the currently existing $8,000 homebuyer tax credit due to end on December 1, 2009.

Senator Johnny Isakson (R-GA) introduced Senate Bill S1230 – the Home Buyer Tax Credit Act of 2009 – on June 10. Senator Isakson created the original $15,000 homebuyer tax credit that morphed into the current $8,000 first-time homebuyer tax credit that became law when the Stimulus Bill was passed. This bill proposes a non-refundable tax credit up to $15,000, that can be split equally over two years, for all primary residence purchases – not just purchases by first time home buyers. The bill has been referred to the Senate Finance Committee for further debate. It has 12 cosponsors, notably including Senator Chris Dodd (D-CT), the Senate Banking Committee Chairman. It would expire one year after enactment.

Representative Kenny Marchant (R-TX) introduced House Bill HR 2619 on May 21.  This proposes to extend the existing $8,000 tax credit to July 1, 2010 and adds provisions for a tax credit of up to $3,000 for homeowners who refinance. This bill has been referred to the House Ways & Means Committee for further debate. There are currently no cosponsors.

Representative Eddie Bernice Johnson (D-TX) introduced HR 2606 – the Home Buying Credit Expansion Act – on May 21. This bill proposes to remove the first-time homebuyer requirement (allowing all principle residence purchases to qualify for a tax credit) as well as extends the bill through Jan 1, 2010. It has one cosponsor (Rep Timothy Bishop D-NY) and has been referred to the House Ways & means Committee.

Representative Howard Coble (R-NC) introduced HR 2801 – the Home Ownership Move the Economy (HOME) Act – on June 10. From the Department of Redundancy Department, this bill appears virtually identical to Rep Johnson’s in that it opens the tax credit up to all primary residence purchases and extends the credit to Jan 1, 2011. It has no cosponsors yet and has also been referred to the House Ways & Means Committee.

Representative Dan Burton (R-IN) introduced HR 2655 on June 2. It has picked up six cosponsors, four Republicans and two Democrats. It joins its cousins in the House Ways & Means Committee and also eliminates the first time home buyer requirement while extending the credit to Jan 1, 2011.

What does all this mean?

I am clearly not a political analyst. It is apparent however, there is interest in extending the existing home buyer tax credit. Why there are three virtually identical bills proposed escapes me. Perhaps it’s a power play where Congressmen want their name attached to the bill. Power plays in D.C. – hard to imagine isn’t it?

Isakson’s Senate Bill proposes the most sweeping changes. Given that it is virtually identical to the original tax credit provisions in the Stimulus Bill, I think this one is going to have a rough road to passage. It was previously passed in the Senate, but the House squelched it. Seems they could just as easily do that again given the current makeup of the House.

The four bills in the House are all quite similar. None propose increasing the credit from the existing $8,000 limit. It will be interesting to see if Marchant’s proposed $3,000 credit for refinances gains any traction. All of the proposals eliminate the first-time buyer provision, which seems to me to be a good thing to do. The NAR recently reported that 40% of current home sales were made by first time buyers. Of course that means 60% were not (not factoring in investors and second home buyers, which are not an insignificant source of home purchases).

Expanding the availability of the tax credit to non-first time buyers seems prudent. There are no current bills that propose extending the tax credit to investors or second home owners – all require the purchase to be a primary residence.

Will the existing $8,000 tax credit be extended or increased?

While it is purely speculation on my part, I think we’re likely to see the existing tax credit extended beyond its current end date of December 1, 2009 (to qualify currently, your home purchase must close on or before November 30, 2009). And we may just see the requirement that you be a first-time home buyer lifted. I’d be surprised if the $15K credit gets past the House, though it may clear the Senate – Dodd’s co-sponsorship will help in that regard.

Of course we’re talking about politicians in Washington, D.C. so who the heck really knows what (if anything) will happen. Do not, I repeat do not plan on the tax credit being extended/expanded based solely on my speculation!

We’ll be watching these bills closely and will report when, or if, they make it out of Committee. Remember your High School civics class – the vast majority of bills die in committee…

Why now?…..here’s why

Anyone looking to buy, move-up or refinance, MUST do it before the spring. Let me explain why I feel this way. Banks are not currently in the business of lending money to home purchasers. Why? Because, with all the risk associated with mortgaging and with inflation looming why would anyone make a 30 year loan at 5%? So banks, for sometime now, have been content to just collect the up-front fees associated with the loan and the processing fees associated with servicing the loan (billing, collection, etc.). The actual loan is financed by the government who has been willing to make loans at a lower rate in part to help stabilize the economy.

Well, the Fed announced last week that they will no longer be buying those mortgages after March of 2010.

Once the government stops purchasing mortgage-backed securities and banks are forced to make the loans, rates will rise. History tells us that once they start to rise they will do so quickly and dramatically.

Again, if you are going to buy, move-up or refinance, DO IT NOW!

Cash for Clunkers…..actually worked…huh?

A vehicle getting 15 mpg and 12,000 miles per year uses 800 gallons a year of gasoline.   A vehicle getting 25 mpg and 12,000 miles per year uses 480 gallons a year.   So, the average Clunker transaction will reduce US gasoline consumption by 320 gallons per year.   There were approximately 700,000 vehicles sold in the program – so that’s 224 million gallons per year.    That equates to saving a bit over 5 million barrels of oil per year. I repeat—per YEAR.  5 million barrels of oil is about ¼ of one day’s US consumption.  And, 5 million barrels of oil costs about $350 million dollars at $75/bbl.

Our Government “gave” each Clunker Trader $4,500 per car for 700,000 transactions which cost US Taxpayers $3,150,000,000–not including Washington’s astounding administrative costs. So, we all contributed through our taxes to spend more than $3 billion to save $350 million.

But, we did save $350 million.

Extend the 8K Home Buyer Credit

Real estate organization leaders are putting more intensive pressure on legislators to extend and expand the $8,000 first-time home buyer tax credit, now due to expire on December 1. Most industry leaders are calling on Congress to extend the tax credit program to at least November 30, 2010 and make it available to all buyers of homes to be used as their principal residence.

“If Congress acts to extend the tax credit program, it would spur 383,000 additional home sales, including 80,000 housing construction starts. That would create nearly 350,000 jobs over the coming year,” said Joe Robson, chairman of the National Association of Home Builders. “That’s good for the economy and good for America.”

Although there have been signs of economic stabilization in recent weeks, the unemployment rate is approaching double-digits. Without a concerted focus on the housing sector, that comprises more than 15 percent of the GDP, any hope for a recovery could fade, a NAHB report noted. “At best, it looks like a jobless recovery once it gets underway. This is why Congress needs to take bold, meaningful action now,” Robson said. Other major real estate organizations are making similar recommendations.

Super-Duper Regulator

The Obama administration has proposed sweeping changes to our financial regulatory system, including the creation of a consumer financial protection agency. Certain adminstration officals are advocating even more drastic changes, like the creation of a single regulator for all banks (and bank holding companies). We clearly need to streamline the system, but a single regulator is not the solution.  The plan fails to identify the real roots of last year’s financial meltdown. The truth is, no regulatory structure — be it a single regulator as in Britain or the multiregulator system we have in the United States — performed well in the crisis.

The principal enablers of our current difficulties were institutions that took on enormous risk by exploiting regulatory gaps between banks and the nonbank shadow financial system, and by using unregulated over-the-counter derivative contracts to develop volatile and potentially dangerous products. Consumers continue to face huge gaps in personal financial protections. We also lack a credible method for closing large financial institutions without inflicting severe collateral damage on the economy.

The creation of a single regulator for all federal- and state-chartered banks would not address these problems. Rather, it would endanger a thriving, 150-year-old banking system that has separate charters for federal and state banks. Within this system, state-chartered institutions tend to be community-oriented and very close to the small businesses and consumers they serve. They provide loans that support economic growth and job creation, especially in rural areas. Main Street banks also are sensitive to market discipline because they know that they’re not too big to fail and that they’ll be closed if they become insolvent.

Concentrating power in a single regulator would inevitably benefit the largest banks and punish community ones. A single regulator’s resources and attention would be focused on the largest banks. This would generate more consolidation in the banking industry at a time when we need to reduce our reliance on large financial institutions and put an end to the idea that certain banks are too big to fail. We need to shift the balance back toward community banking, not toward a system that encourages even more consolidation.

A single-regulator system could also hurt the deposit-insurance system. The Federal Deposit Insurance Corporation currently supervises state banks. The loss of a significant regulatory role would limit its ability to protect depositors by identifying and assessing risks in the financial system.

We can’t put all our eggs in one basket. The risk of weak or misdirected regulation would be increased if power was consolidated in a single federal regulator. We need new mechanisms to achieve consensus positions and rapid responses to financial crises as they develop.

We don’t need — and can’t afford — to depend on one supreme regulator to have sole decision-making authority in times when our entire financial system is in flux.

Cash for Convicts

 President Obama promised in February that he was going to:

“….watch the taxpayers’ money with more rigor and transparency than ever.”

But when you’re spending someone else’s money, it’s natural to be fast and loose with it. With $787 billion in stimulus money to throw around, Congress is spending money with little oversight and no shame.

Federal economic stimulus cash was handed out to cons behind bars after a bureaucratic snafu resulted in $250 checks being sent to some inmates – and now red-faced feds want it back.

Not only did the feds send the cash to incarcerated cons, but they failed to respond to officials who sounded the alarm about the inmate windfall…

Some “rigor” watching the taxpayer’s money.

“Taxpayers already believe the inmates are running the asylum in Washington,” U.S. Sen. Tom Coburn (R-Okla.) said in a statement. “Now it appears they are being compensated for their efforts.”

The state Department of Correction initially withheld stimulus checks mailed to inmates because prison officials believed the convicts were not entitled to the cash, said DOC a spokesperson.

The DOC said it released the funds after the federal government ignored several requests for guidance.

“In the absence of a formal directive, DOC determined that it did not have grounds to continue to withhold the checks from the recipients.”

 “This just goes against all common sense,” said U.S. Rep. Eric Cantor (R-Va.), the House minority whip and a stimulus plan critic. “It shows you the lack of oversight and then what follows is this incredibly nonsensical outcome. Where is the accountability?”

The only requirement to get the cash, under the law, was that the recipient needed to have received benefits from the Social Security Administration, Veterans Affairs or the Railroad Retirement Board between November 2008 and February 2009. When the checks started going out in May, thousands went to prisoners jailed after February 2009 check cut-off date.

A total of 3,900 of the $250 checks were sent to incarcerated persons and most of them, 2,200, were legitimate. The remaining 1,700 checks that went to people who were in jail during the specified time in violation of the law will need to be recalled.  It’s not clear if the cons have already spent the money in the commissary.

“Out of the 52 million one-time economic recovery payments made, we are aware that a relatively small number of Social Security beneficiaries currently incarcerated and not receiving monthly benefits — approximately 3900 — received the payment,” Social Security Administration Commissioner Michael J. Astrue said in a statement provided to The Washington Times. “Most of these beneficiaries — about 2200 — were due the payment because they were not in prison during one of the following months: November 2008, December 2008 or January 2009. The law specified that any beneficiary eligible for a Social Security benefit during one of those months was eligible for the recovery payment.

“A smaller subset of beneficiaries — about 1700 — received the economic recovery payment because our records did not accurately reflect that they were in prison,” the statement said.

Oh well…it’s only 425K…I’m sure much more has been & will continue to be wasted.