Fannie Mae and Freddie Mac are the two semi-government agencies that pretty much drive the mortgage and housing market. And, they’ve driven it into the tank. Fannie & Freddie started out in life as your standard government program that was going to “help” people buy houses. They purchased loans from primary lenders – in the beginning, your bank – and guaranteed repayment to investors even if the borrower defaulted. As Delaware Online notes, they “…helped people buy homes at affordable interest rates.” And with basically no money down.
Let me be really clear right here about a couple of things. First of all, in the interest of full disclosure, I spent 15 years in the mortgage banking industry. Second, the problems in the mortgage industry were created by the Congress and were exacerbated by Administrations of both parties. To his credit, President Bush made a half hearted attempt to reform mortgage lending and was met with a full-on war from Democrats who, by that time, controlled the Congress and who went into full media mode holding hearings that lavished praise on the Democrats who were running F&F into the ground. I’ll put it in perspective. The biggest proponents of the actions of F&F and regulators acting under the authority of a number of legislative acts, primarily the Community Redevelopment Act, were the likes of Barney Frank, Chris Dodd, Sheila Jackson Lee and their ilk who, combined, don’t have a double digit IQ.
At any rate, when the housing and mortgage markets headed south in 2005, the die was cast because F&F owned most of the mortgage paper in the US and to say it was rapidly turning into toilet paper would be kind. So far, F&F have cost the US taxpayers $150B in bailout costs and that will certainly go up, the only question is how much. Prior to 2008, F&F were quasi non-governmental units and in 2008 they were taken over by the government to prevent a crash in the housing industry. And yes, if you were wondering, I typed that with a straight face.
The problem in the industry right now is fairly simple. There is a huge oversupply of housing and a shrinking pool of qualified buyers. As long as the Administration and some of Congress are meddling with the market in an attempt to inflate housing prices, the problems in the real estate industry will drag on. The market is nowhere near the bottom and it will continue to struggle until it gets there.
Let’s look at the problem of oversupply. MLS listings in many major markets are running at ten to eighteen months supply based on sales. A healthy market would be in the vicinity of five months. In addition to the houses currently listed on MLS, you can add in roughly double the MLS numbers being held by banks “real estate owned” (REO) departments that are not currently listed. So we’re at about three years supply. Then add in the houses that are in the foreclosure process where a notice of default has been issued but the trustee sale has not been executed because of a combination of legal issues related to foreclosures and the fact that the banks would rather have the inventory on their books as a default than in their REO department. Double the MLS numbers again, we’re at five years supply. Please note that this number doesn’t include homes that are in default but the foreclosure process hasn’t started. It’s a real number, but for sake of argument we’ll ignore it. Oh, and that doesn’t count houses that their owners would like to sell that can’t be sold because it’s currently worth less than the mortgage. So, we’ve got five to seven years supply available today.
Let’s look at borrowers. Oops, make that “qualified” borrowers. If you’d like to qualify for a mortgage, you have to have good-to-excellent credit (scores of 640+), income that you can verify with either W2s or tax returns, a down payment of 3% to 20% and a debt ratio of typically less than 30%. If you’re self employed and manage to avoid paying much in income tax, typical of self employed folk, even with fantastic credit you can forget about qualifying for a mortgage. I don’t have a “good statistic”, but from personal experience I’m guessing the pool of qualified buyers – and I’m not including non-FHA subprime borrowers – is down something like 30% since 2005.
OK, huge pool of inventory, small pool of borrowers. Got it? Remember “supply and demand”? Lesson? Prices have to come down a whole lot more and until they do, the “housing industry” is going absolutely no where. Please look beyond the headlines when you see things like “Housing is up 4% in January…” because somewhere way down in the article you’ll usually find something about prices dropping in the same month. The bottom line is this: the industry is a big mess, thanks to Federal regulators, and more action at the Federal level is only going to make the problem last longer.
The Washington Post – of all places – summarizes the problem we’re facing with F&F quite well…
The private market has not bounced back with the rest of the economy. Policymakers are concerned about the risk to taxpayers presented by the government’s large footprint in the mortgage market. The Obama administration plans to publish more details about overhauling housing finance in the coming months.
“The housing sector will continue to be a drag on our economic recovery until we end the ongoing bailout of Fannie and Freddie and replace the existing government-backed mortgage finance system with a purely private market solution,” said Rep. Scott Garrett (R-N.J.), chairman of the congressional subcommittee that overseees the firms.
However, that is not a universal view. Top administration advisers — and many outside economists — say the government must still play a significant role in housing.
- The private market for mortgages has not bounced back because of the regulatory outreach history of the federal government and it will not “bounce back” until the government is out of the market. The risk of dealing with regulators is way too high for the reward of servicing three percent mortgages.
- The Administration will be publishing “more details” about overhauling housing finance – read “increasing regulation” – in the next few months. See point one.
- Rep. Garrett is absolutely right. And, in addition, it needs to be made clear that the private market owns the moral hazard that goes with defaults.
- As long as the government is playing a role in housing, the market will never “recover”. Ever. They created this mess thanks to overreaching legislators and regulators and no one in their right mind would chose to participate on a private basis, the risk far outweighs the reward.