Fannie Mae & Freddie Mac are back in the headlines as lawmakers debate the future of these two mortgage giants. Many people have heard about Fannie & Freddie but few understand the role they play in the mortgage industry. I wanted to re-post the summary I wrote back in July of 2008 which you can access HERE. Or, if an audible presentation works better for you I listened to THIS PODCAST from NPR’s Planet Money on my run this morning and it does a pretty good job of summarizing the information.
NPR’s Planet Money did a podcast on March 1st which compared mortgage delinquency rates in the US & Spain. In the US mortgage delinquency rates are currently around 10%. Despite the fact that the unemployment rate is currently higher in Spain the mortgage delinquency rate is down around 3%. So why the big difference?
In Spain, if a borrower is foreclosed on and the lender suffers losses on the loan they can seek the deficiency by going other assets. This is known as a “recourse” loan. Because Spanish banks can go after personal assets Spanish citizens scrape and crawl to make their mortgage payments.
In the US each state has different laws which dictate whether or not a lender can make recourse or non-recourse loans. I’m not sure how reliable this information is but according to Answers.com Oregon & Washington are on the list of non-recourse states. See the entire list HERE.
What I think would be interesting based on this comparison is to see if delinquency rates are higher in non-recourse states versus recourse states. If anyone has a link to this information please leave it in the comment section below.
AN UPDATE TO THIS POST:
I emailed my friend Brent Hunsberger, the author of “It’s only money” blog on oregonlive.com who contacted a real estate attorney. The response is super convoluted. It turns out there are many instances where a mortgage in Oregon can be considered a “recourse” loan. If you are seeking information regarding your personal situation then my advice is to find a competent attorney.
Ever heard of “MERS”? ” MERS” stands for Mortgage Electronic Registration Systems, Inc. and is a private company at the center of scrutiny for it’s involvement in the current foreclosure mess. According to Wikipedia MERS is a “privately held company that operates an electronic registry designed to track servicing rights and ownership of mortgage loans in the United States.”
Essentially, MERS acts an “agent” and as an exchange for mortgage servicers and mortgagors. The founding objective of MERS was to privatize the recording of mortgage notes and offer an exchange of sorts so that loan servicers could buy and sell securitized mortgages. In principal, it should provide greater efficiency to the secondary mortgage market and decrease the cost of loans to consumers. However, as this housing crisis has shown theoretical models don’t always pan out as expected.
The NY Times published THIS PIECE last week and offers a great summary of the formation of MERS and why it is complicating the foreclosure and loan modification process for many homeowners. I would recommend it to anyone looking for some good weekend reading.
The WSJ published THIS ARTICLE late yesterday which caught my eye. Apparently the Obama Administration is working on a plan to force a settlement on the part of lenders who have been guilty of questionable loan servicing practices to write down the principal on mortgages in distressed circumstances.
To this point mortgage relief for troubled homeowners has come in the form of reducing mortgage payments to make the monthly burden more affordable. However, many homeowner’s are frustrated that even with lower payments they owe much more than their home is worth.
It’s important to emphasize that at this point this proposed program is just that: proposed. There are a lot of parties involved with the rolling out of a such a program and I wouldn’t be surprised to see the banking industry attempt to hold up the implementation of such a program in court.
Here are a few interesting excerpts:
- “The cost of those writedowns won’t be borne by investors who purchased mortgage-backed securities…”
- “If a unified settlement can be reached, some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers…”
- “The settlement terms remain fluid, people familiar with the matter cautioned, and haven’t been presented to banks.”
- “Bank executives say principal cuts don’t necessarily improve payment patterns…”
Planet Money had an interesting podcast last Friday about Fannie Mae, Freddie Mac, and how the creation of the 30 year fixed mortgage led to the subprime mortgage crisis. In the piece Bethany McLean & Joe Nocera are interviewed about their book entitled “All the Devils are Here“. In a nutshell, the creation of Fannie Mae and the implicit guarantee of the Federal government ultimately led to the creation of a 30yr fixed mortgage, which morphed into more exotic loan options in the recent decade. We all know how that story ends. Anyways, it’s worth a listen if you have a few minutes.
A little backdrop to this post. Fannie & Freddie got into financial trouble HERE. They are bailed out HERE. As you may recall Fannie Mae & Freddie Mac, two critical players in the US mortgage market, are currently owned by the Federal Government and are technically in conservatorship. The US government has sunk almost $150 billion into the two companies since they took them over back in 2008 and many politicians are calling for the bleeding to stop. Earlier in the week officials met to begin the debate on the future of Fannie & Freddie. Click this link to read more about the meeting.
Part of the reason rates are so low now is because investors believe that the mortgage-backed bonds are guaranteed by the strength of the US government. Therefore, from a practical standpoint less government involvement would ultimately lead to higher mortgage rates. However, conservatives will argue that low mortgage rates is not worth $150 billion every couple years. They have a point….
I am on vacation this week which means I have some time for some good reading. And although I plan to spend my week finishing up the 3rd book in Stieg Larsen’s Millenium Series I wanted to post a couple bits of excellent journalism for those who might be looking for some summer-time reading on the subprime mortgage crisis.
First, I want to thank Kevin Sanger @ the JGP Wealth Management Group for sharing THIS ARTICLE with me almost a year ago. Yes, a year ago, and I finally sat down and read it last week. Michael Lewis dives deep into the fund managers that bet against subprime mortgages and struck it rich. These managers realized that the folks who were investing in subprime-backed mortgages had no idea what they were buying and saw that it would unravel. It is a great insider look into the secondary market for mortgage-backed bonds.
Also, NPR’s Planet Money bought a sub-prime mortgage backed bond a few months ago and have been reporting on it periodically. In these two podcasts (#1 and #2) they fly to Florida to confront some of the mortgage holders who owe them money AND report on a $200 million fraud scheme.
If you’ve been a regular reader of “My Mind on Mortgages” over the years then you know that I am a big fan of the Economist magazine. I appreciate their global perspective and use of economic theory in explaining current events. From time to time they publish special reports on hot topics that are very good. In this weeks issue they did a special report on debt. Here are some links and some interesting excerpts:
–A Cultural Perspective: “The battle between borrowers and creditors may be the defining struggle of the next generation.”
–Consumer Debt: “At the end of the second world war in 1945 consumer credit in America totalled just under $5.7 billion; ten years later it had already grown to nearly $43 billion, and the party was just getting started. It reached $100 billion in 1966, $500 billion in 1984 and $1 trillion in 1994, or around $4,000 for every man, woman and child. The peak, so far, was almost $2.6 trillion in July 2008.”
–Digging Out: “If being able to borrow makes people feel richer (however illusory the sensation), having to repay the debt makes them feel poorer.“
Rob Chrisman wrote in yesterday’s edition of the “Pipeline Press” (a great blog if you want to stay abreast of the changes in the mortgage industry) that new accounting rules may make covered bonds more common with regard to securing mortgages. I originally blogged about covered bonds back in 2008 when the subprime mortgage crisis was unraveling in front of our eyes. Rob provides a great summary about what a covered bond is:
What is a “covered bond”?
In this case, covered bonds are debt securities backed by the cash flows from mortgages, and recourse to a pool of mortgages secures (“covers”) the bond in case the issuer becomes insolvent. Covered bond assets remain on the issuer’s consolidated balance sheet, which comforts end-investors, since they are held on the issuers’ books and the interest is paid from an identifiable source. (Current MBS’s are not held on the issuers’ books.) This type of security has been popular in Europe, but not here in the US. New accounting rules, however, require issuers to carry collateral on their balance sheets even for securitized products such as mortgage bonds, a key feature of covered bonds, and there may be some legislation brewing regarding the FDIC taking over an issuer (in the event of a collapse) that would make it easier to issue them. In the event of default, the investor has recourse to both the pool and the issuer.
The key to the covered bond is that issuing banks are required to keep “skin in the game” which would ultimately lead to more conservative underwriting guidelines. Depending on who you are you may think this is a good or bad idea. Feel free to leave your thoughts below in the comment section.
The NY Times published this article yesterday that examines the ethos of our culture as it relates to homeowner’s who are confronting a home that is now worth less than their mortgage. When I read it I began to think about how our social fabric has evolved along with financial markets.
Fifty years ago a homebuyer would take a mortgage from a local bank who would have then put the loan on their own balance sheet and lived with the consequences. I can imagine that the homeowner had a greater incentive to stay current with payment even if property values declined because they probably did their banking at the same branch that they signed their mortgage papers. Therefore, they’d have to confront the same bankers who would ultimately be negatively impacted by foreclosure.
Today, borrower’s can no longer identify the people who will be negatively impacted by their default. Furthermore, mortgage note holders no longer have the same personal interaction with the people who owe them money. Ever since the birth of securitization the mortgagee/ mortgagor relationship has become depersonalized.
I wonder what impact this has had on creating the current state of the mortgage and housing industry? If you have some thoughts please leave them below.