Fannie Mae Preps Investors for Reform. Book of Business Reflects Tight Credit Conditions
In the wake of the
passage of Wall Street Reform, which many opponents have criticized Capitol Hill for failing
to deal with the future of Fannie Mae and Freddie Mac, the Obama Administration is beginning to present
the broad outlines of how the future of the GSEs will be determined.
In a letter released Tuesday, David H. Stevens, acting commisioner of the FHA, said that the
question of reforming the GSEs is "not if, but when." The Obama administration, he said, has made
it clear from the beginning that the current structure of the government's role
in the housing finance market is unsustainable and unacceptable, but winding down
Freddie and Fannie abruptly would destabilize an already fragile housing
industry and put the loans already on the books of these institutions at even
greater risk.
The acting director
said that any housing finance reform needs to address some complex issues
responsibly.
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The U.S. mortgage market is the second largest
securities market in the world, after U.S Treasuries.
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Fannie and Freddie currently have more than $5
trillion in mortgage guarantees outstanding and hold $1.5 trillion in loans and
securities.
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The GSEs are only one part of a broader system
that includes FHA, Ginnie Mae, the Federal Home Loan Banks, other government
programs, as well as the private sector.
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Current financial support provided by the
government is not an endorsement of the GSE business models; the administration
is aware of the need for comprehensive reform.
READ MORE ABOUT HOUSING FINANCE REFORM
In related news,
Michael J. Williams, President and Chief Executive Office of Fannie Mae, spoke
yesterday to Women in Housing and Finance at a luncheon in Washington. Williams said his company knows that change
is coming but he declined to speculate on the future of the GSEs, saying that Fannie
is taking the necessary steps to prepare for all outcomes and putting the company
on the right track.
In his prepared
remarks, Williams addressed the changes Fannie Mae has made in the nearly two
years since entering government conservatorship, focusing particularly on the
GSE's book of business behind which, he said, is one of the basic lessons of
the crisis. Fannie Mae has learned that
it can't just put people into homes it must make sure they can stay there or
everyone suffers - the borrower, the mortgage industry, the financial system,
and the economy.
A recent survey of
consumer attitudes about homeownership showed that a lot of people still aspire
to own their own homes, but 60 percent thought it would be tougher to do so. They are right, he said, but for the right
reasons. "We need to make sure
people are ready and prepared for homeownership so that they can be successful
homeowners. Across the board, we see a
much deeper understanding of how credit, income, job security, and a down
payment could stand in the way of buying a home."
The housing industry
has also put itself in a stronger position, returning to common-sense lending
and hoping it can stick to those standards once the market recovers. Building on these standards, Fannie Mae has
begun to build a new book of business.
Loan-to-value ratios are averaging nearly 70 percent; credit scores
average about 760; over 90 percent of new borrowers have long-term, fixed-rate
loans and "the number of sub-prime loans in our new book is zero." Taken all together, he said, we're building
the strongest book of business we've seen in the last decade and, since Fannie
Mae prices for risk, as loan quality goes up, guaranty fees go down. Loan guarantees are now actually lower than
in 2008 and 2009.
At the same time,
Williams says that Fannie has not forgotten its mission. Last year it helped provide financing to more
than 1.7 million low-and moderate-income families, more than one million
families living in underserved communities, and nearly 760,000 very low-income
households. Affordable lending was
roughly 50 percent of Fannie's business last year.
"Our stronger
lending standards simply make sense," Williams said. "First, they're better for
homeowners. Borrowers with these new
loans are more likely to keep their homes as long as they want, With fixed rates for long terms, their loans
give them shelter from years of interest rate swings
Second, these stronger loans are better for the mortgage market." Because Fannie provides such a large share of
the market, backing two out of every five new single-family mortgages securitized
in America since the beginning of 2009, just by strengthening lending
standards, "we've ensured that a large share of the market will be more safe
and sound for many years to come."
Williams said that
much of Fannies older book of business, those loans predating 2005 in particular,
is solid but the loans taken out during what he called the boom and bust years
are problematic. An estimated 5 million
homeowners are at least three payments behind on these mortgages. He outlined Fannies involvement in loan
mitigation programs including the Treasury department's Making Home Affordable
program which it administers for the Treasury Department as well as a separate
program run by Fannie which Williams called the "largest foreclosure
operation in America," with over 2,200 employees working on containing losses
and preventing foreclosures, and over the last two years have streamlined
procedures for pre-foreclosure sales.
The companyaready announced a new program called "Deed for
Lease," where borrowers can rent back their homes while they seek other
housing.
Strategic defaulters
have been much in the news, Williams said, and Fannie Mae is seeking a policy
that strikes a fair balance between encouraging people to get help and
producing appropriate penalties for those who simply walk away from their
obligations. To that end, it has
increased the lock-out period; strategic defaulters will be unable to quality
for a Fannie Mae eligible loan for seven years.
Previously the period was five years. READ MORE
Turning to the
housing market, Williams said that his company's role in that market has taken
on added importance in the past two years.
With private investors exiting the market when it collapsed, the
government support of the GSE's ensured they could stabilize the market. Even though some private capital has come
back, as long as the housing market is shaky mortgage funding will be at
risk. Liquidity is the lifeblood of the
housing market and Fannie has provided more than $1 trillion in liquidity to
the market n the last two years and its market presence today is about double
its presence in 2005 - at the height of the bubble - "when the market
largely went around us."