Fannie, Freddie and the 4.5% Mortgage Myth 15 comments
Michael Steinberg
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The Washington Post “Treasury Weighs Action on Mortgage Rates” reports that the Treasury is considering a plan to have banks issue 4.5% 30-year fixed rate mortgages which Fannie Mae (FNM) and Freddie Mac (FRE) purchase. The Treasury would then “possibly” fund the purchases with 3% bonds. The structure of the Treasury’s transaction with the GSEs is not defined. Neither are the fees that the GSEs would collect for the transactions.
What is defined is that borrowers would have to qualify for GSE conforming mortgages and refinancing would be excluded. Borrowers would still have to buy mortgage insurance if they have less than 20% to put down. Mortgage insurers have grown far stricter. GSE and origination fees will increase the effective interest rates.
The Treasury’s premise that extremely low interest rates will allow buyers to pay up for homes, putting a floor under housing prices. This makes no sense for several reasons. First, no one will pay above market just because they could afford to by a lower cost of financing. The house will still have to appraise based on its value to all buyers, not just those able to finance cheaply. Second, the 4.5% rate is not sustainable over time so prices will have to drop back to levels supported by higher mortgage interest rates. Third, foreclosures will not be reduced because refinancings are excluded. Though the plan might support a few short sales helping the banks.
So who is the plan aiming to help? It might entice some of the most financially secure buyers to step forward faster. It also has the potential for the banks to collect fees without encumbering their balance sheets. Fannie and Freddie might also benefit by collecting fees if the new loans are transferred to the Treasury’s balance sheet or their interest rate risk is mitigated by matched long term financing.
On a separate subject, Fannie and Freddie are discussing with their conservator how to maintain their share prices above the NYSE listing threshold. The talk of a reverse stock is misguided. Without instilling investor confidence, their share prices would simply drop back to under a dollar again with nothing accomplished. The Treasury has to determine whether stockholders have a future and communicate the answer unambiguously. Anything short of this will leave the stock valued at no more than a lottery ticket – no matter how many shares are outstanding.
Disclosure: Author is long FNM and FRE.
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This article has 15 comments:
However I agree that the limited time frame proposed of one year will only result in a temporary spike in home prices or a mini-bubble, if you will. Of course stemming the foreclosure tide, if even temporarily is still a good thing.
Appraisals used to have meaning in the mortgage business, now they are mostly a tool for marketing. Therefore this program could actually raise all boats for a while, pulling a little sales momentum back from the depths. Certainly it would be foolish to demolish FNMY stock at such a time.
(2) 4.5% is sustainable if the Fed Funds rate is 1% or lower. Welcome to Japan and ZIRP because its going to stay here for awhile.
(3) Very true, but eventually they're going to have to allow people to refinance. All of those door busting ARMs banks sold with the idea of raising rates later might just have to become fixed at the lower rate.
Keep investing in penny stocks FNM and FRE. They're akin to paying more taxes and the Govt is not above taking charitable donations.
4.5% mortgages will buttress housing prices and it is a killer idea. Let's just hope that when the dust settles our leadership gets their $#!& together and starts fixing some underlying problems for the 5-10 year term...
Moreover, if all the bailout money is going to the banks, but the banks are failing to do the right thing, maybe a re-think is needed as to the interventions required to turn this economy around?
Assume there are about 60 million homes owned in the U.S. (I’m not sure as to the exact number). Assume that of these, 40 million are the primary residence of an owner (i.e., not a second home, beach house, etc.)
What if instead of bailing out the banks, which are aren’t willing to lend it to new homebuyers, for fear of a negative equity spiral, the gov’t stepped in and made loans at 0% interest for all primary residences sufficient to cover the next 1-2 years of mortgage payments associated with those homes.
For those homes showing signs where the owners had trouble making payments, the gov’t works with them to start a savings plan that allows them to use this “grace period” to catch-up on their payments – and at the same time the gov’t actively works with the bank to find a better payment amount the owners can afford by extending the length of the loan (say, from 30 years to 40 years) in return for a loan interest rate.
The government money would eventually have to be repaid by the owners, but at smaller amounts over a longer period.
Moreover, for those who “played by the rules” they could use this grace period on their home loans either to (1) continue to make their own mortgage payments to return the loan principal – effectively benefitting them, and/or (2) buy some consumer goods to stimulate the economy with money they would have used for their mortgage payments.
Of course, the amount loaned at 0% as a “grace period” on home mortgages would need to be proportional to when the home was bought and how much the home was bought for, but making a grace-period for 1-2 years at 0%, eventually payable say in 10-15 years (whereupon if it’s not paid, then the rate started to go up) wouldn’t penalize anyone and would offset those homes that have negative equity.
The gov’t has an obligation to avoid moral hazards. Don’t penalize those who played by the rules before, during, and after the bubble… find a solution that helps both those that needs help and allows those who played by the rules to not be punished but, in fact, contribute to the economy rebound.
Thoughts?
Here's a plan: we get rid of the mortgage interest deduction and mortgage rates will go down to 4.5 on their own.
Unimproved property just outside the city limits is still a good buy, although prices are still increasing.
The interest deduction is going to be hard to shake - also most of it isn't really an interest deduction, it is an expense deduction (any prop not lived in by the owner is essentially a business).
On Dec 05 01:13 PM CityKitty wrote:
> What about renters? My rent is going up next month. Where's my below
> market handout?
>
> Here's a plan: we get rid of the mortgage interest deduction and
> mortgage rates will go down to 4.5 on their own.
On Dec 05 01:13 PM CityKitty wrote:
> What about renters? My rent is going up next month. Where's my below
> market handout?
>
> Here's a plan: we get rid of the mortgage interest deduction and
> mortgage rates will go down to 4.5 on their own.
Lender said "Oh, by the way…thought I'd share some fun facts and figures to help you respond to this market. Feel free to utilize these numbers and maybe together, one client at a time, we can educate the market!
Some facts to know:
* More than 1000 banks closed in 1930 – only 14 U.S. banks have been taken over in 2008
* There are 76 million households in the U.S. that own their home -
24 million of these homes are free and clear
* There are 52 million homes with mortgages - 97.2% of these are not in foreclosure, 93.8% of these homes are current on their payments
On a sobering note:
* Over 20% of homeowners with a mortgage owe more than their home is worth
* 40% of all foreclosures are non-owner occupied
How did we get here?
Decade Homes Sold High Homes Sold Average
1970’s 3.9 million 3 million
1980’s 4 million 3.3 million
1990’s 4.9 million 3.9 million
2000’s 7.1 million 5.6 million
Resale numbers – the above does not include new home sales.
Sources: Wall Street Journal / Moody’s Economy.com / RealtyTrac / NAR / Forbes"
On Dec 05 01:13 PM CityKitty wrote:
> What about renters? My rent is going up next month. Where's my below
> market handout?
>
> Here's a plan: we get rid of the mortgage interest deduction and
> mortgage rates will go down to 4.5 on their own.