Should Fannie and Freddie Be Buying or Guaranteeing Investor Mortgages at All?

The Atlanta Journal-Constitution “Real estate investors decry four-loan limit” is reporting that Fannie Mae (FNM) and Freddie Mac (FRE) reduced the number of loans they are willing to purchase or guarantee from each investor on December 1 from 10 to 4. The GSEs are worried that small investors would be getting in over their heads and the GSEs would be stuck with bad loans. Atlanta area investors are upset because they claim to be part of the housing oversupply solution and should not have their funding cut off. This reminds me of legislation in a few states that limits gun purchases to once every 30 days, to prevent gun trafficking. Fannie and Freddie also don’t want to be caught trafficking in contraband.

The real issue to me is not whether small investors have the capacity to manage more than 4 mortgages responsibly, or even the likelihood of fraud. Rather, the issue is should Fannie and Freddie even be guaranteeing or purchasing investor mortgages at all. With all the Congressional talk of separating the GSEs' affordable housing mission from basic owner-occupied conforming mortgage guarantees, now is not the time to be involved in supporting speculation or even the legitimate pursuit of providing affordable rental housing.

The GSEs got in trouble by reaching for fees and higher rates in transactions like Lehman’s purchase of Archstone-Smith. They have enough work to do unwinding their entries into subprime and Alt-A without dealing with new investors – large or small. The price investors pay for homes should be based on unsubsidized mortgage rates, priced consistent with the risk of investing. It is natural for owner-occupied rates to be substantially cheaper than investor rates. If rents don’t support market interest rates, then the properties are priced too high to be rentals.

Disclosure: Author is long FNM and FRE.

Comments

[CLH:]

The credit crisis was caused by the gov. (FMN FRE)and now the gov wants to cure it the same way they caused it. Capitalism corrects itself if left alone but gov interference only extends and makes a correction impossible.

Its too bad our congress is totally uneducated in economics.

2008 Dec 09 08:14 AM

[Smalltownba...:]

The reason for the reduction from 10 to 4 was not tied to poor performance of rental property owners. It was tied to the failure of real estate speculators in Florida, California, Arizona and Nevada primarily as well as a few other hot markets around the nation. The rate premiums Fannie & Freddie charge for funding investor loans have doubled in the last 9 months and the changes are hurting people who provide solutions in addition to hindering speculation.

As a mortgage lender the investors I work with who own multiple rental properties are now forced to seek loans with higher rates and balloon payments in 2-5 years making their investment much riskier. On one hand the government is working to decrease the potential risk of homebuyers but on the other hand their actions are increasing the risk on approximately 40% of the housing stock which is investor owned. There is no common sense in this equation.

Yes, Fannie and Freddie should continue to provide investor financing especially now since the percentages of owner occupied homes will continue to decline. The levels reached over the last few years were artificial anyway and will not return unless we return to lax underwriting and no down payment loans for people who do not pay their bills. At this point even FHA is considering offering special $100 down financing to investors who purchase HUD owned properties.

2008 Dec 09 08:29 AM

[edwards:]

WhoCanWeSue.com?

2008 Dec 09 09:59 AM

[BerkeleyBob:]

Interesting, I had no idea that up to 40% of housing is investor owned. I do think some fundamental changes need to be made in Fannie & Freddie. There is an inherent conflict in their status as a GSE and the duty of management to maximize shareholder return. I bailed on my position in Freddie long ago, did not panic at the accounting irregularity. I do not understand the hypocrisy of shills for the private sector who claimed Freddie and Fannie were unfair competition and continue to act as if the CRA was a dirty word (socialism). The policy goal of expanding home ownership is worthwhile but not at the cost of poor underwriting and bad appraisals or the destruction of America's fiscal reputation by exporting rating agency blessed fraudulent loans. The source of the bubble's collapse was not the GSE's it was in the private sector. In the present crisis, the kind of dispassionate analysis needed to reconfigure the secondary market in mortgages is going to be hard to find.

2008 Dec 09 02:15 PM

[oldsuretyguy:]

It is apparent to me that there exists a huge conflict of interest between the GSE management and the public interest. The efficacy of management operations and the organizational model filled by the GSE'S was brought into question during the House hearings this morningl. The former heads of Freddie Mac and Fannie Mae were dissected by House panel members determined to uproot the causes of the US housing mortgage crisis and establish blame if possible. The heads of the GSE's steadfastly argued that their rolls, as they saw them, over the past few decades had not been measurably altered. They also argued however, that because of drastic changes in market conditions they were required to change strategies to obtain market "balance" and to produce an adequate rate of return for their shareholders(and presumably their bonuses). There in lies the conflict of quasi public bodies driven by a profit motive wherein management personally benefited from the profits of the companies. The GSE heads admitted that their annual bonuses were consistently higher than their salaries!!! There is a need for a buyer of low and middle income mortgages but the GSE model is a failure because through greed and poor underwriting, they fueled the cycle of distressed loan origination, subsequent distressed loan purchases and mortgage backed securities sales(much of which was purched with recycled petro dollars). The Saudies can't be too happy about that......Oh wait a minute, we bailed out Wallstreet didn't we?!

2008 Dec 09 03:10 PM

[Jade Queen:]

Selling loans away from a local market seems a set-up for failure to me. What does Raines in D.C. care about a property on the Upper Left Coast, or know about it?

If mortgage aggregators are going to exist, shouldn't they at least be near enough to the collateral that somebody can go eyeball it without hopping on a corporate jet?

Fannie and Freddie were out of scale and out of control. If D.C. is going to get smart and get out of the Roman-style international imperialism, how about their getting out of state-side imperialism as well.

We need more businesses that are small enough to fail and scatter to other activities if the needs and wants of the people change, and small enough to let new players in when old games contain more cost and harm than benefits.

2008 Dec 09 03:16 PM

[Augustus:]

Jade Queen misses the point entirely. the whole point of having a national mortgage market is to maek capital available to home buyers in all parts of the country. It worked very well until the underwriting standards went out of the window. All mortgage investors rely upon the underwriting standards, whether in their immediate home area or in another part of the country. FNMA got in trouble when they were compelled by the govt. to invest in low quality subprime loans.

2008 Dec 09 06:25 PM