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More Problems for Fannie and Freddie

|Includes:FMCC, FNMA, SPDR S&P 500 Trust ETF (SPY)


Featuring Richard Suttmeier, Chief Market Strategist
Today I dig deeper into the problems of Fannie Mae and Freddie Mac, and show the daily chart for SPX.
First let’s look at potential mortgage modifications being raised to 125% of appraised values from 105%.
Fannie Mae and Freddie Mac may soon be asked to refinance mortgages with loan-to-value ratios above 105% to boost participation in the failing Obama foreclosure avoidance programs.
The Federal Housing Finance Agency under James Lockhart is seeking to raise the ratio to 125%, which in my judgment would replicate the problems that started the demise of the housing market in the first place.
Funding 125% of a home’s appraised value at current mortgage rates will not provide enough relief, and will only increase the cost of Conservatorship from the $840 billion and counting toward the more than $2 trillion available to support the GSEs, on my favorite chart for June.
One report shows that Fannie and Freddie have refinanced 80,000 mortgages under the Obama Housing Plan at the 105% loan-to-value formula.
That may sound good to a layman but its just 1.6% of the five million homeowners that President Obama told us the program would help. I call this no help statistically.
With declining home values 20.4 million homeowners out of 93 million are underwater versus their mortgage loans. This data is as of May 6 and home values have continued to slide since then.
The Second dilemma facing Fannie and Freddie is the potential funding of warehouse lending.
The Federal Housing Finance Agency may soon be asked to have Fannie and Freddie fund warehouse lending, which is the way independent mortgage companies provided money for mortgages.
This pipeline was a major cause or the mortgage meltdown in the first place. By law the GSEs are not allowed to do this, but there is a loophole to fund the most problematic portion of the housing market – multi-family and other real estate loans.
A recent Reuters/University of Michigan survey shows that the housing recovery will be extremely slow with home values continuing to decline over the next five years.
This will be a drag on consumer spending and keep the US economy in that L-Shaped recovery as the tumbling tumble weeds blow in the wind.
A third stumbling block for Fannie and Freddie is a Congressional request to reverse tighter credit standards.
In March the GSEs stopped guaranteeing mortgages on condos in buildings where fewer than 70% of the units have been sold down from 51%. Fannie Mae will not purchase mortgages in buildings where 15% of owners are delinquent in association dues or where one owner owns more than 10% of the units.
It seems that Barney Frank and Anthony Weiner want Fannie and Freddie to reverse these decisions, which will put even more tax payer money at risk.
If these decisions result in new securitizations there will certainly be another round of toxic mortgage backed securities. I guess you can call this politics as usual.
Finally let’s look at the daily chart for the S&P 500, which is now clearly negative.
Monday’s close at 893 is below the 200-day and 50-day simple moving averages, which are nearly touching at 900 and 898. The S&P has been above the 50-day since March 31st. Chart support is 879.
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