Showing posts with label Freddy Mac. Show all posts
Showing posts with label Freddy Mac. Show all posts

Friday, July 7, 2017

Fed Governor Urges Housing Finance Fix

Headline of a Wall St Journal piece.  Fed Reserve governor Jerome Powell wants more private investors to buy into Fanny and Freddy, so that next time Fanny and Freddy go bust, private investors will lose money rather than taxpayers.  Everyone always thought that Uncle Sam stood behind Fanny and Freddy even though the fine print in the enabling laws did not so state. This wide spread belief allowed Fanny and Freddy to borrow money on the credit of the United States, which meant they could raise money for 3-4%, really cheap.   But when Fanny and Freddy went bust in 2008, Uncle decided us taxpayers were on the hook for $140 billion to avoid besmirching the reputation of the US treasury.
    Fanny and Freddy didn't cause much trouble until the 1980's when they started buying mortgages off banks.  The real estate industry loved this, it made more mortgage money available. Sell a mortgage to Fanny or Freddy, and presto, the bank has the cash to make yet another mortgage.  Fanny and Freddy recovered the money by selling bonds on Wall St.  They said "Look, these bonds are 'backed' by real estate."  Suckers fell for this, and for a while the bonds sold like hotcakes.
   The banks, now that they could unload their mortgages started writing really bad mortgages, "sub prime" and "alt-A" to borrowers who would never be able to pay off the mortgage.  No matter, long as we dump this worthless mortgage on Fanny and Freddy we are OK.  This continued until the sucker investors wised up to the fact that "backed by real estate" meant nothing.  They didn't have the right to foreclose and repossess the real estate.  So the bonds stopped selling, and Fanny and Freddy went Chapter 11.  For $140 billion.  This touched off Great Depression 2.0.
   In actual fact, we ought to shut Fanny and Freddy down, for good.  We don't need them to "make more mortgage money available".   Mortgages are profitable and safe. We used to say "Safe as houses". If the borrower fails to pay, the lender gets the house.  Home mortgage borrowers are strongly motivated to keep up the payments, who wants to explain to a spouse that they are getting evicted?  Far more secure than the stock market.
  Shut down Fanny and Freddy.  The real estate industry (brokers, builders, appliance makers, lumber industry) will cry a lot, but  life will go on. 

Monday, February 29, 2016

Uncle wants to revive Mortgage Backed Securities.

Mortgage backed securities used to be a $ trillion dollar a year market, up until 2007 that is.  Since 2007 nobody will touch them.  The Journal shows a bar graph of sales over the years and zero sales in any year after 2007. 
   Many people think that mortgage backed securities caused Great Depression 2.0  In the go-go real estate bubble back in the aughts, banks and mortgage lenders needed more money to do mortgages with.  Someone had the bright idea of creating a security, essentially a company IOU, which was "backed" by mortgages held by the bank. These IOU's were sold to gullible investors, by promises of high yield,  and the proceeds used to write more mortgages.  Trouble was, the "backing" didn't mean anything, the IOU holders did not get the right to repossess the properties when the borrowers stopped paying.  And when the borrowers stopped paying, the investors stopped getting paid too.  Investors wised up in 2007 and no more mortgage backed securities have been sold. 
   So banks can do mortgages using their own money, of which they never have enough, or by getting FHA or Fanny Mae or Freddy Mac or VA to put up the money.  But, these government agencies, still suffering huge losses from 2007, all have pretty stiff rules about what kind of mortgage they will accept.  Unless the borrower has a real clean credit record, no deal, no mortgage.
  Now we have Monique Rollins,  deputy assistant secretary in Obama's Treasury Dept saying "We do believe that a reformed asset class could responsibly broaden access for qualified buyers who are not being served today."   Translation: Let's do mortgage backed securities to give the banks money to do any kind of mortgage they like."   Which is what caused Great Depression 2.0.  Not good.  But the Obama administration is in favor.
  Of course, Monique has not explained what she would do to get investors to touch the new model mortgage backed securities.  
  I wonder what a Trump administration would do?