Borrowers Desperate For Help

Thousands of homeowners facing foreclosure are turning to the Bush Administration’s foreclosure relief plan for help. HOPE NOW Alliance, a coalition of lenders and nonprofits which plays a central role in the plan, has noticed a significant increase in calls since the campaign was officially announced in the media. In each of the past two quarters, the number of calls has doubled and these days staffers have to deal with up to 3,000 calls a day, up from 100 calls per day in June 2006. The demand is so high that the foundation has tripled its staff, but hiring more counselors is hard, because HOPE NOW cannot offer competitive remuneration. Despite all the blasting the plan received in the media, desperate borrowers are calling by the thousands, and why shouldn’t they: if they get some mortgage relief – perfect, if not – they have nothing to lose by asking for help.

Fannie Mae said that it will reimburse mortgage servicing companies which refer delinquent borrowers to the HOPE counseling hotline, adding to demand for the service. The HOPE NOW toll-free number is 1-888-995-HOPE. It is available 24 hours a day and provides counseling in multiple languages. Now we’ll all sit and watch how all this unwinds, because it’s the best most of us can do – apart from, probably, writing angry comments about irresponsible borrowers/lenders and about using taxpayers’ money to bail out speculators. Oh, in fact Paulson repeatedly denied the possibility of the latter. However, he did say something about the economy and the housing market, but he wasn’t really optimistic: “there is no single or simple solution that will undo the excesses of the last few years”. Sad but true.

Fannie, Freddie: More Gloom Ahead

The CEOs of Fannie Mae and Freddie Mac, the two government-chartered financiers of mortgage loans, recently voiced concerns about the housing market’s future. Freddie Mac’s Richard Syron said his company will likely suffer another quarterly loss of about $2 billion, with credit losses totaling $10-12 billion. The worst is not over yet, however: he expects home prices to drop further before the market stabilizes. The company is in “hiring freeze” in order to control costs while it struggles with losses. Fannie Mae’s CEO Daniel Mudd expects 2008 to be “very tough”, with a gradual recovery in late 2009. He expects home prices to fall 12% by next year and hopes Fannie’s recent efforts to raise capital will be enough to help the company deal with the situation. As the housing slump unfolds, it turns out even the two GSEs are not immune to trouble. Both have slashed their dividends in recent weeks and issued stock to raise capital.

As The Year Ends

2007 is drawing to its end, and between holiday shopping and baking cookies, some are trying to analyze the housing market trends and forecast its future behavior. While predictions range from mildly gloomy to disastrous, the NAR produced an amusingly optimistic home sales forecast for 2008. After reducing their home sales forecasts for 9 straight months, they now revised their 2007 forecast upwards, to 5.67 million from 5.66 million. Chief economist Lawrence Yun said an optimistic job market report and the government’s help for troubled homeowners influenced the improved outlook. The group believes home sales will rise to 5.7 million in 2008. A Global Insight economist forecasts 4.7 million home sales in 2008.

Merrill Lynch predicts a gloomy 2008 for the U.S. economy with high energy prices, weak employment, tight credit and falling home prices. And by the way, Fannie Mae and Freddie Mac are introducing tougher requirements for mortgages they securitize.

Mozilo On Housing Reform

It seems the idea of “freezing” interest rates will be implemented after all, despite its flaws and the fact that it will only help a small number of borrowers. Perhaps top economists are spooked, but why do something that is certain to fail? Even Countrywide’s Mozilo noticed how bad the idea is. He said the better solution would be to raise the conforming loan limits and to allow Fannie Mae and Freddie Mac to keep more loans on their books – an idea rejected by the Bush administration recently. There may be some conflict of interest on Mozilo’s part, but his arguments are reasonable. Freezing interest rates will help some homeowners, but it will hurt lenders and investors, and leave the rest of the borrowers to struggle with increasing mortgage payments. He also noted that the industry needs clear lending standards that will create a sense of certainty and lure investors back into the housing sector, pumping liquidity and spurring mortgage lending (Bingo! But maybe we should leave the conforming loan limits alone, cos they’re pretty high right now anyway).

The worst may not be over yet for the mortgage industry: Banc of America and Fannie Mae both predicted significant home price drops in 2008. Fixing the interest rate on a small portion of mortgages will not prevent foreclosures, especially with borrowers willing to walk away from their “upside down” mortgages.

Fannie Mae Will Cut Dividend, Too

Fannie Mae announced that it will cut its quarterly dividend by 30% from 50 cents to 35 cents a share, beginning the first quarter of 2008. In an attempt to raise capital, the company is planning to issue $7 billion of non-convertible preferred stock this month. The announcement comes after similar moves by sister company Freddie Mac, which issued $6 billion in preferred shares last month. Demand for Freddie stock was 5 times greater than the total amount of stock issued, according to the mortgage giant. Freddie Mac posted a loss of $1,5 billion, and Fannie took a $2 billion hit in the third quarter.

Fannie Mae said its 2008 financial results will probably be disappointing, due to turmoil in the housing markets. Shares dropped 3% on the news. Analysts believe the two GSEs may face significant losses related to subprime and Alt-A securities in the months to come. Unlike many banks, Fannie and Freddie have so far avoided large writedowns, but they are not immune to losses.

Conforming Loan Limit Unchanged In 2008

The conforming loan limit, currently $417,000, will remain unchanged in 2008, announced OFHEO director James B. Lockhart. OFHEO is the entity that regulates Fannie Mae and Freddie Mac, the government-chartered guarantors of home mortgages. Any loans above the $417,000 limit are considered “jumbo” and cannot be guaranteed by Fannie Mae and Freddie Mac, so lenders usually charge higher interest on them. This limit only applies to one-unit properties; multiple-unit properties have higher limits. Alaska, Hawaii, Guam and the U.S. Virgin Islands have higher upper limits than other states. The maximum conforming loan limit is determined by analyzing October-to-October change in the average house price, which has declined more than 3% this year. The maximum limit hasn’t changed for the last 2 years, and it probably won’t get revised upwards anytime soon. The latest NAR report says the inventory of single-family homes on the market is at the highest level in 22 years (10.8 months’ supply), which can only drive home prices down.

Freddie Mac Seeks To Raise Capital

Freddie Mac was all over the headlines this morning, as recent news revealed the mortgage giant’s weaknesses. It is believed that the company may have insufficient capital to cover potential home-loan losses and there’s talk that both GSEs may be insolvent at some point in the near future, should more mortgages go bad. Moody’s and Standard & Poor’s downgraded Freddie’s outlook to “negative” from “stable”, though its debt is still rated AAA. Fannie and Freddie are required to hold 30% more capital than the minimum for other companies, and Freddie Mac found itself short of money, so it is now issuing securities to raise capital. Currently the company has $600 million above the minimum reserve level, much less than its $1-2 billion comfort level. It revealed plans to sell $5 billion of preferred stock in the very near term, probably this week. If losses in the fourth quarter are comparable to those in the previous three months, the mortgage giant will need to raise even more capital. James Lockhart, the director of Fannie Mae and Freddie Mac’s regulator, OFHEO (Office of Federal Housing Enterprise Oversight), refused to suspend the extra capital requirement when asked to.

Fannie And Freddie Under Fire

It was announced earlier this week that New York State Attorney General Andrew Cuomo is investigating Fannie Mae and Freddie Mac in relation to accusations that the two mortgage giants had purchased loans based on inflated appraisals from Washington Mutual. According to Cuomo, WaMu pressured eAppraiseIT, an appraisal company, to inflate home values on thousands of loans which were later sold to Fannie and Freddie. Freddie Mac replied immediately saying it will cooperate with investigators. WaMu and eAppraseIT said they did not breach regulations. WaMu’s stock price dropped 17% on the news, to the lowest level in 20 years.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), the GSEs’ regulator, however, expressed disappointment with the subpoenas. In a letter to Cuomo, he said that Fannie and Freddie “have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals”, and “you and your staff may not fully understand the differences between the mortgage-backed securities issued by the GSEs and those issued by other entities”. I can feel the rage.

Fannie and Freddie have operating rules in place, which say that if the loans they purchase are linked to inflated appraisals, the lender has to buy them back. Too bad for WaMu, it’s already suffering losses from failed subprime loans, so if it has to repurchase all the mortgages it sold to Fannie Mae and Freddie Mac, its financial situation could deteriorate further. For the time being, both companies are continuing to purchase WaMu mortgages.

Countrywide and KB Home: the worst not over yet

During a panel discussion hosted by the Milken Institute, Countrywide’s CEO Angelo Mozilo and KB Home’s President Jeffrey Mezger talked about the housing market, the Fed’s policy and surplus inventories. The worst is not over yet, according to Mozilo, and Mezger believes “things are going to stay tough for quite some time” for KB Home. Both agreed that lifting loan limits for “conforming” mortgages would help the industry, because the current limit is below median prices in many areas. Non-conforming loans that cannot be purchased by Fannie Mae and Freddie Mac come at a higher price, which further diminishes affordability and exacerbates problems in the housing sector.

So if they see more trouble ahead, how come Countrywide promised to post profit in Q4?

Countrywide asked to oust Mozilo

A pension fund advisory group called CtW Investment Group, has sent a letter to the board of mortgage lender Countrywide Financial, asking for Countrywide CEO Angelo Mozilo’s resignation. The American Federation of State, County and Municipal Employees said Mozilo should be replaced with two independent directors, and changes should be made to Countrywide’s executive compensation committee. While the criticism seems reasonable, they seem to be waking up to the facts a little too late. Mozilo’s stock sales caught media attention more than half a year ago and have been discussed in the blogosphere ever since but hey, better late than never.

In other news, the $350 million penalty Fannie Mae paid after accounting errors were exposed is now being distributed to investors who were harmed as a result of the fraud. Glad to know that.

GSEs may have their caps lifted early next year

OFHEO (the Office of Federal Housing Enterprise Oversight), the regulator of Fannie Mae and Freddie Mac, said that the investment caps may be removed altogether for the two GSEs if they establish timely and audited financial reporting. This news comes shortly after the caps were placed 2% higher for both companies, which translates into additional $20 billion or so in investments for each company.

Whether or not this move will be made depends on what and how the two mortgage giants report when they file their annual financial statements for 2007. “Current financials with no material weaknesses is a key test”, according to OFHEO director James Lockhart. He also said that, “there’s a reasonable chance” that the caps will be “changed significantly” if not lifted. The investment caps were initially placed after accounting scandals rocked both companies’ reputations and credibility.

After all the recent activity and the disappointing results of the Fed rate cut, I smell panic.

Regulators lift caps on Fannie and Freddie

Not so long ago, the Bush administration rejected a proposal to raise the limit on how much the two government-chartered enterprises can hold in their portfolios, but a new move by the OFHEO does exactly that. As of October 1, Freddie and Fannie can increase their mortgage portfolios by up to 2% annually, and the caps on both are now at $735 billion, compared to $727 billion for Fannie Mae and $724 billion for Freddie Mac until recently. This is much less than the 10% Fannie asked for, and the company didn’t fail to mention this in its statement: “the more effective response, given the extent of the market disruption, would be to raise our portfolio cap by at least 10 percent so that we can more fully address the ongoing turmoil”.

Christopher Dodd, Chairman of Senate Banking Committee, also criticized the move as “timid and inadequate”, but some analysts fear that lifting the caps on the two GSEs in unwise. Indeed, the Fed already did a lot by cutting the Fed Funds Rate by half a percent, essentially flooding the market with money, so allowing Fannie Mae and Freddie Mac to purchase more loans would trigger another short-lived iteration of the housing bubble. Pulling at levers to find out what happens could be very costly right now, so why not leave the market to fix itself? The rate cut is quite a dangerous experiment already, watch how the economy behaves until the end of the year and then decide what to do next. Now that Fannie and Freddie got their caps lifted a little, I guess it’s best to leave them as they are for a while, because it may take months to see the results of this week’s actions.

It’s official: Lone Star wants to amend tender offer

Yesterday, Lone Star delivered a letter to Accredited Home Lenders Holding Co.’s Board of Directors, which essentially asked for a substantial price cut on the company. It is clear to anyone that Accredited is worth well below $15.10 a share, and its price is declining with each passing day. Therefore, the new price Loan Star is offering is $8.50, “a premium of 35% over the closing price of the Company Common Shares on August 30, 2007”, according to the letter. Still a good price I would say, especially knowing that Lone Star could simply walk away from the deal – leaving the $12 million break up fee behind and after lengthy court proceedings, that is.

And as I read reports on home prices, I can’t help wondering what’s going on. Not that a decline of 0.1% vs. an increase of 0.1% makes much difference, but the way they present data is quite confusing. OFHEO (the Office of Federal Housing Enterprise Oversight, the regulator of Fannie Mae and Freddie Mac) came up with a 0.1% increase in home prices in Q2, and growth of 3.2% year-over-year, the slowest in a decade. Naturally, OFHEO Director James Lockhart didn’t fail to mention that “significant price declines appear localized in areas with weak economies”, but I would say these numbers are too vague because of the way they’re calculated. An index compiled by Standard & Poor’s Corp. showed that home prices declined 3.2% from last year, how’s that for slow house appreciation. Naturally these indices are calculated in different ways and based on different sets of data, so it’s hard to compare, but they both paint similar pictures of the housing market: no more “easy money” and “rapid appreciation”, this is the bursting of the housing bubble (or so say the pessimists).

Bernanke comments on the mortgage crisis

On Aug. 27^th, Fed Chairman Ben Bernanke sent a letter to Senator Charles Schumer, in which he said there’s no need to lift the caps on Fannie Mae’s and Freddie Mac’s portfolios. A similar opinion was expressed by OFHEO (Office of Federal Housing Enterprise Oversight), the federal regulator of the two GSEs’, and President George Bush a couple of weeks ago when a suggestion to lift the portfolio limitations on Fannie and Freddie was rejected. Bernanke said that policy makers may encourage Fannie and Freddie to package more loans into securities and sell them to investors, as these actions are not constrained by the portfolio caps. Bernanke also said that the Fed is closely monitoring the financial markets and “is prepared to act as needed” to prevent bigger problems.

Bernanke suggested developing new mortgage products for low- and moderate-income borrowers that would not cause unexpected spikes in mortgage payments. Clearer explanation of loan terms would also be beneficial to potential borrowers. He also noted that reforming the FHA (Federal Housing Agency) might be helpful.

Analysts believe that these comments spell a high likelihood of a Fed rate cut on the next meeting Sept. 18. Another speech by Bernanke is scheduled for this Friday, and it may well shed some more light on what the Fed is about to do.

Credit panic and foreclosure bailouts

Brilliant “bright” ideas on how to prevent a looming financial crisis are raining from everywhere. Just in the past few days, the following proposals have been all over the news.

PIMCO’s Bill Gross urged the White House to bail out troubled home owners: “If we can bail out Chrysler, why can’t we support the American homeowner?” I would say that the Chrysler bailout wasn’t a very good idea either, but then the government had its own reasons for it. In my opinion, it would be totally unfair to pay for borrowers’ unsound financial decisions with other taxpayers’ money. According to this blog entry, it turns out Mr. Gross himself is heavily invested in mortgages and further foreclosures would sting him quite badly. So that’s why we need to bail out borrowers.

Another brilliant plan comes from presidential candidate Senator Christopher Dodd (D-Conn). What he suggests is, to allow the Federal Housing Administration (a.k.a. FHA) to refinance troubled loans. He believes that the FHA does not serve its purpose well and needs to be reformed is order to be able to help homeowners-to-be. Dodd suddenly appeared among those “concerned” about housing several months ago, and started criticizing the government and the existing system, proposing some rather dubious solutions. Dodd also supported the idea to lift the investment caps on Fannie Mae and Freddie Mac’s portfolio, a move that would allow an inflow of financing on the market. The idea was rejected.

I really wish all these activists were this creative a couple of years ago and invented an economically sound way of “saving the economy”. Unfortunately, right now we are indeed facing serious problems that need to be solved, and every solution seems to have “unwanted side effects” for the economy, the dollar, or the average consumer. Every foreclosure is a particular family’s tragedy, but many of the loans defaulting now should have never been made, and those who were involved in the process only have themselves to blame. It is true that the entire business was infested with fraudulent activity, but in the end everyone had a choice. Sadly, greed often prevailed.

Meanwhile, the Fed has some “bright” ideas of its own. According to CNN Money.com, the central bank has temporarily exempted Citigroup and Bank of America from limitations on the amount of money they can lend. So this is more of the same – a move to artificially boost cash flow in a market that is essentially stagnant. Sounds good for a short-term solution, but in the end market forces should be allowed to play their part in the whole thing.

Mortgage availability drops drastically

As credit markets panic, lenders go out of business and hedge funds collapse, whole classes of loans seem to be evaporating. Lenders are no longer willing to fund “Jumbo” mortgages, or loans for sums above the Fannie Mae limit of $417,000, because there’s no one to sell them to. Those who still offer the product charge a fee of 7% and above – and that is for prime borrowers with good credit and a down payment of more than 5%. No-down payment and 5% down payment loans have virtually disappeared from the market, and so have no-doc, interest-only and some other super-risky loans. Subprime and Alt-A borrowers were the first to feel the squeeze; now even consumers with perfect credit are hard put to find financing at a reasonable price.

A Fed survey discovered that 56.3% of banks have tightened credit standards for loans to borrowers with weak credit. 14.3% of the participants in the survey said they had tightened lending standards to prime borrowers, too. Quite bad for anyone wishing to buy a house or refinance their mortgage. It’s only natural that we’re seeing record levels of delinquencies and foreclosure activity. Consequently, anyone wishing to escape adjusting monthly payments has no real alternative to foreclosure. I wonder home many troubled borrowers actually considered the ‘worst-case scenario’ before they signed their mortgage papers a couple of years ago. Or was it the NAR & Co.’s influence? Housing prices could only go up, right?

Regulators won’t lift investment limits for GSEs

Last week, Fannie Mae requested permission to increase its investment portfolio in order to help spur the slumping mortgage market. It is currently subject to a limitation of 727.2 billion on its portfolio. The Office of Federal Housing Enterprise Oversight, or OFHEO, said on Friday it will not lift the investment caps on Fannie Mae and Freddie Mac. President Bush said that allowing Fannie Mae to purchase more loans was out of the question for the moment. However, “requests for an increase in the portfolio caps” will be kept “under active consideration”, according to a statement by the OFHEO. Freddie Mac’s spokesman expressed disagreement with the OFHEO’s decision.

To prop up the financial system, the Fed injected $38 billion into the market on Friday in the biggest move since the 9/11 terrorist attacks. Similar moves were made by other central banks last week, including those of Germany, Australia and Japan. Consequences of the turmoil in the U.S. financial system are turning up in unexpected places, as a consequence of the interrelations of various investment instruments traded all over the world.

Fannie asks regulators to raise financing cap

Fannie Mae has reportedly asked the Office of Federal Housing Enterprise Oversight (OFHEO) to increase the maximum amount of loans it can hold in its portfolio. Fannie says this will help stabilize the market and provide financing for potential home buyers. The mortgage giant is required to keep mortgage holding at or below $727 billion. Freddie Mac, Fannie’s smaller sibling, is also subject to a similar limitation. Shares of Fannie Mae gained more than 10% on the news and closed at $62.50 on Monday.

Regulators generally try to prevent the two GSEs from controlling too large a part of the market, because of the potential consequences for the broader economy. Allowing Fannie to keep more loans in its portfolio, or raising the cap on ‘conforming’ loans would probably be good for the market, but I don’t think regulators find the thought of permitting Fannie and Freddie to grow even larger very appealing. It’s a well-known fact that in some areas nearly all loans are ‘jumbo’ because the median is well above the $417,000 limit for a ‘conforming’ loan financed by Fannie Mae, so there must be something inherently wrong with the classification in general. While setting ‘local’ limits for ‘conforming’ loans sounds impractical, there must be something that can be done to make the system more realistic.

Another thing that could help spur the market would be a rate cut, but choosing the right policy in the current circumstances is a very complex problem which the Fed will have to resolve on its meeting this week. Most analysts believe that the Fed fund rate will remain at 5.25% where it’s been for more than a year, but a cut is likely sometime by the end of 2007. Much will depend on how the economy behaves, including such indicators as inflation, employment, the dollar, and the whole range of housing-related problems. Housing prices are another concern that needs to be addressed. They grew beyond any reasonable limits during the housing boom, so in the long term, a drop in prices would be considered a good thing. Providing more financing, or cheaper financing, would only slow that process down.

Fannie and Freddie to tighten policies

The two GSEs announced that new lending policies will be effective as of September 13. These come as a response to a directive issued by the federal agency overseeing the mortgages giants. Fannie Mae and Freddie Mac will require that borrowers’ ability to repay loans be evaluated more carefully. Lenders will also have to improve their risk-management practices to keep pace with the increasing risk associated with the industry.

The Office of Federal Housing Enterprise Oversight (OFHEO) which regulates the two companies, called the new rules “a significant step”. Because Fannie and Freddie buy mortgages from both banks and other financial institutions that do not fall under federal regulation, the new policies will, “create market pressure for improved standards among non-banks” according to Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC).

All nontraditional mortgages issued on or after September 13 will be subject to the new rules.

Ex FBI Special Agent joins Fannie Mae Board

Fannie Mae announced last week that Louis Freeh, former FBI director, was elected to join the mortgage giant’s Board of Directors. He is going to serve on the compliance and compensation committees, becoming the eight new director elected since 2004.

This move will improve Fannie’s connections to Congress and the White House at a time when tightening federal oversight over the two Government-Sponsored Enterprises is being discussed.

Freeh has served as an FBI Special Agent from 1975 to 1981; in 1993, he was appointed director of the FBI, where he stayed until 2001. He has received much criticism for his especially radical statements and demands in connection with law enforcement, public organizations and intelligence. A controversial, but powerful figure, he will certainly have a serious influence on Fannie Mae. “Louie’s impressive legal background and experience working in the financial services sector and on corporate boards will be important assets for the company and our shareholders”, said Stephen B. Ashley, Chairman of the Board.

Freeh is currently a lawyer in the private sector; he participates in the board of directors of credit card issuer MBNA, Bristol-Myers Squibb and Gavel Consulting Group.