Fed says expand Fannie, Freddie role to aid housing
By Mark Felsenthal and Margaret Chadbourn – Reuters
The Fed, in a paper sent to lawmakers on Wednesday, outlined an array of steps that could be taken to help the housing sector, including allowing Fannie and Freddie to provide cheaper mortgages to a broader pool of homeowners.
The two companies, the biggest sources of U.S. mortgage funding, were seized by the government in 2008 when they were on the brink of collapse. They have been propped up by $169 billion in taxpayer aid since then, making them a target of many on Capitol Hill.
Even the Obama administration, in a trio of alternatives laid out early last year to reform the U.S. mortgage finance system, supported reducing the government’s role in housing finance.
The purpose of both Freddie and Frannie was add liquidity in the secondary mortgage market. They would purchases from banks and S&L, so they could then take the proceeds from the sale of the loan and lend it out again. Since 30 years mortgage was a long time and had a lot of risk to the investor, the government would guarantee the loan (through establishment of Fannie and Freddie) to make the mortgage investment seem safer. The hope was that this would encourage lending.
“It comes at a time that Congress has become quite skeptical of Fannie and Freddie and their role, and seems to be looking for ways to diminish their long-run role in housing finance, not increase it,” said David Resler, chief economic adviser at Nomura Securities International.
While legislative steps are likely off the table, the Fed’s recommendations left plenty of scope for other approaches and could add to pressure on Fannie Mae’s and Freddie Mac’s regulator, the Federal Housing Finance Agency, to take a broad view in helping housing markets recover rather than focusing narrowly on stemming losses at the firms.
The Fed’s proposal to expand Fannie and Freddie’s role in the government’s main refinance program was among a number of measures the U.S. central bank recommended aimed at bringing down the inventory of unsold homes, making it easier for borrowers to get credit and containing an onslaught of foreclosures
The best way to fix the housing market is encourage strategic default and allow new borrowers and investors to come in purchase these properties. One, this sounds like a backdoor bailout of the banks. Two, it sounds like an election year political agenda handout. Fannie and Freddie were ok, until politicians figured out a way to use the GSE as hand outs for political favors and promote lending to people that shouldn’t received loans in the first place. Rule 1 was you had to qualified to get a home loan. In the 1990′s was the beginning of “You had a pulse you can get a loan” Of coarse this turned into the housing bubble that ended with the bailout by the tax payers.
“Continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery,” the Fed said in the paper, which was sent to the chairman and ranking minority members of the Senate and House of Representatives banking committees.
The Fed also said a government-facilitated program to turn real estate that banks have taken over into rental properties might be beneficial.
The Obama administration has already signaled an intention to sell off properties Fannie Mae and Freddie Mac hold to investors who are willing to turn them into rental properties.
Fed Chairman Ben Bernanke, in a letter accompanying the recommendations, said the U.S. central bank was responding to requests for advice about what could be done to halt the spiral of falling home prices and rising foreclosures.
I see that recommendation meaning that Bank of America needs a bailout on the non-performing assets that not back Frannie or Freddie. Why are Fannie and Freddie going to increase their risk…because you will pay for the bail out.
The United States, the world’s largest economy, has yet to engineer a convincing recovery from the worst recession in decades, in part because of the depressed housing market that has experienced declines not seen since the Great Depression.
House prices have fallen 33 percent from their 2006 peak, resulting in an estimated $7 trillion in household wealth losses. Currently, about 12 million homeowners are underwater on their mortgages nationally, and in states experiencing the largest house price declines, roughly half of all mortgage borrowers owe more than their homes are worth.
Wow, this the first article that discusses the real number of underwater mortgages. We if we bailout banks and borrowers again, I estimating that we will seen another mini-shadow inventory in the future.