Sometimes it’s the job of a columnist to ask rhetorical questions, never expecting a decent answer from anyone. So here I go. As you all know Fannie Mae and Freddie Mac are America’s government-chartered mortgage investing behemoths.
Their goal is to buy residential loans from originators in the secondary market, replenishing the pool of mortgage money that’s available to consumers.
And as you all also know, the Treasury Department took control of these two enterprises in the autumn of 2008 after it was determined they were headed for insolvency. The last thing that the US government wanted – George W Bush was in the White House at the time – was the linchpin of the housing market going belly-up.
Before the credit crisis, the two bought about half of all loans originated here – a ratio that has since grown to almost 70%. Without them, there would be no mortgage market and thus no economic recovery, if that’s what we’re in.
As for their future, the Obama White House hasn’t yet figured out that unsolvable puzzle, but it promises to unleash some type of plan early next year. We shall see.
Anyway, there’s something that’s been bugging me about Fannie and Freddie lately. Bear me with me, because it’s going to get a bit complicated.
Over the past few months, the two have been jamming loan buybacks down the throat of the mortgage industry.
With all the buybacks and insurance policies, Fannie Mae and Freddie Mac losses should be minimal
A loan buyback occurs when Fannie or Freddie, or any secondary market investor for that matter, forces the lender that originally funded the loan – or sometimes the current servicer – to buy it back because it has gone delinquent.
In some cases, the two even force buybacks on current loans – but that’s a column for another time.
During the second half of 2009, the government-sponsored enterprises forced the nation’s mega-banks and others to repurchase roughly $30bn in residential loans. And that’s just the second half.
The way I see it, we have all of 2010 and next year left. It’s going to be a loan buyback storm from here on.
I assume that when either Fannie or Freddie asks Bank of America, Wells Fargo, JPMorgan Chase, or Citigroup to repurchase a mortgage, they say, “Yes, right away, sir.” If they don’t, the GSEs will stop buying their newly originated loans.
Then there’s the mortgage insurance industry to consider. America’s seven mortgage insurance firms insure the first 25% of losses on loans sold to the GSEs. From what I’ve heard, the insurance firms have paid out somewhere in the range of $30bn to $50bn in claims.
In theory, most of that money should have gone to Fannie and Freddie.
And then there’s bond insurance on all the crappy mortgage-backed securities that Wall Street sold to the GSEs. Some of that bond insurance money should be flowing back to them.
One last thing – what about the legal rights of the GSEs? If they were sold crap by the Street – sub-prime mortgage-backed securities being at the top of the list – can’t the GSEs sue the Street for financial damages?
Shakespeare had it wrong. It’s not ’First, we kill all the lawyers’, it should be ’First, we hire all the lawyers’.
Principal writedown plan
Anyway, what I’m getting at is that Fannie and Freddie have lost $130bn or so over the past two years. Uncle Sam has pumped about the same amount of cash into them, keeping their net worth positions above zero.
But with all these buybacks, with all these mortgage insurance policies, with all the bond insurance they have, shouldn’t their losses be minimal?
I know this sounds crazy – but someone has to pay. Yet it seems that the government-owned enterprises are trying to make everyone pay. So why shouldn’t their losses eventually be compensated? What am I missing?
I told you I had some rhetorical questions to ask. One of these days I hope to have some answers for you.
At the time of going to press Bank of America, the nation’s largest servicer of home mortgages, had unveiled a plan to consider principal writedowns for certain struggling mortgagors instead of cutting their note rates.
In some cases, the principal will be reduced to 31% of a consumer’s household income. But Bank of America mortgage chief Barbara Desoer warns that the new principal reduction effort would be limited in its scope and will be available only to certain eligible loans and borrowers.
The mega-servicer is targeting troubled loans it inherited via its 2008 acquisition of Countrywide Financial. Bank of America says it will consider principal reductions on certain negative amortising payment option adjustable rate mortgages and will convert some of these loans to fully amortising products.
The announcement is significant because even though the bank is cutting these principal reduction deals to settle legal claims against Countrywide, the move could open the door to other large servicers doing the same. Stay tuned.