The NAR released Pending Home Sales data this morning.

From the release:

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in January, fell 7.6 percent to 90.4 from an upwardly revised 97.8 in December, but remains 12.3 percent higher than January 2009 when it was 80.5.

A sale is listed as “pending” when the contract has been signed but the
transaction has not closed, though the sale usually is finalized within
one or two months of signing. Mortgage and real estate professionals know
that a signed contract is just the first step in a long process
nowadays. The hard part is qualifying and closing!

Since activity spiked over the seasonally supportive spring and summer months, before topping out in October, there has been a drastic drop off in sales contract signings. In all reality I should say the index has returned to pre-stimulus levels.

There is one twist to the above discussed “drastic drop off” that must be mentioned.

Over the past month there has been a steady streak of noticeably weaker than anticipated economic indicators. Declines in  manufacturing output, labor demand,
retail sales, and housing activity have all been blamed on wintry weather as blizzard conditions in more than one geographic region, accompanied by unusually large amounts of snow and ice accumulation, forced most folks into their homes, shut in from shopping. (online too?)

Lawrence Yun, NAR chief economist says: “Weather is likely to impact housing data….January pending sales, though still higher than one year ago, remain much lower than expected given that a large number of potential buyers are eligible for the expanded home buyer tax credit. Moreover, the abnormally severe and prolonged winter weather, which affected large regions of the U.S., hampered shopping activity in February,”

Looking ahead….

Yun says he expects a turn around late this spring/early this summer: “We will see weak near-term sales followed by a likely surge of existing-home sales in April, May and June,”

The Pending Home Sales index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that closed existing-home sales generally lag the Pending Home Sales Index by two months.

Given the decline in signed sales contracts in January and expectations for another slow month in February (because snow was worse in Feb), Yun’s outlook for a pick up in activity sometime in late spring/early summer makes sense…especially when you add in an anticipated spike in buyer demand as the tax credit draws closer to expiration in April (for June closings).

I do not want to paint a super positive picture though, statements like “a pick up in activity” and “spike in buyer demand” may be taken as “everything is going to be OK this spring”. The fact is, there are still major structural problems that only time (and jobs) can fix, specifically damaged consumer credit profiles. If you’ve never had the pleasure of trying to repair a borrower’s FICO score, it is not a fast process in any way. It takes time, discipline, and steady income.  It will take years of credit rebuilding (or guideline relaxation) before housing demand (qualified) is really restored.

I think we will see existing home sales increase up to 5.4 million annual sales in the early summer with activity slowing down back toward 5.00 million annual sales later in the year.

My point: the rejuvenation of housing demand really is a function of macroeconomic progress, specifically jobs. Considering productivity is running at a record high and firms are investing in technology to make production more efficient…many jobs that were lost over the last two years will likely be lost forever. This does not make me feel warm and fuzzy about sustained positive progress in housing….that recovery will take many years. The market will feel slow for awhile….

READ MORE ABOUT THE LACK OF QUALIFIED BORROWERS

The Federal Reserve today reported on their weekly purchases of agency mortgage-backed securities (MBS).

In the week ending March 3, 2010, the Federal Reserve purchased a net total of $10.00 billion agency MBS. This represents a $1 billion decline from the previous reporting period and breaks a three week streak of $11 billion net total purchases.

The goal of the Federal Reserve’s agency MBS program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally. Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for the program. The program includes, but is not limited to, 30-year, 20-year and 15-year securities of these issuers. (N.Y. Fed MBS FAQs)

Since the inception of the program in January 2009, the Fed has spent $1.22 trillion in the agency MBS market, or 97.3 percent of the allocated $1.25 trillion, which is scheduled to run out at the end of this month. With four weeks left in the program there is now only $34.08 billion in funds remaining.

Of the net $10.00 billion purchases made in the week ending March 3, 2010:

• $100 million was used to buy 30 year 4.0 MBS coupons. 1 percent of total weekly purchases
• $6.60 billion was used to buy 30 year 4.5 MBS coupons. 66 percent of total weekly purchases
• $2.30 billion was used to buy 30 year 5.0 MBS coupons. 23 percent of total weekly purchases
• $1.00 billion was used to buy 15 year 4.5 MBS coupons. 10 percent of total weekly purchases

63 percent of the mortgage-backs purchased were Fannie Mae MBS, 36 percent were Freddie Mac coupons, and 10 percent were Ginnie Mae. 90 percent of purchases were 30 year MBS coupons.

The Fed’s daily purchase average during the trading week was $2.0 billion per day. This is $200 million less than the previous reporting period daily average of $2.2 billion. If the Fed were to evenly disperse the remaining $34.08 billion over the next 4 weeks, they would average $1.70 billion purchases per day or $8.52 billion per week.

Below is a chart illustrating the evolution of the Federal Reserve’s Agency MBS Purchase Program. Notice over the past few months the Fed has reduced their purchases and used remaining funds to offset new loan production supply, 4.50 (RED) and 5.00 (GREEN) MBS coupons specifically,  which has helped keep mortgage rates low relative to benchmark Treasury yields.

So far the gradual reduction in the Fed’s weekly purchases has been counterbalanced by the slowdown in new loan production. If remaining funds are spread out equally over the next 4 weeks, soon there will not be enough $$$ to offset average new loan production supply from originators (currently running under $2 billion per day). While we do not expect the Fed to exit the program in this manner, we still anticipate that yield spreads will begin to widen against benchmark Treasuries in the next few weeks. This means mortgage rates should start rising compared to Treasuries in the next month.

Currently, the secondary market current coupon (essentially the MBS yield  lenders use to derive par mortgage rates after servicing and guarantee fees) is 4.268%. The 10 year Treasury note yield is 3.609%.

Yield Spread Calculation: 4.268% – 3.609% = 66.2 basis points.

When the Federal Reserve does exit the agency MBS market, we estimate the secondary market current coupon yield spread will widen out as high as 100 basis points over 10 year Treasury yields. This would put the MBS yield lenders use to derive par mortgage rates at 4.609%. 

If the 10 year Treasury note touches 4.00% and the current coupon yield spread widens to 100 basis points, the MBS yield lenders would use to derive the par mortgage rate would be 5.00%. This is the base yield used to set mortgage rates. If 10 year Treasury yields do touch 4.00% in the months ahead, we expect the average par 30 year fixed mortgage rate to approach 5.50%. We do not expect 10s to break 4.00% in the first half of 2010.

Equity futures are firmly higher this morning ahead of February employment numbers. Payrolls are expected to continue declining but investors are reacting positively to news that the Bank of Japan could initiate measures to protect the economy from deflation.

Overseas markets have been positive across the board, including a 2.20% gain in Japan, a 1.03% gain in Hong Kong, and gains of around 1% in Europe.

“The Nikkei posted its strongest week of the year as the yen weakened amid speculation that the BoJ will undertake further easing,” noted analysts from BMO. “Meantime, a successful 10-year bond sale by Greece (which raised €5 bln), and stronger-than-expected factory data, are giving Europe a lift, though the euro is little changed.”

Two hours before the opening bell, Dow futures are up 35 points to 10,466 while S&P 500 futures are off 5.10 points to 1,127.40.

Commodities remain mixed. WTI crude oil is up 46 cents to $80.67 per barrel but Spot Gold is down $9.60 per ounce to $1,133.70.

Key Events Today:

8:30 ― The Employment Situation remains dire and few economists are predicting any improvement in February. The consensus among economists is to see 68k jobs lost compared with a 20k decline in January. The worsening is a reflection of cold weather, while on the upside there should be some temporary hiring for the 2010 Census. READ MORE

Economists at Nomura estimate the underlying trend in private employment growth to be about -20,000, adding that a firm read is tough because of volatile jobless claims.

“The severe winter storm that battered the Northeast during the period in which the employment figures were calculated may depress job growth,” they added. “Based on the performance of payrolls around other storms ― in particular the Northeast blizzard in January 1996 ― we assume that weather-related factors will subtract 50,000 from employment growth.”

Analysts at BBVA added: “While job losses have slowed significantly from 2009’s average of 398K, they will continue in February. The transition to net job creation will be slow because businesses are currently increasing productivity of existing employees in order to meet new demand. The labor market could remain one of the main challenges to recovery in 2010.”

The unemployment rate, which fell from 10.0% to 9.7% last month, is expected to rise to 9.8%.

3:00 ― Consumer Credit has been falling steadily since mid-2008. In December credit fell by $1.8 billion, a tiny amount compared to the record $21.8 billion drop in November. In January the consensus looks for a $4.0 billion drop, with estimates ranging from $3.0 billion to $10.0 billion.

“Consumer credit outstanding is expected to shrink for the eighteenth consecutive month as consumers continue to whittle down their debt and lenders maintain tighter credit standards than before the crisis,” wrote economists at BBVA. “Non-revolving credit has begun to stabilize, but the ongoing decline in revolving credit indicates that households are limiting the use of credit cards. Household deleveraging could be one of the primary drivers behind the slow recovery of PCE in 2010.”

Via email, I recieved the following guidance from the FHA this morning:

Subject:  Guidance for Currently FHA-Approved Loan Correspondents Regarding Renewal of FHA Lender Approval for 2010

As proposed in a November 30, 2009 via 74 FR 62521, HUD is seeking to eliminate FHA approval for loan correspondents.  Because this rulemaking is still in process and a final rule has not yet been issued, FHA is extending the deadline for the submission of audited financial statements for loan correspondents seeking renewal of their FHA lender approval for 2010. 

For loan correspondents with a fiscal year end of December 31, and that would ordinarily be required to renew their FHA approval by March 31, 2010, HUD is providing these lenders with an additional 30 days in which to submit their audited financial statements.  These loan correspondents must continue to comply with existing requirements for the submission of their Annual Certifications and renewal fees, but will be given until April 30, 2010, to submit audited financial statements.  Again, the deadline for the submission of the Annual Certification and renewal fee has not been changed. 

Loan correspondents that do not complete their renewal in accordance with the deadlines as specified above will no longer be FHA-approved as of the effective date of the final rule that follows the November 30, 2009, proposed rule. 

Here is the verbiage from the Federal Register about the proposed change that would eliminate the need for brokers and correspondents to gain direct approval from the FHA:

FHA proposes to no longer approve loan correspondents as approved participants in FHA programs.

Mortgagees would be required to ensure that their loan correspondents meet applicable requirements. The FHA approved mortgagee will, in turn, act as sponsor as it has in the past. However, in using a  sponsor/correspondent relationship, the sponsoring mortgagee must agree to assume responsibility for any loan correspondent that works with the mortgagee in the FHA insured loan, and assume liability for the FHAinsured loan underwritten and closed in the name of the FHA-approved mortgagee.

This was first announced on September 18, 2010

If you have questions regarding this issue, please contact the FHA Resource Center by email at info@fhaoutreach.com, or by telephone at 1-800-CALL-FHA (1-800-225-5342).  Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).

Equity futures are moderately higher ahead of a fairly light week of economic data. 

Dow futures are trading 18 points higher at 10,563 and S&P 500 futures are up a 2 points to 1,138. 

Commodities are also edging slightly higher with WTI crude oil up 33 cents to $81.83 per barrel and Spot Gold up 54 cents to $1,135.19.

Meantime, the US dollar is a bit lower against the euro since France’s Nicolas Sarkozy said the continent would help Greece: “if it were necessary, the states of the euro zone would fulfill their commitments.” 

In terms of data the week ahead doesn’t quite begin until Wednesday afternoon when the Treasury releases its budget statement. On Thursday, weekly jobless claims will be accompanied by the monthly trade balance. Friday’s retail sales index is the highlight this week.

Key Events This Week:

Monday:

8:35 ― Kevin Warsh, governor of the Federal Reserve, speaks to the Hedge Fund Institutional Forum in New York.

• Treasury Auctions:
• 11:30 ― 3-Month Bills
• 11:30 ― 6-Month Bills

Tuesday:

Notification Day: March Fannie Mae and Freddie Mac 30 year agency MBS coupons begin the settlement process.

9:30 ― Charles Evans, president of the Chicago Fed, speaks to the NABE annual policy conference in Arlington, Va. 

Treasury Auctions:

• 11:30 ― 4-Week Bills
• 11:30 ― 52-Week Bills
• 1:00 ― 3-Year Notes ($40 billion)

Wednesday:

10:00 ― Wholesale Trade Inventories are expected to increase by 0.2% in January, a fraction of the 0.8% decline seen in December. Compared to 12 months prior, inventories were down 10.2% in the last report.

Economists from Nomura said demand from retailers continues to grow but they suspect that wholesalers “will remain cautious about accumulating stocks given ongoing uncertainties about the outlook.”

Going against the consensus call, Ian Shepherdson from HFE said to expect another drop of around 0.5%. “But sales are still rising strongly, and we expect a 1% gain, driven by the durable goods sector,” he added.

2:00 ― The Treasury Budget Statement is expected to show a massive deficit in February. The consensus call is to see a gap of $223 billion in the month, compared with $193 billion in the previous February and $43 million in January. 

“February is typically a month of large deficits due to income tax refund payments,” economists at Nomura point out. “Given tax law changes in last year’s stimulus bill ― including the Making Work Pay tax credit and the first time homeowners tax credit― refunds could be substantial this year.”

Bloomberg News calculates that the February deficit has averaged $144.3 billion over the past 5 years, much higher than the 10-year average of $108.0 million.

Treasury Auctions:

• 1:00 ― 10-Year Notes ($21 billion)

Thursday:

8:30 ― Economists expect the Trade Balance to widen modestly in January. The consensus call is for a $41 billion deficit, compared with $40.2 billion a month before but well up from the $36.4 billion gap in November. 

Economists from IHS Global Insight said higher oil prices have pushed up the bill for imports recently. 

“Export and import volumes both surged in December and we may see a pause in trade growth in January,” they added. “In particular, exports and imports of aircraft will probably fall after sharp increases last month. But the underlying recovery in global trade will continue.”

Analysts from Nomura note that foreign demand for US products, especially from China, remains strong. 

“However, stronger domestic growth is likely to lead to a pickup in imports as well,” they said. “We expect import volumes to increase by a greater amount than export volumes. The major ports have recorded increases in both inbound and outbound container traffic during the month.”

8:30 ― In the final months of 2009 Initial Jobless Claims were falling on a monthly basis but for the past two months the trend has reversed. Claims averaged 471k in February compared to 462k claims in January and 460k in December. For the first week of March economists expect to see claims fall 15k to 454k. But even if accurate it’s nothing to cheer about ― to indicate growth the weekly trend has to be around 400k or lower on a sustained basis.

“This indicator has been exhibiting an upward trend since mid January, illustrative of the ongoing weakness in the labor market,” said economists from BBVA. “Nevertheless, initial claims have come down significantly from their peak of 658K in March 2009. They are expected to drop further, but at a pace consistent with the slow recovery of the labor market.”

Treasury Auctions:

• 1:00 ― 30-Year Bonds ($13 billion)

Friday:

8:30 ― Retail Sales is easily the most important figure to be released this week. And that’s unfortunate, because sales are expected to fall 0.2% in February after 0.5% gain to start the year. Part the negativity is due to autos as new vehicle sales slid 4.2% in the month, but even with them excluded the index is expected to be flat following a 0.6% gain.  

Ellen Zentner from BTMU said the results will be dim for two reasons.

“Blame Toyota, but mostly blame the weather because we expect a -3.3% decline in motor vehicle sales in February and that’s going to be the biggest drag on overall retail sales,” she said. “But weather also depressed other areas of spending as snowstorms and all-around nasty weather hit the country over and over again throughout the month. Already we saw a weather-impact on February payrolls in which retail jobs were flat following a big +42K gain in the prior month.”

Analysts at IHS Global Insight point out that not all news has been negative lately. 

“The ICSC index of comparable chain-store sales increased a surprisingly strong 1.0% in February, suggesting some upside risk to our projection,” they wrote. “The rebound in the stock market appears to be boosting sales of apparel and luxury goods, but it will take an upturn in employment to generate robust growth across sales channels.”

10:00 ― It looks as though Consumer Sentiment will be of no real importance this month. The consensus call is for the score to edge up from 73.6 to 74.0, not quite a breathtakingly steep climb. 

Economists from Nomura said the Reuter’s/University of Michigan report should inch up due to “improving financial conditions.” Analysts from IHS Global Insight note that “encouraging signs” of imminent job growth could help too. And the forecasting team at BBVA looks for upward trend, albeit a slow one because of general economic uncertainty. 

10:00 ― Business Inventories are set to increase by 0.2% in January, effectively filling in for the 0.2% drawback in December.

“The inventory adjustment has been playing an important role in stimulating industrial production and driving GDP growth over the past two quarters,” wrote economists at BBVA. “Businesses allowed stock levels to get so low that they now need to rebuild inventories in order to meet sales demand. As a result, inventories are expected to rise in January, indicating that the change in inventories could also have a positive impact on 1Q10 GDP.”

Investors Business Daily this week continued playing the role of drummer boy in the relentless assault from the right on Fannie Mae, Freddie Mac and the Community Reinvestment Act as the chief culprits of the financial crisis.

In a March 3 editorial, IBD dismisses the conclusions of the bipartisan Financial Crisis Inquiry Commission that found no reason to lay the blame of the collapse of the housing markets on CRA.  The editorial even perversely characterizes CRA as “redlining” legislation, demonstrating shameful disregard for the history of housing and race in America in the 20th century.

IBD’s piece is part of a meme that has taken root by way of Rush Limbaugh (“CRA was used by ACORN and their allies to wreck the mortgage market.”) and American Enterprise Institute’s Peter Wallison (“CRA …Fannie Mae and Freddie Mac …are to blame for the financial crisis”) and brazen, over-the-line bloggers whose blame-minorities language on CRA is not fit to quote here. 

OK, I can’t resist citing a few samples, at least some from writers whose not-so-subtle references give you a small, bitter taste of the more offensive, unquotable posts. For example, there are references in “investment” and “business” blogs, where the bigotry is sanitized (barely) by the use of sentences such as: “CRA’s primary purpose was to force banks and other lenders to give mortgage loans to un-creditworthy borrowers (many of whom were minorities).”

Or this: “CRA pushed by radical organizations such as Barack Obama’s ACORN and Jesse Jackson’s Rainbow/PUSH Coalition as a way to achieve the Marxist dream of wealth re-distribution.” 

Good gracious, in the case of that last one it seems George Wallace and Joe McCarthy had a baby and became a 21st century blogger.

On one level, the whole thing is a good example of how the importance of a narrative in public debate cannot be overemphasized. We all like a good story. It’s a propensity baked into our DNA.

Narrative is not the same as story. Narrative is how the story is told. It makes it easier to take something complex and make it more easily digestible. For example, life is a story. You are born, you live and you die. What happens in between is complicated. It can’t all be told unless the storyteller makes the choice of a narrative.

That’s why the “CRA caused the crisis” narrative is so useful to slanted pundits who want to explain something to us that’s just not that simple. In the political and policy arenas, the most successful narratives are the ones that lend themselves to quick quotations and short attention spans (of both the audience and the storyteller).  Often, and sadly, some conveniently connect to the heart and head via veiled symbolism and prejudices.

Here’s the rub: once the narrative is chosen, and it sticks, it is very hard to discuss the issue outside the framework of the established narrative. Take a look at an interview online this week with Kevin Hall, national economics correspondent for the McClatchy newspaper chain. Hall goes after the myth that Fannie, Freddie and CRA were to blame.

Here’s Hall’s take:

“There’s a perception that has been fueled by the right that somehow Fannie and Freddie are behind this whole collapse because of the Community Reinvestment Act and the forcing of banks to lend to minorities. The truth could be nothing farther than that, and we’ve written stories about that and proved it, yet it seems to take on, you know, this national lore as if it just has to be true.”

He continued: “The CRA loans are the best-performing loans. The subprime loans—in fact, the majority of subprime loans weren’t given to minorities; they were given to white folks who were buying second homes and vacation homes and flipping homes.”

Granted, Hall’s sound bite itself is a bit of an oversimplication and, what could be argued, reverse racism. Maybe in an environment where others continue to fan the flame, it may sometimes prove irresistible to fight fire with fire.

The Financial Crimes Enforcement Network (FinCEN), an arm of the Treasury which generally tracks drug money and
terrorist funding has now apparently added Home Equity Conversion
Mortgage (HECM) fraud to their efforts.

In a recent Miami Herald article titled, “Crooks Misusing Foreign Trade,” James H. Freis, director of (FinCEN), said, “FinCEN has seen a big problem recently with home equity conversion mortgages….regulators are also seeing seniors duped into buying financial products not in their best interest as an outright theft of proceeds from reverse mortgage proceeds.”

Although I applaud FinCEN, the HUD Inspector General and all other law enforcement agencies who try and protect us from predatory practices, I am afraid statements such as these are not qualified, yet have some how still become the norm rather that the exception.

Former FHA Commissioner Brian Montgomery commented by saying, “such statements that go without a challenge are downright destructive to the reverse mortgage industry.”

I can’t agree more.  Qualifying these statements is not the sole responsibility of MBA and or NRMLA. I can think of others who claim to have the best interest of our seniors at heart who should take up a position to support law enforcement’s effort to protect seniors but who should also profess the benefits of the reverse mortgage program and the potential positive impact on our seniors.

To that point where is AARP?

Although they did show positive support for the program back in 2007, there hasn’t been much mentioned of it since. Do they not believe that the future generation of seniors will need a mechanism such as the reverse mortgage to maintain some semblance of a quality of life? And what about the leadership in our cities; have they not thought about the necessity of the reverse mortgage for their aging citizens? Almost every city in America is struggling with transitional housing for its seniors. Most do not have the resources to fund such requirements. Would it, therefore, not make sense to support a program that provided those seniors with the wherewithal to stay in their homes and provide for themselves?

And then there’s congress. I find it incomprehensible that there isn’t a champion of this program on the Hill. Why is it that the only rhetoric coming from Washington regarding this unique program is in the form of “victims and villains”? If congress only comments on why something can’t work, is there hope for them to ever support alternatives to our aging and bankrupt entitlement system?

So why is there so little public support for the reverse mortgage program, especially if the majority of the information and data collected indicates that this program makes sense and a majority of satisfied seniors seem to exist?

Maybe it’s because the industry is so fragmented and the level of support it would require is impossible to achieve without the coordination and collaboration of all parties. But is it not time for all interested parties to put aside the need to be ‘front and center’ and take a position alongside one another? Joined in supporting a viable complement to current retirement vehicles such as pension programs, social security payments and individual retirement savings?

The reverse mortgage program is an ingenious mechanism that we can’t afford to squander.  This is an opportunity to guarantee quality of life for our seniors of tomorrow.

In
a recent Voice of Housing post, I lamented the fact that there seems to be
shockingly little public debate underway concerning the future of the US
Housing Finance Industry. 
I ended that post with the question … in the industry’s future form, is there
any role left for the GSEs, Fannie
Mae and Freddie Mac?

Intellectual
honesty demands that I offer my answers to these questions in the hope that
those answers serve as a catalyst for additional public discourse on this
important topic. 

The
US Housing Finance Industry is like a stool with 3 legs. One of those legs is
the “government”-sector leg existing primarily through FHA and Ginnie Mae; the
second leg is the “private”-sector leg and functions through large diversified
financial institutions such as Bank of America, Citi, Chase, and Wells Fargo;
and the third leg of that stool is the “quasi-qovernmental”-sector and
functions through Fannie Mae and Freddie Mac.

Today,
two of those legs – the “private” and “quasi-governmental”-sectors – are
broken.  And the third leg, the
“governmental”-sector, is straining mightily under the weight of the burden
that has been placed upon it to carry the load during these historic housing
crises. To be sure, FHA
and Ginnie Mae – and most importantly the
many professionals that fill their ranks, have performed heroically during this
crises.  Without the success of both
organizations in taking up the slack left by the void created in the failure of
the other industry sectors, the damage to this nation’s economy would have been
even more profound and far longer lasting.

It
is precisely this interdependence, though, that demands that any plan to recast
the nation’s housing finance industry be done holistically – with the proper
analysis and understanding of the implications and impacts of decisions
relating to one of these three critical sectors on the other.  In other words, action to reform the GSEs
can’t effectively take place without proper consideration being given to the
impacts on FHA and Ginnie Mae, and visa versa. 
To do otherwise would be like stitching a cut on a patient without
giving any consideration to the risk of infection – the bleeding may stop, but
the patient may still die.

So,
to answer my earlier question concerning the future form of the US housing
finance industry, lets begin by focusing on the three “Rs”: reform, reorganize
and reassure.

Reform: requires that action be
taken to reform FHA and Ginnie Mae.

At their core, both organizations are
insurance companies – FHA to the extent that it insures lenders against the credit
risk associated with defaults by FHA borrowers – and Ginnie Mae to the extent
that it guarantees the timely payment of principal and interest to investors in
Ginnie Mae securities and thereby insures those investors against the default
risk posed by the issuers of those securities. 
These roles must be distinguished from the larger  – and I might add, perfectly appropriate -
housing policy/program role that is today a key component of the U.S. Department of Housing
and Urban Development (HUD).

To
accomplish this, FHA and Ginnie Mae should be separated from HUD and permitted
to function as an independent, self-funded department of the government, much
like the FDIC does today. HUD should be left to function as the government’s
housing policy/program arm. Among other things, an immediate benefit of this
model would be that FHA and Ginnie Mae would be freed from the shackles of the
federal budget process and therefore able to staff their organizations
appropriately as the demand on them increased. As an example, Ginnie Mae’s
portfolio in the last three years has increased from approximately $80 billion to
nearly $900 billion today. Despite that, the staff of full time professionals at
Ginnie Mae remains below 72!  That’s
right – 72! 

Reorganize: Fannie Mae and Freddie
Mac and merge them into a single organization that combines the best of each
organization. So to answer my earlier question, unequivocally YES there is an
important role for the GSEs in the US housing finance industry of the future -
just not in their current form. 

While
there were once good and valid to have two such entities, those conditions no
longer exist.  Unquestionably, both
organizations are populated with very bright, dedicated and hard-working
professionals, and each in their own way contribute materially to the essential
processes of managing credit risk and providing liquidity to the secondary
market. They accomplish this many ways, including, for example, through the
development of various credit risk standards and the development and deployment
of important technology systems and platforms that today form the backbone of
many lenders’ underwriting and risk management platforms.  But today, there are many functions within
each organization that are redundant. 
That is not a slam on either organization but simply a reality of the
circumstances in which both organizations existed and grew. Those circumstances
understandably promoted competition among them, which in turn contributed to
the business decisions they made and this redundancy, among other things. 

There
are many ways such”reorganization” could be accomplished. One idea frequently
suggested and that deserves further consideration involves the “good-bank” “bad-bank”
model, where the companies current whole loan portfolios and securities would
be parked in some “bad-bank” entity to manage those assets through their
lifecycle while a good-bank – in this case a clean liquidity entity – was
formed to support the industry’s future credit risk management and liquidity
requirements. In this model, the “best-in-class” functions, processes and
operations from each respective GSE would be contributed to the new – good-bank
entity, if you will.  As envisioned, this
“good-bank” entity would be privately capitalized with ABSOLUTELY no government
guarantee – implied or otherwise.

Naturally,
other good models will be proposed and deserve serious debate and
consideration.  And regardless of which
emerges as the preferred model, reorganization of the current entities is
critical first step.

Reassure: the community of investors world-wide that the US housing
finance industry has been reset on a solid foundation. This is accomplished
only when all three legs of the stool are rebuilt and reset -  because only then will the requisite level of
investor confidence – and in turn private capital -  return to the industry as a replacement for
the trillions of dollars that are today coming from the US Treasury. 

Absent
such reassurance, a recast US Housing Finance Industry will remain a wish and
its renewed vitality will be long delayed.

Yesterday Freddie Mac announced that it would purchase “substantially all” of the seriously delinquent loans from their fixed-rate mortgage Participation Certificate (PC) securities.

The implications of the move extend well beyond the immediate effect on the investors in Freddie Mac securities. Of course, right away we’ll see at least some of the impacts of the FAS 166 & 167 rulings that my colleague Joe Murin anticipated in a post last month here on “Voice of Housing”.   As Joe pointed out, investors’ returns in these securities will be hit insofar as these repurchases will accelerate prepayment speeds, which will reduce the value of the securities to those investors.   

In the big picture, Freddie’s decision goes to the heart of the question concerning the future role of the GSEs – and dare I say relevance – in the US housing system as it is recast. 

To be sure, yesterday’s action by Freddie Mac comes only as a result of the US Treasury’s guarantee of both GSEs’ financial obligations.  Let’s not forget, by all measures both institutions are insolvent, and in the absence of the government’s intervention and guarantee, they would be unable to function as going concerns.  Look at it that way and yesterday’s action by Freddie Mac, as a steward of billions and billions of taxpayer dollars, makes complete sense.  

The cost of repurchasing these loans today and holding them in the company’s mortgage investment portfolio is likely lower than the cost of guaranteeing payments to the holders of the securities, including advances of interest at the security coupon rate.

So as a taxpayer, I say, “Thank you, Freddie Mac!”

Against this backdrop, one wonders whether the investors in these securities – despite that fact that their yields will undoubtedly be hurt – warrant much sympathy. After all, for years both GSEs aggressively resisted all attempts to characterize their government guarantees as “explicit”, in order to avoid the regulatory scrutiny and oversight that would have resulted from such status.  In the face of those protests by the GSEs, and continual assurances of sound financial management and solvency, investors eagerly purchased securities from both of them.  

If these organizations had been truly private, these investors likely would have been wiped out when the GSEs entered conservatorship in 2008.  With yesterday’s announcement, we learn that those investors were actually pretty smart – they were betting, and obviously got it right  – that despite the government’s protestations to the contrary, Freddie and Fannie’s guarantees were actually explicit and unlimited in scope.   

So whom will these investors believe in the future? 

If they believe neither the government nor the GSEs, then we all may have a great deal to fear regarding the future of the US housing system. To be perfectly blunt, private capital will not return, in amounts sufficient to sustain American housing at necessary levels, in the absence of clarity and improved investor confidence.  That absence is painfully present today.

Unless we agree that our housing finance structure of the future is a “national” function – run in large measure by the federal government and funded by taxpayers — we are long overdue to begin in earnest the debate over the real future of this industry. The first, honest question of that discussion should be: Is there any role for left the GSEs?

The noted historian and activist Howard Zinn died this past week.  As a student at Boston University during the latter years of the Vietnam era, I took Professor Zinn’s now-famed political science course.  One of his oft-quoted lines, spoken then in the context of the anti-war movement, seems to apply now to the continued efforts by federal officials to build stability in the nation’s financial system.
 
Zinn suggested that if you know history, then you might not be so easily fooled by the government when it tells you that you must do something for this or that reason. He called history a protective armor against being misled.

Those words resonate today when you tune into the emotions of an outraged public who are frustrated with the consequences of the government’s bailout of big banks and Wall Street.  Many Americans feel fooled and misled. Maybe it’s because there was very little history to fall back on.
 
Granted, no one would ever accuse the ultra-liberal Zinn of spending too much time pondering the banking world. But now some credible experts are making very Zinn-like observations on the downsides of what seemed at the time to be necessary steps in 2008.

No less than former Fed chief Paul Volcker, a trusted adviser to President Obama, wrote in the Sunday New York Times this weekend that concern persists that there is a “residue of moral hazard” from the efforts by the Fed, the Treasury and other governments to rescues large, failing institutions.

“As things stand, the consequence will be to enhance incentives to risk-taking and leverage, with the implication of an even more fragile financial system,” Volcker wrote. “We need to find more effective fail-safe arrangements.”

Nobel Prize-winning economist Paul Krugman last week seemed to sound an alarm when saying that without adequate financial reform we may be headed down a familiar risky path more eagerly than anyone would expect in a period immediately following economic calamity. He warned that Congress’ currently proposed reform language, if enacted, would make it “all too easy for those rules to get weakened to the point where they wouldn’t do the job. A few tweaks in the fine print and banks would be free to play the same game all over again.”

And in a report released on Sunday by the government’s own independent watchdog at the Treasury Department asserts that the government’s response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future.

“Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car,” wrote Neil Barofsky, the special inspector general for the troubled asset relief program, or TARP.

Interesting. Barofsky’s line echoes another famous Zinn quote: Even if you win the rat race, you’re still a rat.