Fannie Mae Preps Investors for Reform. Book of Business Reflects Tight Credit Conditions

by devteam July 29th, 2010 | Share

In the wake of thernpassage of Wall Street Reform, which many opponents have criticized Capitol Hill for failingrnto deal with the future of Fannie Mae and Freddie Mac, the Obama Administration is beginning to presentrnthe broad outlines of how the future of the GSEs will be determined.</p

In a letter released Tuesday, David H. Stevens, acting commisioner of the FHA, said that thernquestion of reforming the GSEs is “not if, but when.”   The Obama administration, he said, has madernit clear from the beginning that the current structure of the government's rolernin the housing finance market is unsustainable and unacceptable, but winding downrnFreddie and Fannie abruptly would destabilize an already fragile housingrnindustry and put the loans already on the books of these institutions at evenrngreater risk. </p

The acting directorrnsaid that any housing finance reform needs to address some complex issuesrnresponsibly.</p<ul class="unIndentedList"<liThe U.S. mortgage market is the second largestrnsecurities market in the world, after U.S Treasuries.</li<liFannie and Freddie currently have more than $5rntrillion in mortgage guarantees outstanding and hold $1.5 trillion in loans andrnsecurities.</li<liThe GSEs are only one part of a broader systemrnthat includes FHA, Ginnie Mae, the Federal Home Loan Banks, other governmentrnprograms, as well as the private sector.</li<liCurrent financial support provided by therngovernment is not an endorsement of the GSE business models; the administrationrnis aware of the need for comprehensive reform. </li</ul


In related news,rnMichael J. Williams, President and Chief Executive Office of Fannie Mae, spokernyesterday to Women in Housing and Finance at a luncheon in Washington.  Williams said his company knows that changernis coming but he declined to speculate on the future of the GSEs, saying that Fanniernis taking the necessary steps to prepare for all outcomes and putting the companyrnon the right track. </p

In his preparedrnremarks, Williams addressed the changes Fannie Mae has made in the nearly twornyears since entering government conservatorship, focusing particularly on thernGSE's book of business behind which, he said, is one of the basic lessons ofrnthe crisis.  Fannie Mae has learned thatrnit can't just put people into homes it must make sure they can stay there orrneveryone suffers – the borrower, the mortgage industry, the financial system,rnand the economy.</p

A recent survey ofrnconsumer attitudes about homeownership showed that a lot of people still aspirernto own their own homes, but 60 percent thought it would be tougher to do so.  They are right, he said, but for the rightrnreasons.  “We need to make surernpeople are ready and prepared for homeownership so that they can be successfulrnhomeowners.  Across the board, we see arnmuch deeper understanding of how credit, income, job security, and a downrnpayment could stand in the way of buying a home.”</p

The housing industryrnhas also put itself in a stronger position, returning to common-sense lendingrnand hoping it can stick to those standards once the market recovers.  Building on these standards, Fannie Mae hasrnbegun to build a new book of business. rnLoan-to-value ratios are averaging nearly 70 percent; credit scoresrnaverage about 760; over 90 percent of new borrowers have long-term, fixed-raternloans and “the number of sub-prime loans in our new book is zero.”  Taken all together, he said, we're buildingrnthe strongest book of business we've seen in the last decade and, since FanniernMae prices for risk, as loan quality goes up, guaranty fees go down.  Loan guarantees are now actually lower thanrnin 2008 and 2009.</p

At the same time,rnWilliams says that Fannie has not forgotten its mission.  Last year it helped provide financing to morernthan 1.7 million low-and moderate-income families, more than one millionrnfamilies living in underserved communities, and nearly 760,000 very low-incomernhouseholds.  Affordable lending wasrnroughly 50 percent of Fannie's business last year.</p

“Our strongerrnlending standards simply make sense,” Williams said.  “First, they're better forrnhomeowners.  Borrowers with these newrnloans are more likely to keep their homes as long as they want,  With fixed rates for long terms, their loansrngive them shelter from years of interest  rate swings rnSecond, these stronger loans are better for the mortgage market.”  Because Fannie provides such a large share ofrnthe market, backing two out of every five new single-family mortgages securitizedrnin America since the beginning of 2009, just by strengthening lendingrnstandards, “we've ensured that a large share of the market will be more safernand sound for many years to come.” </p

Williams said thatrnmuch of Fannies older book of business, those loans predating 2005 in particular,rnis solid but the loans taken out during what he called the boom and bust yearsrnare problematic.  An estimated 5 millionrnhomeowners are at least three payments behind on these mortgages.  He outlined Fannies involvement in loanrnmitigation programs including the Treasury department's Making Home Affordablernprogram which it administers for the Treasury Department as well as a separaternprogram run by Fannie which Williams called the “largest foreclosurernoperation in America,” with over 2,200 employees working on containing lossesrnand preventing foreclosures, and over the last two years have streamlinedrnprocedures for pre-foreclosure sales. rnThe companyaready announced a new program called “Deed forrnLease,” where borrowers can rent back their homes while they seek otherrnhousing. </p

Strategic defaultersrnhave been much in the news, Williams said, and Fannie Mae is seeking a policyrnthat strikes a fair balance between encouraging people to get help andrnproducing appropriate penalties for those who simply walk away from theirrnobligations.  To that end, it hasrnincreased the lock-out period; strategic defaulters will be unable to qualityrnfor a Fannie Mae eligible loan for seven years. rnPreviously the period was five years.  READ MORE</p

Turning to thernhousing market, Williams said that his company's role in that market has takenrnon added importance in the past two years. rnWith private investors exiting the market when it collapsed, therngovernment support of the GSE's ensured they could stabilize the market.  Even though some private capital has comernback, as long as the housing market is shaky mortgage funding will be atrnrisk.  Liquidity is the lifeblood of thernhousing market and Fannie has provided more than $1 trillion in liquidity tornthe market n the last two years and its market presence today is about doublernits presence in 2005 – at the height of the bubble – “when the marketrnlargely went around us.”

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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