Historic Times in Real Estate.
Maybe they should have verified that the borrower had the income to repay the loan.
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A gentleman by the name of Rick Klein, who is a mortgage lender for Wells Fargo in its Park City, Utah office, and whom I have the pleasure to serve with on the Park City Board of Realtors Professional Development Committee, has sent some work to me that is remarkable, incredibly insightful, of major import and is worth reporting here and definitely reading in full.
Rick regularly contributes to the local real estate industry and consults the Board on current legislation and affairs of the mortgage industry. After you read this…you’ll have an accurate understanding of recent events with Freddie Mac and Fannie Mae, the new oversight agency, and how it affects you and your clients.
With Rick’s amazing translation and related links of these events, you’ll see that is good news.
Take some loan packages to Rick Klein. You’re dealing with a pro:
Rick J. Klein
Home Mortgage Consultant
Office: (435) 647-9055
Fax: (435) 647-9056
Cell: (801) 558-5626
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Here’s Rick’s opening vignette … the analysis follows …
Presentation on the Housing and Economic Reform Act of 2008
Sharon asked me to spend 3 or 4 minutes discussing the Housing and Economic Recovery Act of 2008. Please know I cannot honor this time limit. Here’s why.
The Act! [700 pages.] In addition, yesterday I “Googled” The Act and there are more than 535,000 linked results referring to it. Please know this is considered the most extensive and important housing legislation since 1938.
I began this story four months ago at a Board breakfast. I told the tale of young lady, named Lender, her buff boyfriend named Condo, and her parents FNMA and FHLMC. We left the story with Lender proving herself an untrustworthy floozy who had been cavorting with con-man Condo-tel and her parents furious with her for sneaking him into their house. The family circle was clearly in crises.
What happened next brought further shame upon the family. The Omnipotent One: she who is nowhere, yet everywhere; she who has no voice, but who is heard by all, the one known as “the Market” said: “It is not only Lady Lender who is a foolish and greedy harlot; I see she was genetically pre-disposed by her parents FNMA and FHLMC for they know not whether to serve the public or their share holders. And, they have sought higher margins and they have taken great risk leaving their balance sheets in ruins. Thus, I will sell them short and drive their stocks lower. [Think down 90 – 95% this past year.].
But there went up a woeful cry from the people all across the land. They began calling upon the gods, known as Congress, to stop the pain in the housing family circle. A great shudder was felt around the globe and was especially strong between Wall Street and D.C. The gods knew they must attend to the cries of the people and restore financial stability (it is an election year you know).
So Congress called upon their titans, named the Treasury, the Feds, and HUD to wake from their slumber and remedy the housing and credit mess. In response, The Mighty Paulson and Bernacke, formerly the great slayers of Bear Stearns, appealed to Congress to make FNMA and FHLMC their chosen people who must be saved regardless of their greed or sins of hubris. Congress granted their wish and declared “we will save these under-capitalized parents, but they must pay atonement and we shall rectify this in our own way. [Translation, it is going to be big, costly, and very, very complicated – pointing to the 700 page bill.] First, we will create a Cyclops to keep a large and watchful eye on FNMA and FHLMC. This new regulator shall be called The Federal Housing Finance Agency or FeHo, for short.
And when the agencies knew they would be rescued with government backing, they raised their voices and shouted “Thank the Lord, our shareholders are saved for we shall not be nationalized.”
The Cyclops called FeHo also was pleased, for now he would be a “world class” regulator and could oversee the agencies’ operations, risks, records, and assure adequate capital reserves. The agencies assigned to FeHo’s watch would have defined goals for low- and moderate-income loans, must seek permission for new products, and even gain approval for executive compensation. Moreover, if the agencies ever needed the emergency funds assured from Congress, the regulator could stop dividends to stockholders, end executive bonuses, and even eliminate the famous golden parachutes.
And when the executives learned of the power of this Cyclops, they trembled and cried “holy shit.”
And Congress was not done with their remedy for the housing and credit mess [this only takes us to page 394] and they created more Acts within their mighty legislation.
They turned to their dutiful servant, FHA, and said you will find a way to make loans that will not go bad and will not be a cost to the taxpayer to those homeowners who are already delinquent or in default on their existing loans. And FHA said, “Say What? And you want this done by October 1st?” But the mystics of Congress like Dodd, said, “Yes, work overtime, but we will modernize you, increase down payments, and eliminate the down payment assistance program, and drive a stake in the heart of your nemesis Nehemiah.”
And FHA sighed and said “we shall obey and we will write copious memos, policies and procedures”.
Then Congress turned to the down-trodden and the delinquent and said we offer you the Hope for Homeowners Act, or HoHo, for short. Lady lender will voluntarily shave her head, reduce your principle and refuse to foreclose upon you. She will also remove any pre-payment penalties and make 2nd liens magically disappear. And you will gladly share your future appreciation with the gods in exchange from being saved from foreclosure.
And the nearly foreclosed rejoiced and said a prayer to make it to October 1st.
Then Congress said to the delinquents, you shall have payments you can afford, we will turn your sub-prime loan into a 30 year fixed, but you must provide full documentation to FHA and sign an affidavit that you told the complete truth and nothing but the truth on your original loan application.
Then the nearly foreclosed, said Holy, HoHo.
And then Congress told all first time home buyers to get off their duffs and go buy homes to reduce inventory and improve the housing market. In return, they would receive a handsome tax credit. And the fence-setters said, “but we are confused and don’t know what this means. Tell us: is this like a windfall or an interest free loan?”
And Congress next turned to Lady Lender and said; “you have many among you that cannot spell mortgage and have the ethics of a shyster. Your loan officers must undergo an FBI background check, they must all go back to school to learn how to spell affordability and honesty, they must learn to care more for their customers than their commission, and we will create a national database to monitor all of these hacks and the companies for which they work. You too must atone and provide improved disclosure to protect consumers and to further delay Realtors’ closings.”
And Lady Lender said we are so sorry for our wanton ways, and thank the lord that you saved momma Fannie and poppa Freddie for we know not what we would have done without them.
And Congress stretched forth its arms and created more such acts such as one for Veterans, for Cities, for increased consumer counseling, for reverse mortgages, for energy efficient mortgages, for manufactured housing, for Real Estate Investment Trusts, for Public Housing Authorities, for multi-family housing, and for all things related to real estate … and to help them obtain votes. For these gods intended the scope, the power and the weight of the bill to be mighty.
And so was the legislation written and so was it passed and signed into law. And so we are here today, at a historic crossroad, waiting for this story to unfold.
Thank you for your time.
Rick Klein
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This is what just happened to our nation’s mortgage lenders ….
We live in a historic time and the events of this past weekend are a huge chapter in the story. While this email is a little long, I promise it contains great news for you and for your clients. Please read.
Last month I presented to the Board of Realtors my allegorical explanation of the Housing and Economic Recovery Act of 2008.
While I intended the foregoin tale to be comical yet accurate, I underscored its historic importance. Over 50% of this legislation (measured by number of pages) addressed concerns of regulating FNMA and FHLMC (or, the Government Sponsored Enterprises, GSEs). The bill created a new regulator, Federal Housing Finance Agency (or FeHo in allegory) FHFA, to oversee the agencies. Keep in mind, last quarter the GSEs provided approximately 75% of all funds for mortgages in the U.S.
Well, within one month after the passage of this bill, FHFA together with the Treasury announced this past Sunday that FNMA and FHLMC were being placed into conservatorship (this is not nationalized, this is not receivership, but rather strong-armed government oversight).
The following comments are segmented into three categories: what we know, what I believe are clear ramifications, and my predications. By and large, the results are great news for our industry.
What we know:
Secretary Paulson stated three over-arching goals: a) to provide stability to the financial markets; b) to support the availability of mortgage finance; c) and to protect the taxpayer. In line with these goals, the government took the following four steps.
1. “The primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance.” In brief, the GSEs will no longer be operated to maximize returns for shareholders.
2. The Treasury and FHFA established Preferred Stock Purchase Agreements to ensure each entity will maintain a positive net worth. Current common and preferred stock bear losses ahead of the new government senior preferred stock. The Treasury will purchase $1B worth of this senior preferred stock from each company with the ability to purchase up to $100B per entity. For this reassurance, the government will have the option to purchase up to 79.9% of the common stock at a nominal fee (say $1.00). Dividends for the common and the preferred stock are now eliminated. (FNMA’s stock price has fallen from a high of about $70/share to $0.80 today.) The clear goal here was to reassure domestic and, more importantly, foreign investors of our mortgage debt while minimizing losses to U.S. taxpayers.
3. Establishment of a new secured lending credit facility which will be available for the agencies as an ultimate liquidity back stop through the end of 2009. (Think borrowing at the Fed window at very low rates.)
4. Treasury is also initiating a temporary program to purchase GSE Mortgage Back Securities (MBS) to increase liquidity and reduce the spread between MBS and treasury issuances. (See #3 in the following section).
Finally, Paulson was very clear that the next Administration and Congress must resolve the “hybrid” nature of the public/private nature of the FNMA and FHLMC. What an amazing and interesting time in the history of real estate!
So what does this mean?
5. Monday was business as usual. I am still taking applications, I am still closing and providing financing for home buyers.
6. FNMA and FHLMC are still purchasing loans from lenders providing liquidity in the mortgage market (albeit without their CEOs, stock dividends, and lobbyists).
7. Interest rates should (yesterday did) decline. Two reasons: first, to improve their balance statements both FNMA and FHLMC increased their guarantee fees over the past six months. These are fees charged to lenders to insure and securitize their loans and these fees are passed on to consumers as higher rates. From goal #1 above, we can anticipate these fees will be reduced. Second, due to investor fears regarding mortgages in general and the agencies’ debt issuances in specific the yield spread between treasuries and mortgage backed securities has widened – read, mortgage rates have increased or stayed the same while the Feds have reduced the discount rate. With such fears diminished, rates should decline. I predict the rate on a 30 year fixed will approach 5.5%.
8. Additionally, due to the fear of central banks, sovereign funds, and major banks from China, to Japan, to the Middle-East, the government’s bold intervention should allay these fears and bring more buyers into the U.S. capital markets to purchase our debt instruments; improving rates and liquidity.
My Predictions:
9. This action will help slow housing price depreciation. I realize this may sound like a bold statement, however, allow me to make two cogent points. First, while we clearly have an oversupply of inventory, we also have a crisis in confidence spurred on by a negative press. The action of the government will bring a level of reassurance to the market while at the same time we are building 60% fewer homes this year. This sharp drop in supply coupled with pent-up demand should promote accelerated home ownership except for one problem: foreclosures. The press reported last week 9% of our nation’s housing stock is either delinquent or in foreclosure.
10. This brings me to the second point: FNMA and FLMC not only guarantee loans to investors globally, but they own $1.4T worth of mortgage backed securities (many of these are alt-a and stupid option ARMS). The government has advocated for lenders to modify loan terms to preclude foreclosures; well, they are now the owners of a massive amount of this product. Thus, they are well postured to re-structure this debt and thus, mitigating many foreclosures.
11. As noted above, rates will decline. Mathematically, a 1% decrease in rates is the equivalent of a seller or a builder reducing their price by 10%. With many home values already reduced 15% to 25%, another 10% reduction will make house payments in line with rent payments in many parts of the country.
12. My most speculative prediction is that to “stabilize” the markets, FHFA will revisit FNMA’s and FHLMC’s strict underwriting guidelines. Much of the focus on the legislation was to provide increased financing to low - and moderate-income families. Thus, I suspect the regulators will revisit these guidelines and balance safety and soundness between homeowners and debt holders. I vote that we will see moderate credit easing in the months ahead. And, this would be very good news for both buyers and sellers.
13. The enhanced liquidity will have only an indirect effect on non-conforming loans, at least in the short term. This means that Wall Street Investment banks will only slowly warm to this product and for the next 12 months interest rates on this product may only improve slowly. Thus, I will continue to encourage 2nd mortgages and seller carry backs on loan over the conforming limits. ($729,750 until 12/30/08 and then $625,500 thereafter in Summit County)
To summarize, the intervention taken by the government this weekend with FNMA and FHMLC is unprecedented. While this latest “bail-out du jour” will be debated for generations, I believe this intervention will be a very positive step in healing the housing and mortgage markets over the next 6 - 12 months.
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