March 3, 2018

Keeping The Situation Alive Is Part Of The Problem

A weekend topic starting with DSN News. “GSE reform has been a hot-button topic ever since Fannie Mae and Freddie Mac came under government conservatorship during the financial crisis, but it’s one of those talking points that often seems heavy on the talk and light on the corresponding action. This week an assembly of analysts and think tanks, including the American Enterprise Institute, introduced a proposal outlining how President Trump could, at least theoretically, move to eliminate the GSEs without having to rely on Congressional support.”

“The plan hinges upon having a Trump-appointed head of the Federal Housing Finance Agency, the government organization tasked with overseeing the GSEs. The FHFA is currently overseen by Obama-era appointee Mel Watt, whose term will conclude at the end of this year. The new paper argues that a Trump-appointed head of the FHFA could essentially whittle Fannie and Freddie down gradually. This process would involve limiting the types of loans the GSEs could purchase and lowering the size limits for those loans. The authors of the paper said they believed that the plan would allow President Trump to ‘break this logjam.’”

“In a January op-ed for the Wall Street Journal, Keynote Speaker Peter put it bluntly: ‘The trouble here is not merely that the Treasury is an outlier in what was supposed to be a deregulatory administration. It is also that the department’s current custodians appear to have learned nothing from the financial crisis, which was caused by precisely the policies they now support.’”

“The AEI paper argues that, rather than focusing on affordable housing mandates, government subsidies should be reduced, which they argue would bring down home prices and make homeownership available to a broader spectrum of Americans.”

“Not everyone would support such a plan, of course, with some proponents arguing that of Fannie and Freddie are in need of either moderate reform or minor policy adjustments. Moody’s Analytics Chief Economist Mark Zandi put it succinctly, telling MarketWatch that when it came to the GSEs, ‘it’s not fixed but it’s not broken.’”

“Last week California-based investment management firm PIMCO wrote in a letter to Congress that, ‘We believe GSE ‘reform’ should simply formalize the current state of affairs—namely, by making the government guarantee explicit and otherwise keeping Fannie and Freddie functioning as they largely are today. In other words, Congress should be honest about conservatorship: It has been and continues to be immensely successful, not to mention wildly profitable, and the current system works.’”

From The Daily News. “Zombie homes are a blight upon a community. Yet more fees aren’t the answer, according to Timothy Moriarty of Medina Savings & Loan. Moriarty visited February’s Association of Municipalities meeting to talk about zombie properties from a bank perspective. Using Medina Savings & Loan statistics, he said that out of every 100 loans, only three are delinquent. Out of those, one in 100 is 90 days past due and only one in 300 is in the foreclosure process.”

“‘You see the results of that, but it’s not like it’s overwhelming from a bank’s perspective,’ he said. ‘There is a lot of different circumstances why these go into foreclosures.’”

“The problem, he said, boils down to the fact there are two types of commercial lenders. Portfolio lenders — such as Medina Savings and Loan — make up 5 percent of creditors. They originate a loan and keep it, taking on the risk. The other 95 percent go through brokers and bid banks which package up loans — there’s no way to know who the mortgage owners are. There is no risk to those lenders.”

“From a portfolio lender’s point of view, Moriarty said part of the problem is New York State, after the latter changed its rules to greatly lengthen the foreclosure process. In the past, a homeowner might be four months delinquent and would have five months to resolve the situation. Typical foreclosure houses are zombie properties which have gone into disrepair over the years because the homeowners cannot afford to fix them. Moriarty said these people decide not to pay the mortgage anymore and simply stay there until the process is finished, which takes a couple of years.”

“‘I bring up the cost because from a bank’s perspective, you got to look at it used to be a five-month process. Get it back. Get it sold. Get it done,’ he said. ‘But now it takes so long and it’s so costly.’”

“Moriarty said tacking on fees isn’t the answer and all it does is raise the threshold at which banks walk away. However, the second type of lender — which makes up 95 percent of those who give out loans — would have sold the loan off. The banks can sell high-risk loans in through Fannie Mae and Freddie Mac. Moriarty said keeping the situation alive is part of the problem — that the United States taxpayers are on the hook for 95 percent of the loans.”

“He said the next housing crisis will be bigger than the previous one as a result. ‘There is very little we can do,’ he added. ‘All I can really do is go and change the locks and cut the lawn.’”

“Moriarty said to fix this problem, he suggested closing up Fannie and Freddie — government-sponsored loan enterprises — and making portfolio lenders, who will manage the risk, the leading lenders again.”

“He also said the homeowner seems to have zero responsibility in the entire situation and the process needs to go back to what it was by lowering expenses and shortening the process. ‘If they thought they only had five months like they used to, after they’re four months delinquent, they would be more responsible in making the payments,’ he said. ‘It used to be homes were the first things people paid,’ he said. ‘It’s the last thing people pay now. They’ll pay the car first because we can pick that up in 10 days. A home, it takes two years.’”