The country’s two secondary mortgage market companies Fannie Mae and Freddie Mac will no longer have to borrow money from the U.S. Treasury to make their quarterly dividend payments to the federal government (in effect borrowing from the Treasury so they can make payments back to the Treasury), a move that could help reassure investors that the companies are less likely to tap out their federal credit lines any time soon. But the dividend requirement, which diverts money away from the mortgage market, remains in effect.
If the whole idea of Fannie and Freddie borrowing from the Treasury to make dividend payments to the Treasury makes you scratch your head, it’s because of the way the federal government structured its conservatorship of the two companies in the wake of the financial meltdown in 2008. At the time the Federal Housing Finance Agency (FHFA) stepped in as conservator of the two companies, which were burning through their capital reserves to compensate investors for all their loans going bad, the federal government agreed to inject capital into the companies in exchange for ownership of the companies’ preferred stock. The idea was that the companies would pay back the government for its assistance through their preferred stock dividend payments.
On paper the idea seems reasonable, but in practice it had the effect of forcing the companies to draw down from their capital lines to the U.S. Treasury to make their dividend payments whenever their quarterly performance wasn’t sufficient to generate enough funds for their 10-percent dividend payment.
The arrangement never made much sense to NAR, which since 2010 has been calling for Treasury, at a minimum, to reduce the dividend requirement so the companies would have more money with which to stabilize the mortgage market. As then-NAR President Ron Phipps said in testimony before the Senate Banking Committee in early 2011, the dividend payment is “punitive” and should be reduced to 5 percent from 10 percent if not eliminated altogether. “It makes no apparent sense for the Treasury Department to transfer amounts to the GSEs so they, in turn, will have enough money to make the dividend payment back to the Treasury,” he said.
Under the change Treasury announced today, it would replace the 10 percent quarterly dividend requirement with a quarterly “sweep” of the companies’ profits, whatever those profits are, making it unnecessary for the companies to make draws on their federal lines of credit to make up for any gap in their 10-percent dividend obligation. Under this arrangement, Treasury might get more funds than it would some quarters but in other quarters it might get less, but now it won’t be necessary for the companies to make up the difference by drawing down on their lines of credit.
As Treasury puts it, “The agreements will replace the 10 percent dividend payments made to Treasury on its preferred stock investments in Fannie Mae and Freddie Mac with a quarterly sweep of every dollar of profit that each firm earns going forward.”
This doesn’t necessarily mean the companies’ obligations to Treasury are any less; it just means they no longer have to make draws on their credit lines, reducing the chance they’ll max out on those lines in the near future. That, at a minimum, can be expected to provide some long-term reassurance to investors about market stability than would otherwise have been the case.
Treasury’s announcement also touched on another change, which is speeding up a requirement that the companies shrink the size of their portfolio of retained loans. Under the original conservatorship agreement, the companies were to wind down their portfolios by 10 percent a year until they had shrunk their portfolios to $250 billion by 2022. Now they’re to shrink them by 15 percent a year and get to $250 billion four years sooner, by 2018.
Treasury says these changes are aimed at winding down the federal government’s involvement in the companies more quickly, although it doesn’t say anything more about what it’s plans are for the wind-down.
“With today’s announcement, we are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac,” says Michael Stegman, counselor to the secretary of the Treasury for housing finance policy, “while continuing to support the necessary process of repair and recovery in the housing market.”
NAR’s position is that the former structure of the secondary mortgage market companies, in which gains accrued to the companies’ private shareholders while losses accrued to taxpayers, is unacceptable and whatever entities replace them should be government-chartered and non-profit and should support, with explicit government backing, a private mortgage-lender dominated market.
With today’s announcement, we get no further clarity on what the federal government is thinking of doing, but we do see that it recognizes, as NAR has been saying for the last two years, that the 10-percent dividend requirement was working at cross purposes with the companies’ goals.
REOs and other distressed sales make up about a third of the market today on a national basis and NAR’s just-released Investment and Vacation Home Buyers Survey shows that distressed homes comprise about a quarter of the homes bought for non-primary use.
Against this backdrop, Fannie Mae about a month ago announced that agents working with households buying a Fannie Mae REO must submit the offer online through the company’s HomePath portal. It won’t accept offers any other way.
The good news is that offers can only be submitted by agents. So, households interested in making an offer on an REO property have to contact an agent and work with that person on the submission.
The other good news is that submission is quick and easy because of the all-online process. That means you fill out all the forms online, scan the supporting documents, save them as digital files, and include them in your submission.
Although the process is straight-forward, it’s inevitable that you’ll have a lot of questions. So, we’re hosting the Fannie Mae executives who are overseeing this process for a one-hour webinar on how the submission process works. They’ll walk you through the steps.
They’ll also talk about policy matters that you’ll need to know about, such as their 15-day “first-look” period, which restricts offers from investors on new REO listings. They’ll talk about financing matters, too.
It’s a free webinar and you’ll be directed to an online manual and other materials to make it as easy as possible to master working online. You can imagine that it won’t be too long into the future when many transactons will be done this way.
The webinar is Thursday, April 26, at 3 p.m., Eastern Time. Presenters are Jane Severn, director of new business initiatives for Fannie Mae, and Robin Still, senior strategic planning analyst with the company.
Go to the registration page for the free webinar. To register, you just need to provide a name and e-mail address: Go to the REGISTRATION PAGE now.
If you’re working with a buyer who’s interested in submitting an offer for a Fannie Mae REO, you’ll have to do it online. The secondary mortgage market company last week launched an all-online system for submitting offers on its inventory of foreclosed homes.
Here’s how Fannie describes it on its HomePath website:
“Making an offer to purchase a HomePath property is now quick, easy and entirely online! Beginning February 2, all offers on HomePath properties must be made using the HomePath Online Offer system. If you’re ready to make an offer, just have your real estate professional click the “Make an Offer” button on the property information and follow the instructions.”
Only licensed agents can make offers, so any consumers shopping for a home on Fannie’s HomePath site have to contact an agent first.
If you’re not already registered as an agent with the site, you’ll need to do that, then click the “Make an Offer” button and follow the instructions. You’ll have to be able to scan documents and otherwise be prepared to input information digitally.
Registering with the site so you can submit offers as a selling agent is not the same thing as registering with Fannie Mae as an approved listing agent. That seems obvious, but sometimes it helps to state the obvious to avoid confusion. To become a listing agent for Fannie Mae in your market, you have to submit an application (also an online process) and then go through its proprietary selection process, which requires you to submit information about your practice. Every market is different, but generally the company works with a handful of brokers or agents that it has selected to list its REO properties.
The company says it pays a commission of 2.5 percent to the listing broker, with a $1,000 minimum, and a commission of 3 percent to the selling broker, also with a $1,000 minimum. It says it has some additional selling incentives in some markets.
Fannie gives owner-occupant buyers a 15-day window after a property comes on the market to make an offer without competition from investors. Offers made by investors during that “first-look” period are rejected from the system with instructions to resubmit after the 15-day period ends, if the property isn’t under contract by that time. The offers are not kept in the system and queued up.
Buyers can use any financing they want, including Fannie Mae financing through its two HomePath mortgage programs, one for purchases and one for purchases with renovation. If the buyer is using HomePath financing, Fannie only requires a downpayment of 3 percent, waives the appraisal and also doesn’t require mortgage insurance. Investors can get up to 90 percent financing.
You can learn more about online submissions on the Real Estate Professionals’ page on the HomePath website and click on “HomePath Online Offers Support page.”
By Brian Summerfield, Online Editor, REALTOR® Magazine
A subject we’ve talked about a great deal here on the Speaking of Real Estate blog got some play during the Republican presidential debate last night in Jacksonville. (Transcripts are available here.) A question was asked of the four candidates about how to phase out government-sponsored enterprises Fannie Mae and Freddie Mac.
However, none of them gave satisfactory answers. Former Massachusetts Gov. Mitt Romney started out by claiming that “we’ve had this discussion before,” then attacked fellow candidate and former Speaker of the House Newt Gingrich for his business ties to Freddie Mac. Romney concluded by saying creating jobs was crucial for improving the housing market — which I believe is true, but that doesn’t answer the question.
In his response, Gingrich defended his involvement with Freddie and charged that Romney had made a fortune off of his investments in the GSEs. The two candidates went on for a couple more minutes trading barbs about who, exactly, had benefitted more from their Fannie and Freddie affiliations.
Rick Santorum, a former Senator from Pennsylvania, said he “stood tall” against the GSEs back in 2006 when he wrote a letter with other senators asking for Fannie and Freddie reform that involved gradually reducing the number of mortgages underwritten by the two. He then criticized both Romney and Gingrich for criticizing each other instead of focusing on the question. Continue reading »
Since the market downturn several years ago lawmakers in Washington have been talking about reforming the secondary mortgage market but nothing has come out of Congress yet. This year, though, a lot of progress is expected to be made toward reform, so it will be especially important for real estate brokers and sales associates to stay engaged in what’s happening, particularly this spring.
Although we’re still waiting for legislation to come out, lawmakers have been working on the issue quite a bit. Four bills have been introduced that would take a comprehensive approach to reform, including a bill by Rep. Gary Miller (R-Calif.) that very closely matches up with NAR’s priority, which is to encourage private investors to return to the secondary market while replacing Fannie Mae and Freddie Mac with an entity that continues to back conforming loans but as a nonprofit, not as a for-profit company.
NAR wants the federal government to keep a presence in the market out of a concern that mortgages remain available and affordable even in bad markets, when it’s too risky or not profitable enough for purely private participants to be counted on.
Sen. Johnny Isakson (R-Ga.) also has a bill out that matches up with NAR aims in many respects, and the association is working with the senator and his staff to refine his approach this spring. In a key point about his bill, it would define conforming loans as those that are based on sound underwriting, not on the amount of downpayment.
That’s important, because banking regulators have drafted Wall Street reform rules that would define conforming loans—what they call qualified residential mortgages (QRM)—as those that meet minimum downpayment requirements and other standards. NAR and others have been vocal about how bad that would be for the market, and the Isakson bill would address that.
In addition to these and a couple of other comprehensive reform bills, lawmakers have introduced 19 other bills that look at specific aspects of reform. NAR has never come out in support of any of these single-issue bills because it wants reform to be comprehensive, not piecemeal. All of the aims of these many bills will get looked at and, as NAR would like to see it, folded into a comprehensive bill where that makes sense.
So, a lot will be going on in the next few months, and NAR members can expct to hear more shortly. But whether all of this activity results in a single bill for a vote this year is uncertain. For one thing, starting around summer lawmakers will begin focusing on the upcoming national elections, so that could mean putting off a big vote like this until 2013, when the dust from the elections has settled.
But that’s all the more reason NAR members have to be engaged now. Because even if legislation takes until 2013 to pass, key decisions could be made in the next few months.
You can learn more about what to expect on reform in the 6-minute video with NAR analyst Tony Hutchinson.
By Stacey Moncrieff, Editor in Chief, REALTOR® Magazine
In “How Mr. Volcker Would Fix It,” New York Times business writer Gretchen Morgenson examines Paul Volcker’s speech at a Group of Thirty meeting, in which he called for an eventual end to secondary market agencies Fannie Mae and Freddie Mac. (Volcker was the inflation-fighting chairman of the Federal Reserve under Presidents Carter and Reagan and served President Obama for two years as chairman of the President’s Economic Recovery Advisory Board, now the President’s Council on Jobs and Competitiveness.)
In some respects, Volcker’s position parallels that of the NATIONAL ASSOCIATION OF REALTORS®, an organization that nurtured the formation of Fannie Mae during the Great Depression. In 2009, an NAR working group called for an end to the quasi-government status of the secondary market agencies, saying it was clear the agencies’ public mission and private profit motives were incompatible. The NAR called for the creation of a new purely public entity with an explicit government guarantee that would serve as a mortgage market backstop in times of economic uncertainty. (See “NAR Principles for Restructuring the Secondary Mortgage Market.“)
By Robert Freedman, Senior Editor, REALTOR® Magazine
If you’re thinking about working with a financially distressed seller and the house he wants to sell is trashed, take the extra time to be sure he didn’t trash it himself. One of the types of short sale fraud that Fannie Mae is seeing these days is “reverse staged” houses. In these cases, owners trash their house to knock down the property value. A buyer with whom the owner is colluding then comes in with a low-ball offer, buys it and fixes it back up, then flips it for its real market value. That seems like a brazen scheme, but mortgage fraud by its nature is a brazen activity.
To learn more about this and other types of short-sale fraud, we spoke with Kim Ellison, Fannie Mae senior industry relations manager for the mortgage fraud program.
REALTOR® Magazine: What kinds of short-sale fraud are you seeing?
Kim Ellison: Illegal flipping and non-arm’s-length transactions. The non-arm’s-length space is a smaller percentage, roughly 9 percent. Usually the delinquent home owner is selling the property to a family member or a business partner without disclosing the relationship. It’s really an effort for the owner to stay in the home. Instead of making payments to the mortgage company they’re making payments to the family member, as rent. They’re hoping to clean up their credit and reapply for a mortgage down the road. Continue reading »
By Robert Freedman, Senior Editor, REALTOR® Magazine
A group of academics writing in a New York Times opinion piece yesterday, “White Picket Fence? Not So Fast” (Aug. 17, 2011), call for a phasing out of Fannie Mae and Freddie Mac and ending the government support of home mortgages that flow through them. To their credit, Viral Acharya, Matthew Richardson, Stijn Van Nieuwerburgh, and Lawrence White say the phase-out should be gradual to “minimize the system-wide shock” that would follow if the secondary mortgage market were closed down overnight.
But the writers use figures and make logical inferences that cry out for more scrutiny.
First, they say the mortgage interest deduction costs the government more than $100 billion a year, and they cite the Congressional Joint Committee on Taxation saying MID costs $700 billion over five years. But as economists and academics will acknowledge, determining how much MID costs the government is as much art as science, because the number you come up with depends on the numbers you put into the calculation. And what those numbers are aren’t widely agreed upon.
John Weicher, FHA commissioner under President George W. Bush and the assistant secretary of policy development and research under the first President Bush, says MID costs are closer to $20 billion a year, and he’s not alone in saying that. Other academics put the number in that range. The reason? They use a calculation that factors in the changes of behavior among households if MID is curtailed or eliminated. The idea goes something like this: as MID shrinks, households put their money into other tax-saving assets. Continue reading »
By Brian Summerfield, Online Editor, REALTOR® Magazine
When the Bourbon royals took over France again after the violent revolutions and Napoleonic wars that spanned more than two decades through the late 18th and early 19th centuries, the famous French diplomat Talleyrand supposedly said they had “learned nothing and forgotten nothing.” In other words, they immediately resumed the behaviors that had led to those national catastrophes in the first place.
Unfortunately, Talleyrand’s quip may apply to the United States during the Great Recession that started in late 2007. In remarks this morning at a 30 Under 30 event held in NAR’s Chicago office, Bethany McLean, co-author of the best-selling All the Devils Are Here, said the response to the financial crisis shows how much we — politicians, business leaders, regulators, and the public — haven’t learned. The book, written with New York Times columnist Joe Nocera, is a riveting account of the financial innovations and regulatory decisions that led to the near collapse of the world economy in the fall of 2008. McLean is a contributing editor with Vanity Fair, a columnist for Slate, and a frequent guest on Bloomberg news.
Part of the problem with bringing about real change is the complexity of the crisis. “What makes the narrative unsatisfying is that there’s not one simple explanation for it,” she said. Continue reading »
By Brian Summerfield, Online Editor, REALTOR® Magazine
REALTOR® Magazine’s editors are in Washington, D.C., this week for the 2011 Midyear Legislative Meetings & Trade Expo. Here’s a high-level look at some of what we’ll be covering here at Speaking of Real Estate:
- An examination of the priorities and performance of Congress.
- Proposals to reform government-sponsored enterprises Fannie Mae and Freddie Mac.
- How to keep mortgage capital flowing.
- The REALTOR® Party Political Survival Initiative.
- The economic outlook for residential and commercial real estate.
Be sure to check in to this blog and check out our Daily News to get the latest reports and analyses coming out of Washington this week. And don’t forget to visit Midyear Live, which brings you a members-eye-view of this event.