NAR President Gary Thomas in testimony before the Senate Banking Committee this week again took aim at a proposal floated by a federal regulator to reduce the size of loans that Fannie Mae and Freddie Mac can handle. Although details are still to be released, the Federal Housing Finance Agency has said it wants to reduce these limits, which in high-cost areas can go as high as $625,500. Reducing this would shut the door to reasonably priced mortgage financing not just for middle-class households living in expensive areas, but for households everywhere, because the regular loan limit would be affected as well. “This isn’t just a high-cost area problem,” Thomas said.
Sen. Robert Menendez (D-N.J.) said he recognized the sweeping nature of the impact. “So, reducing loan limits also hurts existing home owners,” he said.
Thomas also urged lawmakers to back bi-partisan legislation, the “Housing Finance Reform and Taxpayer Protection Act of 2013,” S. 1217, introduced by Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) , because it would reform the secondary mortgage market while leaving in place a federal backstop, an NAR priority.
“It’s extremely likely that any secondary mortgage market structure without a government guarantee will foster mortgage products that are more aligned with business goals then with the best interests of consumers,” he said.
It was Thomas’ second appearance before the committee in three weeks. His earlier appearance, at the height of concern over whether Congress would increase the federal borrowing limit before the U.S. Treasury ran out of money to pay the government’s debts, was timely, to say the least. Sen. Heidi Heikamp (D-N.D.) credited Thomas’ earlier testimony for changing minds at a very tense time. “Mr. Thomas, I think your testimony on the debt ceiling and what it would mean for borrowers had a huge impact,” she said. “I think we were able to change public opinion.”
Sen. Sherrod Brown (D-Ohio) also thanked Thomas for his earlier appearance as well as the input REALTORS® provided when he met with them last week in Ohio. “I spoke with a number of your members—the Columbus Board of REALTORS®,” he said. “About 100 of them were there, just to discuss some of these issues.”
For Thomas, the key to his testimony was to keep lawmakers focused on how all the moving parts of mortgage finance reform that Congress is looking at fit together. To that end, he urged Congress, for the short term, to look closely at FHFA’s plan to reduce loan limits without losing sight of the long-term need to reform the secondary market in a way that maintains a federal backstop.
Access Thomas’ written statement.
To get a good picture of why it’s so important for a continued federal role in the mortgage market, view remarks by Ginnie Mae President Ted Tozer, who in a conversation with NAR Vice President Joe Ventrone explains the role the guarantee plays for global mortgage investors.
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.
By Robert Freedman, Senior Editor, REALTOR® Magazine
The administration yesterday rolled out an initiative to boost refinancing so struggling underwater borrowers can take advantage of today’s historically low interest rates. The effort is being called HARP 2, with “HARP” standing for Home Affordable Refinance Program and “2” standing for the fact that the first iteration of the program, rolled out two years ago, hasn’t attracted the volume of refis that’s needed to match the scale of the problem.
Under the new version of the program, lenders process refi applications for borrowers no matter how deeply they’re underwater. Previously, the limit was set at borrowers whose loan-to-value ratio was no more than 125 percent. Even so, the program isn’t intended for all underwater borrowers; just those who have been conscientious in making their payments despite having to pay on a mortgage that’s larger than the value of their home. Those who have stopped making payments or who have a checkered history of making payments can’t apply.
For eligible borrowers, the refi option is available to them without the lender having to order a new appraisal, which saves them several hundred dollars, and they get a waiver on fees that Fannie Mae and Freddie Mac would otherwise charge them because they’re high risk (that is, they’re underwater). Lenders, in turn, get relief from having to make representations and warranties that would otherwise hold them liable for losses on defective loans.
There are other important pieces to the initiative, including a requirement in some cases for borrowers to refi into a shorter-term loan to get all of the benefits.
It’s too soon to know how much the initiative will help borrowers. Some of the provisions require federal guidance, so lenders can’t start processing applications right away. And Fannie Mae and Freddie Mac still have to do some updating of their automated underwriting programs, and lenders, in turn, have to update their underwriting procedures. In short, you can expect little to happen before the first part of next year. Continue reading »
By Robert Freedman, senior editor, REALTOR® Magazine
The agency that oversees Fannie Mae and Freddie Mac could strike a considerable blow against the growing use of private transfer fees. If it does, the move would put the agency in alignment with NAR, which, along with other industry groups, says the fees are a stealthy way for third parties to milk real estate transactions for money without necessarily adding anything of value.
If you’re not familiar with them, the fees are encumbrances on titles imposed by developers that typically require a payment to the developer any time the property is bought or sold subsequent to the initial transaction. The fees are similar to encumbrances placed on properties by public sector agencies or nonprofit organizations to provide for a public use. A good example is a conservation easement in which an encumbrance is placed on the title of a property to restrict future development.
In the case of private transfer fees, though, a case for any kind of public good isn’t necessarily made. A developer might say the fee income will go into neighborhood improvement, but in some cases no such claim is made. Instead, the fee is simply a way to create an income stream to the developer long after the property is initially sold.
Wall Street is reportedly getting in on the act, with financial gurus devising ways to create securities for sale to investors that are collateralized by the fees.
NAR has been offering assistance to state associations of REALTORS® for battling the fees and has been seeing considerable success. About a dozen and a half states now either ban outright or restrict the fees in some manner, up from practically zero when the effort was launched last year.
Now, with the Federal Housing Finance Agency (FHFA) publicly questioning the fees and considering taking steps to stop Fannie Mae and Freddie Mac from accepting mortgages on properties whose title is encumbered by the fees, the move to get them stopped is gaining even more momentum.
You can read FHFA’s concerns in a notice it just published. What’s interesting about the notice is the agency lays out in clear terms the many reasons why it thinks the fees are a net detriment to homeowners, the economy, and the real estate industry.
You can learn about NAR’s efforts to help state associations of REALTORS® in the video below, released earlier this year. NAR has also joined with others in a coalition to fight the fees.
People have different views about the value of private transfer fees. At this point, FHFA is saying the fees appear to be something that do more harm than good. We’ll see what the agency ultimately does.