Home Income News

Speaking of the GSEs, it really is so encouraging to see that a week after Freddie went cap-in-hand to the Treasury for a $10.6 billion cash infusion, Fannie had to go begging for $8.4 billion to cover its burgeoning losses. These two wards of the state have now drained $148 bln of aid out of taxpayer pocketbooks since the mid-2008 bailout.

And what a housing mess it is – Fannie reported that its delinquency rate still rose to 5.47% in Q1. What is happening now is that a growing number of people who can in fact pay their mortgage have stopped making their payments out of “anger” – according to a disturbing article that showed up on page A4 of yesterday’s WSJ (Emotion Drives Many Defaults). Why it’s disturbing is that it cites research showing that 12% of mortgage defaults are now “strategic” and that somehow this is now okay on our increasingly hedonistic society. In fact, a law professor is quoted as lamenting why people are “throwing their money away on a home in which they may never have equity.” Wow. Look how far we have progressed. We used to be told “why throw your money away on rent? Why don’t you own?” Now it’s “why throw your money away on a house?” Maybe because you signed a contract – now why should that matter?

You really can’t make this stuff up.

Actually, the numbers Rosenberg is using may be understating the actual strategic default numbers. The following is from Monday’s Post Chronicle:

According to new data from the team of researchers at the University of Chicago and Northwestern University that first identified the scope of "strategic default" behavior last year, the number of homeowners willing to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage, has dramatically increased compared to just a year ago.

The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009. RealtyTrac reported foreclosure filings on 932,234 properties in the first quarter, a 7 percent increase from the previous quarter and a 16 percent increase from the first quarter of 2009.

Some 288,992 foreclosures per quarter are strategic defaults.

Gretchen Morgenson of the New York Times had this to say on Saturday:

But taxpayers should examine Freddie’s first-quarter numbers not only because the losses are our responsibility. Since they also include details on Freddie’s delinquent mortgages, the company’s sales of foreclosed properties and losses on those sales, the results provide a telling snapshot of the current state of the housing market.

That picture isn’t pretty. Serious delinquencies in Freddie’s single-family conventional loan portfolio — those more than 90 days late — came in at 4.13 percent, up from 2.41 percent for the period a year earlier. Delinquencies in the company’s Alt-A book, one step up from subprime loans, totaled 12.84 percent, while delinquencies on interest-only mortgages were 18.5 percent. Delinquencies on its small portfolio of option-adjustable rate loans totaled 19.8 percent.

The company’s inventory of foreclosed properties rose from 29,145 units at the end of March 2009 to almost 54,000 units this year. Perhaps most troubling, Freddie’s nonperforming assets almost doubled, rising to $115 billion from $62 billion.

When Freddie sells properties, either before or after foreclosure, it generates losses of 39 percent, on average.

Fannie and Freddie, lest you’ve forgotten, have been longstanding kingpins in the housing market, buying mortgages from banks that issue them so the banks could turn around and lend even more. After both companies overindulged in the lucrative but riskier end of home loans, they nearly collapsed, prompting the federal rescue. Since then, the government has continued to use the firms as mortgage buyers of last resort, to help stabilize a housing market that is still deeply troubled.

To some, the current silence on what to do about Freddie and Fannie is deafening — as is the lack of chatter about Freddie’s disastrous report last week.

“I don’t understand why people are not talking about it,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, referring to Freddie’s losses. “It seems to me the most fundamental question is, have they on an ongoing basis been paying too much for loans even since they went into conservatorship?”

Mr. Baker’s concern that Freddie may be racking up losses by overpaying for mortgages derives from his suspicion that the government might be encouraging it to do so as a way to bolster the operations of mortgage lenders.

That would make Fannie’s and Freddie’s mortgage-buying yet another backdoor bailout of the nation’s banks, Mr. Baker said, and could explain the government’s reluctance to include them in the reform efforts now being so hotly debated in Washington.

“If they are deliberately paying too much for mortgages to support the banks,” Mr. Baker said, “the government wants them to be in a position to keep doing that, and that would mean not doing anything about their status until further down the road.”

It’s no surprise that the government doesn’t want to acknowledge the soaring taxpayer costs associated with these mortgage zombies. The truth about Fannie and Freddie has always been hard to come by in Washington, and huge piles of money seem to circulate silently around both firms.

REMEMBER last Christmas Eve? That’s when the Treasury quietly decided to remove the $400 billion limit on federal borrowings available to Fannie and Freddie through 2012.

That stealth move didn’t engender much confidence in either the companies or their government guardian.

 The Banksters Win Again!

Don’t worry, be happy! Just how many ways are there for the government to bail out the banksters? Things are not pretty out there. I am not going to pretend they are. And housing is slated to get much worse in the coming months now that the $8,000 tax credit is gone and so is Quantitative Easing, the term used for the buying of mortgage backed securities by the Federal Reserve. But don’t worry, just like in 2007; It’s contained!

William Mason CFA