Fannie, Freddie Model Declared Dead - FINALLY!
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
Fannie, Freddie Model Declared Dead - FINALLY!
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Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes
15yI don't think the issue is securitization, per se.
The issue is partly that an entity backed by the full faith and credit of the government -- oops, I mean the taxpayer -- undertook a social mission to increase homeownership. Whether you think that's a battle that should be waged by government in the first place is largely an opinion; we need homeowners, for sure, but we need renters, too. And at least as recently as 30 to 40 years ago, owning a home was something you aspired to.
You scrimped and you saved, and you dreamed of your white picket fence. My parents did this for six years, eventually putting 20% down on their home and taking out a fully-amortizing 10-year loan -- at a rate of 10.75%, I believe.
Of late, however, the notion is that you need only 3% down to buy a house, and hey, if you don't have that, get a relative to give it to you, or get a non-profit to help you, or hey, just pay 3% more for the house and get the seller to contribute 3% (or more). We've had people buying houses for years with no real skin in the game, and for a time, it all worked out. They were able to make their payments, and eventually the home's value crept up enough that, even if there was a foreclosure, the lender had a better shot of coming out whole. (Everyone remembers the 125% LTV HELOC, right?)
My point in all of this is that it has little to do with securitization, which is nothing more than taking a basket of small securities (the individual loans), putting them into a larger basket, slicing that basket up into pieces with some degree of cash-flow predictability. Now, did Fannie and Freddie rely on this process to fund the loans they bought? Yes, of course. But securitization, in and of itself, is not the issue. At least in my opinion...
I think what we had here was the perfect storm. Not only did we have underwriting standards go out the window, but we also had interest rates held down too low after 9/11. The low rates did what they were supposed to do, which was keep the economy going, but they were kept there for far too long, and speculation in real estate was rampant. I think I remember there being a time when something like 40% to 50% of all real estate sales were "second homes" because people were buying solely for an appreciation play. Remember hearing tales of people buying two ocean condos, watching them double, then selling one to pay for both? I remember that very well...that was insanity.
So, we had a good ol' fashioned speculative bubble, only it was funded with debt secured by the very asset on which the speculation was being made, which made it even worse when the whole thing imploded. Sort of like when we used to let people buy stock on 90% margin...only with real estate we were really letting people buy it on 99% to 100% margin. Who WOULDN'T speculate on a house when you have zero dollars invested? Heads, I win...tails, you (the taxpayer) lose...
Time to conclude my rant...I suppose you could argue that, but for the securitization process, Fannie and Freddie never would have existed, ergo, securitization is to blame. If Fannie and Freddie were not GSEs, though, they could still have used securitization to raise funds for their operations, but the cost would have been a little higher because of the lack of the implied government backing. But, non-GSE versions of Fannie and Freddie would have likely paid more attention to credit quality (assuming that they could be brought down and not deemed "too big to fail"), and they certainly would not have had a social mission at the direction of the federal government.
I do agree that it would be better for everyone if the people who made mortgage loans just kept them in their portfolio, but the total value of all mortgages in the US (at least around 2008) was about $10 trillion. All banks in the US today have assets of about $12 trillion, so it looks as if we can't rely on the banking system to fully fund all of the country's mortgage needs, thereby making some level of securitization a necessity.
49 Replies
- Real Estate Broker · Fort Pierce, FL · Member since 2009 · 221 posts · 95 votes15y
Bryan,
When you have a moment, can you post links? I've been watching some official from up north spouting he wants do do away with the GSE's or at least minimize their roles.
I want to see how this is argued between the powers to be.
- Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes15y
- Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes15y
http://online.wsj.com/article/SB10001424052748703989504576128403630694340.html#
Just got this emailed from a lender today. Interesting news. The article states that Fannie and Freddie will be phased out under the Obama administration.
The article predicts less government regulation / intervention in the mortgage market will increase borrowing cost.
I'm not sure how I feel about this. I am all for free market, but a few questions I had about this article:
1. Isn't this type of de-regulation promoting what started the crisis in the first place? Won't lenders be more inclined to look the other way on bad reports and just sign off?
2. Why would no government intervention raise borrowing costs? Economics 101 says that free market encourages competition and the real winner is the consumer. I'm lost on this one.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
It won't be "less regulation." It will keep our bloated government from buying paper that no sane private institution would buy because they are pushing for an "ownership society." Prices for debt money will necessarily rise with only rational private entities buying mortgages.
I'll post some more links in a few Stan.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
Here are some more stories...feel free to post others if you find them:
Obama declares Fannie, Freddie model ‘dead’
US Mortgage Market Overhaul: The Winners and the Losers
Obama report on Fannie, Freddie plan may boost mortgage rates
If people are forced to put 20% down on their purchases I am convinced we will be fine going forward.
- Real Estate Investor · DFW, TX · Member since 2011 · 81 posts · 11 votes15y
Here's the way I see it. If you look closely at what has happend with the new credit card act.
The gov put these new regs on the banks. Now to make up for the loss of interest rate increases. They now charge unbelievable fees. Late fees... higher, new transfer balance fees, shorter interest free periods and so on. And all the banks are doing the same thing in lock step.
There isn't any real competition any more. You can get the same bene's from most of them.
So, if they go private with the mortgages. I'll bet the banks will set a standard between themselves with fees that will be the new norm. Changing the future costs of buying a house for ever. "It's not personal. It's business" Just my .02. - 15yMark UpdegraffBusiness MemberReal Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 692 votes
If people are forced to put 20% down, it is going to eliminate or seriously delay many buyers. With the decline in the value of the dollar, unemployment, and stagnant wages I think this will put a lot of downward pressure on home prices. Great time for buy & hold!
Updegraff Group Realty4.746 Reviews - Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
It is hard to imagine this all being phased in at once. I do agree it will put a lot of downward pressure on pricing though. It will be a breath of fresh air that we are forcing people to be responsible or potentially lose a lot of money though!
- Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes15y
To err is human, to really screw things up - it takes a computer, to FUBAR the entire thing, it takes government.
I about choked on my coffee this morning when I read that the president of the National Association of Realtors was against FNMA and FDMC getting out of the mortgage business or at least scaling way back. The current mess we are in is due largely to the government trying to manipulate the market place by lowering lending standards.
If the US is really a FREE ENTERPRISE and CAPITALISTIC Economic system, then let that system work. Having a government interfere with it distorts the outcome. While I do agree we need regulation, much like a cop regulating the flow of traffic, we don't need the cops telling what kind of car to drive.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
Originally posted by Mike M:
To err is human, to really screw things up - it takes a computer, to FUBAR the entire thing, it takes government.Priceless! I couldn't agree more Mike.
- 15yMichele GallowayPro MemberInvestor · Windsor Mill, MD · Member since 2010 · 29 posts · 11 votes
There goes the middle class. We will be a two class society... The Rich and the Poor... Just like all of the other Third World Countries.
As Nikita Khrushchev Said... "America will fall without a shot being fired. It will fall from within."
- Real Estate Broker · Fort Pierce, FL · Member since 2009 · 221 posts · 95 votes15y
Bryan, thanks for the links.
Now, I’m totally confused! Almost all mortgages I originated were to the standards of Fannie or Freddie. Are the standards not sufficient? Were the standards the cause of this calamity?
If you get rid of the GSE’s, thereby getting rid of government involvement, who does the regulating across this diverse country?
How well are private institutions performing in this market? Do private institutions have a different set of underwriting guidelines which far exceeds those Fannie and Freddie?
I’m thinking the problems may not actually be Fannie and Freddie but what forces that drives them….WALL STREET!Sorry for the all question post, but as I said, I’m totally confused. 10,20 or 30 years ago, I did not hear anything about getting rid of Fannie and Freddie and as far as I know the standards have basically remained the same. So, another question, what changed? WALL STREET!
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
Right....that is such a logical conclusion from making people put 20% down and have a vested interest in making their mortgage payments.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
@Stan
Securitization passes the buck. The whole model right now is fraught with problems that beg for fraud to occur. Everything is built to sell instead of built to keep.
Fannie and Freddie are not needed. The private market can function on its own just fine without the government setting the conditions for people to buy houses they can't afford.
- Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes15y
I don't think the issue is securitization, per se.
The issue is partly that an entity backed by the full faith and credit of the government -- oops, I mean the taxpayer -- undertook a social mission to increase homeownership. Whether you think that's a battle that should be waged by government in the first place is largely an opinion; we need homeowners, for sure, but we need renters, too. And at least as recently as 30 to 40 years ago, owning a home was something you aspired to.
You scrimped and you saved, and you dreamed of your white picket fence. My parents did this for six years, eventually putting 20% down on their home and taking out a fully-amortizing 10-year loan -- at a rate of 10.75%, I believe.
Of late, however, the notion is that you need only 3% down to buy a house, and hey, if you don't have that, get a relative to give it to you, or get a non-profit to help you, or hey, just pay 3% more for the house and get the seller to contribute 3% (or more). We've had people buying houses for years with no real skin in the game, and for a time, it all worked out. They were able to make their payments, and eventually the home's value crept up enough that, even if there was a foreclosure, the lender had a better shot of coming out whole. (Everyone remembers the 125% LTV HELOC, right?)
My point in all of this is that it has little to do with securitization, which is nothing more than taking a basket of small securities (the individual loans), putting them into a larger basket, slicing that basket up into pieces with some degree of cash-flow predictability. Now, did Fannie and Freddie rely on this process to fund the loans they bought? Yes, of course. But securitization, in and of itself, is not the issue. At least in my opinion...
I think what we had here was the perfect storm. Not only did we have underwriting standards go out the window, but we also had interest rates held down too low after 9/11. The low rates did what they were supposed to do, which was keep the economy going, but they were kept there for far too long, and speculation in real estate was rampant. I think I remember there being a time when something like 40% to 50% of all real estate sales were "second homes" because people were buying solely for an appreciation play. Remember hearing tales of people buying two ocean condos, watching them double, then selling one to pay for both? I remember that very well...that was insanity.
So, we had a good ol' fashioned speculative bubble, only it was funded with debt secured by the very asset on which the speculation was being made, which made it even worse when the whole thing imploded. Sort of like when we used to let people buy stock on 90% margin...only with real estate we were really letting people buy it on 99% to 100% margin. Who WOULDN'T speculate on a house when you have zero dollars invested? Heads, I win...tails, you (the taxpayer) lose...
Time to conclude my rant...I suppose you could argue that, but for the securitization process, Fannie and Freddie never would have existed, ergo, securitization is to blame. If Fannie and Freddie were not GSEs, though, they could still have used securitization to raise funds for their operations, but the cost would have been a little higher because of the lack of the implied government backing. But, non-GSE versions of Fannie and Freddie would have likely paid more attention to credit quality (assuming that they could be brought down and not deemed "too big to fail"), and they certainly would not have had a social mission at the direction of the federal government.
I do agree that it would be better for everyone if the people who made mortgage loans just kept them in their portfolio, but the total value of all mortgages in the US (at least around 2008) was about $10 trillion. All banks in the US today have assets of about $12 trillion, so it looks as if we can't rely on the banking system to fully fund all of the country's mortgage needs, thereby making some level of securitization a necessity.
- Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes15y
Originally posted by Michele Galloway:
There goes the middle class. We will be a two class society... The Rich and the Poor... Just like all of the other Third World Countries.As Nikita Khrushchev Said... "America will fall without a shot being fired. It will fall from within."
Hmmm, quoting the Communist Leader of Russia during the Cold War doesn't carry much weight. Actually, RUSSIA FELL without a shot being fired!! Therefore, Khrushchev was WRONG, just like most Socialist/Liberals/Communists are wrong.
Taking the government out of the Mortgage business will actually strengthen the Middle Class, as long as the Government still "regulates" the business in an Overseer position. Let the private sector say what loan requirements they want, such as LTV, FICO score, etc... Make sure there is no racism, red lining or graft going on, and we would see a tremendous rebound in the housing market. The Private Sector is so much more efficient!
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
Securitization certainly wasn't the sole cause, but it does pass the buck and misalign incentives IMO.
I don't agree with the fact that the private sector can't support all of the mortgage product needed though. A small handful of behemoth banks may not be able to, but a large number of banks across the country can.
- Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes15y
With respect to the secondary mortgage market, the private institutions / individual buyers will be fine. They've got plenty of money, and since its their own actual money being put out there, they actually underwrite the loans that they are considering. What a concept!
- Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes15y
Originally posted by Bryan Hancock:
I don't agree with the fact that the private sector can't support all of the mortgage product needed though. A small handful of behemoth banks may not be able to, but a large number of banks across the country can.Absent any facts, I would agree with you, but I'm just using the numbers I see. In 2008, there were about $10 trillion in mortgages. It's not clear to me if that's just residential. In the US, banks today -- ALL U.S. banks, not just the mega-monsters -- have about $12 trillion in assets, according to the Fed. So if those numbers are right, I don't see how the banking system could be asked to put 80+% of its assets in residential mortgages.
- SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes15y
Originally posted by Mike M:
Actually, RUSSIA FELL without a shot being fired!! Therefore, Khrushchev was WRONG, just like most Socialist/Liberals/Communists are wrong.True, but we won't be far behind the way things are going.
I agree the government doesn't have any business in picking in the winners and losers in our society, but I don't mind the government making home ownership an equal "opportunity" for all. That doesn't mean we should be handing over real estate to those unqualified for it, but I'd hate to see what would happen in this country if home ownership were simply left up to the likes of Wall Street. We might return to the days of Czars and Serfs where the top 1% of the wealthy own ALL the land and the rest of us peons must rent from them.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes15y
Chicken and egg...The government owns most of the market because the government crowds out the private institutions. Something that is done in waves where the government involvement is wound down and the private entities phase in would work just fine. We could have a return to small, regional banking simultaneously where everyone competes.
Simple.
- Investor · Newbury Park, CA · Member since 2010 · 80 posts · 19 votes15y
Originally posted by Mike M:
To err is human, to really screw things up - it takes a computer, to FUBAR the entire thing, it takes government.I about choked on my coffee this morning when I read that the president of the National Association of Realtors was against FNMA and FDMC getting out of the mortgage business or at least scaling way back. The current mess we are in is due largely to the government trying to manipulate the market place by lowering lending standards.
If the US is really a FREE ENTERPRISE and CAPITALISTIC Economic system, then let that system work. Having a government interfere with it distorts the outcome. While I do agree we need regulation, much like a cop regulating the flow of traffic, we don't need the cops telling what kind of car to drive.
What if someone is driving a tank? - Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes15y
I think a huge part is the economy.Heck I spend more on utilities almost than my mortgage payment!!
I remember being at Cracker barrel waiting to be seated and looking in the Farmers Almanac going back years.
What astounded me is yes people put 20% down but the cost of living was way less as well.
I remember seeing something in the 1940's and 1950's a house was like 25 or 30,000 and the average salary was around 18,000.So it was easy to save money.
fast forward to today on what a median home costs compare to average salary.Costs have gone through the roof and salary for most families has become frozen or decreased.
The problem is pay isn't keeping up with costs of living.
If we have no middle class and just the rich and the poor you are looking at another Egypt scenario.
45% in Egypt live under the poverty level.That's why they led hundreds of thousands of protestors down the street to oust the president.
I just don't see putting 20% down but maybe 10%
Now if a house that was 100k was 3,500 down and that house dropped in value to 50,000 then 10% down is 5k.I could see that working.
I just don't think salaries support putting 20% down for most people.
- Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes15y
Economics change over time. My parents did not have a monthly cell phone bill, satellite TV bill, internet access bill and many others that we have. Their parents didn't have but one car and a $5.00 a month rent payment.
The average US Household income is around $60,000 (you can check 10 different websites and get 10 different answers, but 60K seems to be close enough)
The average cost of a house in the US is $170,000.
I do not see why it is so hard for folks to save up 20% to buy a house? Is it because they bought too many video games with their credit card? Is it because they have too many toys? How many people in Egypt, supposedly poor, were carrying cell phones? How many of them got news of the protest via Facebook (computer and internet connection). Funny how the "poor" of today differs from the "poor" of just 50 years ago!
Over 60% of Americans own their own home. This is a pretty LARGE Middle Class if you ask me. It is when the government tried to push that up to 70% that we got into the mess we have now. You will ALWAYS have poor with you, whether it be laziness, lack of skills, illness, or some other factor. You will ALWAYS have the wealthy too. It does the economy, nor the individual, no good to force the wealthy to give money to the poor. What helps the economy, and the individual, is OPPORTUNITY.
As Real Estate investors, we are always looking for OPPORTUNITY. The US Economic system is based upon providing opportunity for every one. It is not based upon the government giving a monthly check to someone too lazy to work. It should not be based upon the government buying a mortgage loan so the lender can loan more money. Taxpayer dollars have no business backing up mortgage loans!
- Involved In Real Estate · Battle Creek, MI · Member since 2010 · 18 posts · 25 votes15y
Wow probably one of the best threads I have seen in a while...the one statement that I have heard in relation to GSE's like fannie and freddie is "Privatized Profits and Socialized Losses" when things are good they get to profit and when things are bad we the taxpayers bail them out...Its amazing what the american free-enterpise system can do when given the opportunity...just look at all of the entrepreneurs that have creatively solved many of the problems that our government has created in relation to our current mortgage crisis...free markets work when they are not in competition with the government...either way this is gonna hurt for a while but I would prefer to have government out of the mortgage market completely...I think it would be the best thing for long term stability...
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