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Fannie Talks Tough
On Wednesday Fannie Mae issued a statement regarding its policy toward
strategic defaulters. The new policy is a (weak) carrot and stick
approach for dealing with those homeowners who are underwater and have
little (or no) hope of getting out of the water. Several measures were
announced to achieve the goal of getting trouble borrowers to come
forward and speak with their loan servicer versus to just stop paying
and wait to see what happens. No new credit and a risk of default
judgments were the sticks. As near as I can tell there was no carrot.
There are several aspects to the announcement that has me puzzled.
Fannie appears to be doing this in a vacuum. Freddie Mac has not
established any similar policies. The quote from Freddie was:
“Freddie Mac
is closely following Fannie’s moves but had not yet adopted them.”
The FHFA (the regulator for Fannie and Freddie) commented:
“We
support Fannie Mae taking a policy position that discourages borrowers
who can afford to pay their mortgage from walking away.”
A significant comment on this comes from the Treasury Department:
“Fannie Mae’s plan does not represent official
Obama administration policy.”
Fannie and Freddie have been in conservatorship for nearly two years.
Treasury has already plunked $120b into the rat hole. Even the CBO is
estimating the ultimate cost at nearly $400b. There are private
estimates that take the number as high as $1 Trillion. A meaningless,
but still “optically” significant step has been taken to de-list
F/F. This horrible mess is today a 100% government problem.
Given that as a background I find it very difficult to believe that
Fannie did this without the full involvement of the FHFA. This means
that Chris DeMarco, the acting Director, had to have signed off on it.
If DeMarco approved it for Fannie, why was Freddie not included? There
is no way that he considers these two beasts as separate entities at
this point.
I don't believe that DeMarco let this happen without the express prior
approval of Treasury. That is not how things work in D.C. When a
Treasury “spokesman” says that the moves by Fannie, “Do not represent
Obama administration policy” there is some form of cover up. In my
opinion this important step had to have the sign-off of Treasury
Secretary Tim Geithner. Geithner would not have approved this without
specific WH approval. This probably means he called Rahm. This
conversation could have gone like:
TG: We are getting killed on the strategic defaults. It could cost us
a half trillion if we don’t do something about it. Fannie has a plan to
scare its lenders. Should the government take a heavy hand in this?
RE: We talked about it and the decision is that we can’t afford more
losses so go forward and threaten the lenders. But the WH wants to
distance itself from this. So make it look like a “one off” policy by
Fannie and Treasury and WH will give it a no comment. Okay?
TG: Got it. This is going to put DeMarco in a tight spot. What should
I tell him?
RE: Tell him if he plays ball with this and keeps us out of the
“hardball” strategy we might consider removing that “Acting” title. We
need a lightening rod. He’s it.
For me there are only two possibilities. Both are troubling. The “get
tough” approach by Fannie was either:
(A)
Just a one off thing that happened based on an internal decision at
Fannie and given the nod by FHFA.
Just a one off thing that happened based on an internal decision at
Fannie and given the nod by FHFA.
or;
(B)
This plan was vetted by many levels within the Government including
Treasury and the White House. A decision was made to go forward. It had
the approval of Obama.
This plan was vetted by many levels within the Government including
Treasury and the White House. A decision was made to go forward. It had
the approval of Obama.
If it is (A) it would suggest that there very little
coordination/discussions of critical policy choices being made on what
is clearly the “Big Risk” to the broad economy. It would imply that
there's no one running this big ship. If that should prove to be the
case, then heads (Geithner’s) should roll. I would call that Benign
Neglect.
If it is (B) and the WH approved this plan, then I think this should be
understood by all. I have no problem if the WH plays tough with the
likes of Iran, N. Korea or Venezuela. It is quit another matter to turn
on the citizens.
The policy changes at Fannie should have been handled differently. This
is a difficult problem. Our economic health will be impacted for many
years by the choices we make. I think an announcement as significant as
the Fannie move should have come from the President. He should have made
these points:
-It is a mistake of history
that the US government has become the dominant provider of mortgages.
that the US government has become the dominant provider of mortgages.
-We must accept that mistake
and the consequences of what has come with it.
and the consequences of what has come with it.
-As the government has been
part of the problem, we must be part of the solution.
part of the problem, we must be part of the solution.
-A policy is being
established that will impact all of the Federal mortgage lenders
including Fannie, Freddie and FHA.
established that will impact all of the Federal mortgage lenders
including Fannie, Freddie and FHA.
-Borrowers who are underwater
today as a result of the unprecedented decline in RE values will be
eligible for principal debt relief. Borrowers who get lowered principal
will be obligated to pay a tax of (50%?) on any gains that are realized
on the sale of a home that is in excess of the new mortgage balance.
today as a result of the unprecedented decline in RE values will be
eligible for principal debt relief. Borrowers who get lowered principal
will be obligated to pay a tax of (50%?) on any gains that are realized
on the sale of a home that is in excess of the new mortgage balance.
-Borrowers who do not come
forward over the next 180 days and seek assistance (strategic
defaulters) will be treated harshly. Those that do not come forward and
are delinquent on loans to Federal lenders will be subject to rapid
foreclosure leading to eviction. Judgments (where permitted) will be
aggressively pursued. IRS tax liens will be used to enforce judgments.
forward over the next 180 days and seek assistance (strategic
defaulters) will be treated harshly. Those that do not come forward and
are delinquent on loans to Federal lenders will be subject to rapid
foreclosure leading to eviction. Judgments (where permitted) will be
aggressively pursued. IRS tax liens will be used to enforce judgments.
-Private sector lenders will
be encouraged to follow the decisions made at the Federal level. If
private lenders fail to cooperate they will be subject to draconian
regulatory scrutiny. If they don’t play ball we will make their lives
miserable. We will shut them down if necessary. We will publish a list
of those who are not contributing to the resolution of the problem on a
monthly basis. Those who do not cooperate will be run out of town. Their
depositors and customers will desert them. Their bondholders will lose
money; their equity will be wiped out.
be encouraged to follow the decisions made at the Federal level. If
private lenders fail to cooperate they will be subject to draconian
regulatory scrutiny. If they don’t play ball we will make their lives
miserable. We will shut them down if necessary. We will publish a list
of those who are not contributing to the resolution of the problem on a
monthly basis. Those who do not cooperate will be run out of town. Their
depositors and customers will desert them. Their bondholders will lose
money; their equity will be wiped out.
Something along these lines would be a real carrot and stick approach.
The one from Fannie is just a pretend one.
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Uncle Ira? Is that you?
Bruce, i liked most of your posts except this one.
I don't agree with you to punish homeowners who has purchased a house and its value is dropped, they CAN default, just like banks played in this speculation and pushed the house prices up and sold these houses to the poor guys, if the banks can get away with this speculation so does the homeowners, its a fair game, you cant change the rules of the game in the middle of the game. I guess you are trying to protect the good guys who are still paying their mortgages so their house prices should not fall further, it doesn't work like that, whoever purchased a house they took a risk,if the values drop now, it will go up when the hyperinflation hits the markets, so if you want to pay your mortgage, that's fine, pay it, but don't try to punish people who walk away.
Its a very hard decision for them to walk away, if they feel that they are deceived, don't believe this fed operated ponzi scheme anymore, i don't blame them. In my opinion they are taking a revenge from the system by defaulting. I support the people who fight with this corrupt system, not banks.
ps. to make things more clear, i did not purchased a house and don't have any mortgage .
This piece was not understood. Actually this piece was poorly written so it was not understandable. All the negative comments are reading me wrong. I want debt relief. I want it as soon as possible so we can get back to some degree of normalcy.
It is not going to come on a plate folks. It will come with preconditions and quid pro quos. Yes I was prepared for tough treatment for some in exchange for fair treatment of the vast majority.
But I did not make that clear so I am drinking a vat of gin. Fuck me....
If you're drinking a whole vat of gin, it's gonna take a LOT of Viagra to make this work.
This maybe a long time coming, as everyone knows fannie/freddie made big bucks during this orchestrated boom, bought loans they shouldn't have, lowered their standards, jacked their risks, paid theirselves handsomely I'm sure, had a few firings, a few suicides in-house and clients, I'm sure during these pumped up fraudulant years, so you won't see me giving them any kudos, and I'm not forgeting our congress or my part for not staying aware of the ridiculousness in government creationism, a world to their own, corrupt, paid for, and laws to serve their own interests and certainly not for YOU, the american people, unless they're talking out both sides of their mouths, but this as you all have pointed out, probably won't matter a bit, as their credit will be shot for 7 yrs anyway, and I certainly hope they don't go after deficiency balances, that would be bad, esp. after they've already found the ponzi scheme tied to mods, improper incentives to servicers, lenders hiding their bad debt to avoid increase capital requirements. THERE WAS A TIME WHEN LENDERS DID NOT SELL THEIR PAPER, THEY ACTUALLY HELD THEIR LOANS ON THEIR BOOKS, aren't they hoarding enough, making enough off of their 0% money from every freeloading government program created just for them too? It's sad they have to be two faced, they get the public stuck on assistance but don't have the will to get off of it themselves. LENDERS KNOW HOW TO DO THE RIGHT THING, THEY KNOW HOW TO UNDERWRITE, IF THEY'RE FORCED TO, I GUESS, DO NOT TELL ME THAT THEY WILL PASS ON LOANS THAT MAKE SENSE, UNLESS THEY HAVE NO USE OF STOCKHOLDERS OR CLIENTS OR BEING IN BUSINESS. THIS ACTUALLY MIGHT BE A GOOD THING, IN THE LONG RUN.
When you stop deceiving yourself, can you look at yourself in the mirror?
WAKE UP PEOPLE! Are you going to be standing when everything around you falls? I hope so, cause you maybe the only one you can count on.
"Why would anyone buy a house."
Once upon a time when housing cost 3x income, buying a house was a good idea. Instead of paying rent, you paid down a loan and in the end and just before retirement you had a a free place to live. I know many cases of retire people living only on SS but since they don't have to worry about rent because of a paid mortgage they are doing ok. I also know a few people that are paying half of their SS to rent and aren't faring so well and are seeking government housing assistance. Pray that by the time the boomers retire, most have a paid off mortgage.
I'm a boomer, and my home was paid off 15yrs ago.........
My cost of living, taxes,utilites,up keep etc,etc, are less than I could ever rent a 2 bedroom apt for.
I (still) can get at least what I paid for it, likely 25% more, now...even in this disaster............if it all DOES go to Obamageddon, it's my fort.
Bottom line, keep your ass out of uber debt, and do not try and keep up w/ the Jone's, as in Jerry Jones............
This is all bs Bruce, and I think you know it.
I'm not a big fan of your suggestions either by the way; the ultimatums and deadlines.
A big fish corporation defaults, in their best interests, and they don't have to deal with this crap. They get bailed out like TishmanSpeyer, or walk away clean, and get hailed for making a sound business judgement.
The little guys default, in their best interests, and it's lets change the rules and tak'em to the woodshed.
Fuck this corporatist pseudo republic of a country, the federal government, the corporations, and Fannie/Freddie. (Amongst others.)
We are a nation of abusers and usurers at the top, those chained to the welfare state on the bottom, and the indentured indebted trapped and taxed in the middle.
Mark to market, beeeyatches!!!
Why would anyone buy a house. Home ownership opens you to aggressive taxation by your local government, and there's nothing you can do to escape, short of selling. It's a deflating, depreciating asset with high "operating costs". And as an astute poster pointed out, with all of the government intervention, house prices are so distorted and twisted that it is impossible to know what they are "worth". The best analytical approach is a rental rate equivalent, and on that basis most homes are massively overvalued, particularly if the ubber bears are correct, i.e. unemployment up and personal incomes down.
I sold my house (NYC condo) in 2005 and damn glad I did.
Until the banks mark to market and liquidate their bad loans, defaulters should be allowed to stay in their homes.
Why?, they should never have assumed a debt they could not pay to begin with............DO YOU?
Not me...............
Strategic defaulters, able to pay, should do the right thing.......
Pay, you made the deal, you agreed to the numbers.
Now the poor that were GIVEN these homes, under DURESS by Clinton, and Congress, that's another matter.(Let's not forget, FM/FM, were forced into these bad loans, by SAMMY.
I'm just trying to get the banks to mark to market and this seems like a good populist strategy to force that to occur. We've been propping them up too long and a more honest approach is needed. Also, why should we allow the banks to "stay in their houses" when we kick out ordinary folks?
“Fannie Mae’s plan does not represent official Obama administration policy.”
Politics...there is little public support for bailing out underwater homeowners(let em walk away if they can't pay) but the WH has to show some compassion. So let Fannie be the one to whirl the whip while the WH pretends to be on the side of the suffering homeowner...
"-We must accept that mistake and the consequences of what has come with it."
heh
I am stunned it took this long post conservatorship to make this move. Why buy a house until the freeloaders are out? Until then, actual home prices are not known. I thought this day would come before end of yesr 2008, not two years later. Now it has the trappings of an idle threat. People were being *encouraged* to default to qualify for HAMP. Ruthless default is with us now for the next three years - this won't do a thing until it has real teeth and consequences.
I know! Let’s have all the “congress people” who got “donations” from FRE/FNM give the money back. That would help a lot. Maybe Rahm can cram back the $340,000 he took from FRE.
"Those that do not come forward and are delinquent on loans to Federal lenders will be subject to rapid foreclosure leading to eviction."
Bruce, those people are for the most part eligible VOTERS. Hell will freeze over before any elected official would sanction anything like what you're proposing.
Lets be practical: either uniform debt relief, i.e. Oprah's style "you get $50k of your mortgage forgiven, you get $50K of your mortgage forgiven, you own your house - you get $50K tax credit, etc" giveaway to EVERYONE, or let the market bottom QUICKLY so that people with cash can buy properties and rent them back at affordable cost. If it's done quickly it will cause less pain than if it's dragged out
Isn't the administrations real goal to make the banks whole on all their bad loans that should not have made?
Obummer et al does this by bleeding the borrowers and tax payers as much and often as possible until they reach the squealing threshold?
In that equation the borrowers are inconsequential... borrowers don't matter. The banks do.
Finding taxpayers to covertly bleed (eg Fannie, Freddie, FHA) do...
That is why every HARP, HAMP and HUMP fail and we extend and pretend bad loans until Fannie, Freddie and FHA are up to their eyeballs in Wall Street TBTF junk?
In that context, threatening some sheeple that are getting out of line makes perfect sense...
IMHO, the loans that should never have been made, should ALL be on FM/FM, and they bring the real mkt value down, and resell them.(people living there are not making pmts, so out they go).
Before Congress forced FM/FM, to ALLOW these loans, if you stopped pmt, you were out.............
What's so different now?.
I liked your insights till your ending recommendations. This recommended bit of destroying institutions that are not playing ball with Federal policy sounds totalitarian. Considering the quality of Federal policies over the years, we need people and companies that will stand up against such policies without risk of punitive action.
Don't think it would much matter,......96% of ALL Mortgages are under FM/FM Umbrella.Odds would be slim, the loan is not thru them.
My thinking is they are part of the solution or the are part of the problem. If they are part of the problem I would hit them with a stick. Hard.
Call that totalitarian if you like. I call it fair.
I call it Stalinist. I usually enjoy your posts, but this is just evil. Do you really want to turn the IRS into the KGB? Do you have any respect for the rule of law, or the constitution? Be careful what you are advocating. These are perilous times.
Kaiserhoff, at first I had your reaction: Phrases like "treat harshly" and "aggressively pursue" made me nervous. However, upon reflection, it might be fine. The in-context quote:
This quote has more colorful words than I would use. Rather, I would merely (quickly) execute the terms of contract default. That's pretty much all Bruce is saying here.
For example, I would support quick eviction and forclose, abiding by the terms of the contract. For non-recourse loans, the "buyer" is done, possibly punished by the 1099 income of the unpaid debt depending on *existing* state and federal laws (that's the way it works now, depending on the state). I don't agree with new laws that take effect retro-actively. This, IMHO, is "fair".
However, I concede the next paragraph is a little more difficult for me:
Rather, I would say private sector lenders can execute the terms of their contract, and pursue the walk-away only within the context of the current laws in the state. Nothing new is required.
Much of the problem is that banks simply refuse to clear their books of bad MBS ... why should they? If they wait long enough, the Fed will keep buying that crap up at PAR for the taxpayer to eat.
To keep from dragging this out, I would merely execute all forclosures, according to contract, quickly. That won't happen, though, because F&F don't have the cash to perform that liquidation and write-down.
Quick execution? Fine with me. New punishment dreamed up to apply retro-actively? Hell No.
New punishment dreamed up to apply retro-actively?
My point exactly. Rule of law is breaking down under the Chicago thugocracy. Why throw gas on the flames? Ideas have consequences. None of this is far from current reality.
Men are now routinely thrown in prison over support issues. The IRS already enforces student loan debt. If the answer is more power for the scum in Washington, it must be a damn strange question.
" Rule of law is breaking down under the Chicago thugocracy."
God how I miss the good old days of law and order before January 20, 2009. Those were the days, boy! All of a sudden, things have just gone to hell!!
The Courts are so backed up it will take years
anyway they want to press forward...
unless the newly deputized Obama police come to repossess cuz they ARE the law.
I am not forcing anyone including the banks to do anything. I am giving them both two doors to choose. You can let this linger on and try to settle it one by one in the courts. Will not work in my opinion. We will die before we get there.
Carrot and stick shoud provide incentives to both sides to move this on down the road to a better end. It can't be just the banks lose everything or the opposite where homeowners are destroyed. Neither of those extremes will solve anything. So it has to be something in the middle. Debt relief yes, dead beats no.
PS Getting an IRS tax lien on court ordered payments is no big deal. What I a suggesting is well within the norm.
The just passed FinReg abomination reportedly has another 4 trillion in it for the TBTF crowd. Somehow, that doesn't seem to offend you. Nor does the original 1 trillion stolen at the point of a gun, or the 200 billion being stolen from savers each year to benefit the banksters.
Didn't all the big banks just go through the largest "strategic default" in the history of the planet? Why is that just hunkey-dorey while some poor schmuck's strategic default on a home loan is the crime of the century? If there is something other than blatant hypocracy there, I missed it.
You are not "forcing anyone to do anything", but you are advocating the abuse of power. You are also, I think, deluded about real estate values. Forcing payment of upside down loans will not restore the unicorn housing prices of the bubble.
Those who have a moral bug up their butts need to remember a simple Mule Creek admonition. "Most questions of high-mindedness depend on whose hogs are in whose cabbage patch. "
PS - Most of your work is excellent, and most of us hate and despise Washington for very sound reasons.
they are not legally allowed to obtain your financial information, so how would they legally determine who is strategically defaulting?
Easy, the fact that your employed, and your still having taxes taken out for SS/MC/FICA........
If your pay hasn't changed, it would be assumed your were.
OOHHHH MMMYYYYYYYYYY ?
Really good analysis, Bruce. It's hard to tell if we are (A) "benign neglect" or (B) afraid to go public with an actual change in policy.
Of course, we are playing with BIG poker chips (and maybe big bluffs), so it's a tough spot. In the end, though, F&F will have to be cut off and shut down -- faster is better.
Always choose pretend when it comes to government dictum.
As they say, "Talk is cheap."
BHO talks a lot too.