By G.L.C., on September 16th, 2008
It has finally happened: the federal takeover of Fannie Mae and Freddie Mac, which together own or guarantee almost half of the $12 trillion home mortgage debt. The takeover came after inspectors poring over the books of the two companies concluded that the accounting methods used by Freddie Mac had overstated the capital cushion of the company. The methods used to bolster the capital cushion have caused serious concerns among regulators. Freddie Mac’s portfolio has many securities backed by subprime loans, but the company has not written down the value of these loans to reflect the current market price. The two companies have also inflated their financial positions by relying on deferred tax assets – Fannie Mae’s worth increased by $36 billion and Freddie Mac’s by $28 billion. Without tax deferred assets, the value of both companies would fall below the regulatory requirements.
The takeover is being seen as necessary to help stabilize the mortgage industry in the short term. But it does not answer the all-important question of how best to finance home mortgages in the United States.
The lender’s retention of credit risk and maturity matched finding are two key characteristics of safe, efficient, fixed rate mortgage lending. In the mortgage market, these two characteristics are missing to a great extent. Lenders have used the securitization process to pass the risk to others. The transaction cost of securitization is high, particularly if the mortgages are refinanced at a lower interest rate. Maturity mismatching has been prevailing at most lenders, including Fannie Mae and Freddie Mac, since the early 1980s.
One answer to the question is to introduce covered bond financing for mortgages. These bonds are on balance sheet borrowings and secured by mortgages owned by the issuer of the bonds. The lender can safely hold on its balance sheet the fixed rate mortgage it has made.
Covered bonds are new to the United States. Only two lenders – Bank of America and Washington Mutual – issue them. But in Europe, they have been issued for over two centuries. Today there are approximately $3 trillion of these outstanding in Europe. Since these bonds are on balance sheet borrowings, it acts as an incentive for good lending decisions: the lender would be stuck with lending errors.
The authorities are now taking steps making covered bonds more popular. The United States Treasury has already issued a set of best practices for issuing covered bonds. New Jersey Rep. Scott Garrett introduced a legislation for providing statutory protection for investors of covered bonds similar to the protection enjoyed by investors of covered bonds in Europe.
Covered bonds have the potential to fund a significant portion of the $10 trillion outstanding in home mortgages today. With covered bonds, the lenders need not sell their fixed rate mortgages into a secondary mortgage market. Instead, they can safely keep their mortgages.
The federal takeover of Fannie Mae and Freddie Mac has only demonstrated that the present mortgage infrastructure is inefficient and extremely risky. The introduction of covered bonds in such a scenario is a welcome step in the right direction.
By G.L.C., on September 8th, 2008
There seems to be no end to the foreclosure crisis. In fact it is likely to get worse.
Option Adjustable Rate Mortgages (ARMs) allow homeowners to choose a low minimum monthly payment typically for five years. The low monthly payments often fall short of the interest due on the loan. The difference is added to the loan balance. After five years, the loan is recast, and the monthly payments are increased to ensure full repayment of the loan by maturity. Option ARMs were originally designed for self-employed people with fluctuating incomes and gained popularity with other workers during the peak of the real estate boom in 2004, when rapidly rising home values would have otherwise kept many buyers out of the market. It peaked in the first three quarters of 2006, exceeding 15 percent of the value of all first mortgage originations, according to data from the Mortgage Bankers Association.
According to a study released by Fitch Ratings, over the next two years, $96 billion of such mortgages sold with initial flexible payment options will switch to more stringent terms. The switch will hike the homeowner’s monthly payments by about 60%. This can result in more than double the number of homeowners falling behind on their mortgage payments on such mortgages issued between 2004 and 2007. Late payments and defaults on such mortgages are already as high as 24% in some areas. The potential average payment increase on recasting loans was 63% or $1053 extra due each month. Most of these mortgages will not reach the five year period until after 2010, but many of these mortgages have a limit on negative amortization generally between 110% and 125% of the original loan amount. And when the homeowner reached this limit, the mortgage may be recast much earlier.
The combined impact of payment shock, declining home prices, and restricted availability of mortgage credit may leave many homeowners with such mortgages unwilling or unable to continue making the monthly payments.
Optional ARMs have been a boon to many homeowners who otherwise would not have been able to own homes. But now it has become a ticking time bomb waiting to explode. Lack of legislation to regulate such mortgages is one of the reasons for the present state of affairs. But the sad part is that such mortgages would not have been possible without federal laws passed in the 1980s – the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and the Alternative Mortgage Transactions Parity Act of 1982 (AMTPA).
DIDMCA abolished state usury caps that had limited the interest rates banks could charge on primary mortgages – and, in the process, gave banks more incentives to make home loans to folks with less-than-perfect credit. Before AMTPA, banks were barred from making anything but the conventional fixed-rate, amortizing mortgages. AMPTA lifted those restrictions, giving birth to all the new and exotic mortgages that have so many homeowners in trouble today, including optional ARMs. There were no substitute regulations to make sure these new mortgages didn’t turn out to be exploitative.
While it’s too late for some homeowners, efforts are being made by the Congress. An October 2007 report put out by the Senate and House’s Joint Economic Committee (which is chaired by Sen. Charles Schumer of New York) recommended that underwriting standards be tightened on adjustable-rate mortgages. The report suggests that the federal government should require lenders to determine that the borrower has the ability to repay a loan at the fully-indexed rate and assume fully amortized payments.
By G.L.C., on August 20th, 2008
As more homeowners enter foreclosure, the fees charged by loan service companies during the process are coming under increased legal scrutiny. Last year the total late fees generated by Countrywide Financial Corp. was $285 million – a 20 percent rise from the previous year, accounting for almost 7.5 percent of its revenues.
Rhonda Winnecour is a court official who monitors consumer bankruptcies in a Pittsburgh bankruptcy court. As the court’s chapter 13 trustee, she takes payments from homeowners trying to save their homes in bankruptcy. She then forwards the payments to the mortgage companies. One such mortgage company happens to be Countrywide.
Ms. Winnecour, in a motions, alleged that Countrywide destroyed, lost, or misplaced $515,000 in checks made by homeowners trying to save their home. She further alleged that after destroying, loosing, or misplacing the checks, Countrywide added improper charges to the homeowner’s debt in many cases – nearly 300. Countrywide threatened the integrity of the bankruptcy process by dishonoring its obligation as a creditor to provide a truthful and accurate account of the funds it has received. Countrywide acknowledged errors in handling some debts, but it had denied any systematic effort to thwart bankruptcy protections to collect money.
Countrywide cut a deal with Ms. Winnecour and $325,000 to settle allegations. Countrywide agreed to reconcile its records with the trustee’s (Ms. Winnecour) in regards to the amounts owed them by the borrowers in the case. If the figures aren’t in agreement, Countrywide can either change its figures to agree with the trustee’s or show reason why the trustee’s numbers are inaccurate. In one of the cases, Countrywide overcharged a homeowner couple for escrow to cover property taxes and insurance. Countrywide agreed to nullify the money it claimed the couple owed them as well as waive future escrow requirements and pay their attorney’s fees.
On August 11, the settlement terms came up for approval before U.S. Bankruptcy Court Judge Thomas Agresti. The settlement is now being challenged by the Justice Department. According to the Justice Department, the settlement’s non-disparagement clause may impede, impair, or otherwise chill witness testimony in the government’s ongoing investigation of Countrywide. Under the settlement, Ms. Winnecour could not in any manner directly or indirectly disparage Countrywide, and she had to ensure that her employees did not criticize Countrywide. According to the Justice Department, this is nothing but an attempt to silence a critic, and the settlement posed a threat to the government’s attempt to rein in Countrywide’s allegedly abusive tactics with consumers and with the courts. The challenge by the Justice Department has resulted in Judge Agresti authorizing a probe of Countrywide’s mortgage processing system by the United States trustee.
With the challenge by the Justice Department, the government hopes to send out a tough message to companies like Countrywide who have time and again used abusive tactics against helpless borrowers and got away with it using their clout.
By G.L.C., on August 15th, 2008
The Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) together own or guarantee almost half of the $12 trillion home mortgage debt. These are two of the largest financial institutions in the country.
Although Freddie Mac and Fannie Mae are government sponsored enterprises, they are privately owned. They enjoy special privileges. They need not register their securities with the government, pay state and local income taxes, and are conferred special treatment for investment purposes. The securities issued by them have the aura of a government guarantee. In the credit markets, these securities are priced as low risk investments. This enables them to place their securities at lower yields in the financial markets than would have been otherwise possible.
Both companies were created to facilitate the availability of mortgage finance to homeowners at affordable rates.
When the sub prime crisis hit America, the fortunes of these two companies were affected to a great extent. The widespread repossession and distress sale of home through out America caused a general decline in home prices which led to negative equity and delinquency in respect to several mortgages that these two companies had owned or guaranteed. They were terribly over-leveraged to such an extent that the edifice came crashing down. The problems were so serious that the government had to step in and pass a law to prevent these two companies from collapsing.
There are some lessons to be learned from all this. The concept of privately owned entity and government sponsored enterprise are contradictory. Lenders carefully consider the financial health of a privately owned entity and limit exposure to prudent level. They are subject to market regulations such as registration of securities, payment of state and local income tax, etc.
A government sponsored enterprise has an aura of implicit federal government backing. It enjoys several benefits and is not subject to strict scrutiny by lenders and investors. It is not subject to the same market regulations as a privately owned entity.
The government has so far managed to keep the liabilities of Freddie Mac and Fannie Mae out of its balance sheet. But because they are government sponsored enterprises, the government may be forced to turn to the tax payer to bail them out.
The shareholders of Freddie Mac and Fannie Mae have made huge profits over the years on account of the special privileges the companies enjoyed as government sponsored enterprises.
Because of the government sponsored enterprise status these two privately owned entities enjoy, the shareholders of these two companies have been able to rake in profits, but now that these two companies are in financial distress, they have turned to the government who had to bail them out. In the end it is the tax payer who is forced to pick up the tab for the financial mismanagement of two privately owned entities because they happen to be government sponsored enterprises.
The new law does not address the issue at all. So long as these two companies enjoy special privileges as government sponsored enterprises, the shareholders will rake in the profits and the government will have to step in (at the cost of tax payers) every time these companies are in financial distress. The law should have made these companies subject to tougher market regulations.
By G.L.C., on August 6th, 2008
Fannie Mae and Freddie Mac together own or guarantee almost half of the $12 trillion home mortgage debt. In an attempt to rein in Fannie Mae and Freddie Mac, President Bush, on July 30, signed into law a package to resurrect the mortgage industry by pumping in $300 billion to help distressed homeowners get more affordable, government-backed mortgages and get out from under risky mortgages they cannot afford. The new law creates a stronger regulator for the two companies and gives the government the option to take equity stakes if the two companies run into trouble. In order to spur home buying, it offers tax breaks, sets up the first national licensing system for mortgage brokers and loan officers, and raises the limit on the size of mortgages that Fannie Mae and Freddie Mac can guarantee. The markets welcomed the new law and the shares of the two companies initially rose.
But whether the new law will succeed in reining them in is doubtful. The main reason the law might fail is the immense lobbying clout of Fannie Mae and Freddie Mac, which is imminent from the fact that a proposal to eliminate their lobbying budgets was not even put to a vote on the Senate floor. Majority Leader Harry Reid refused to allow a vote on Republican Jim Reid’s amendment to bar political donations and lobbying by the two companies.
Lobbying by Fannie Mae and Freddie Mac is nothing new. According to an editorial in The Wall Street Journal, the political action committees of the two companies have already distributed roughly $800,000 to U.S House and Senate members this election cycle.
According to the Fannie Mae Foundation website, Jesse Jackson’s Citizenship Education Fund has received $660,000 from Fannie Mae alone since 1996. In the 1990’s Jesse Jackson accused these companies of discriminatory lending practices, but the allegations disappeared once the money started flowing.
On the positive side, the law aims to alleviate home foreclosures via a government guarantee that both penalizes the lenders and gives the government a share of the upside if prices recover. But this provision is voluntary and is likely to have only a few takers. Throwing government cash at a market that is already heavily distorted by tax breaks and subsidies is certainly not a good idea, especially at a time when house sales, if not prices, look at last to be bottoming.
There is virtually no protection for the American taxpayer. It imposes no changes in management or approach on the companies and no penalties on shareholders. The current arrangement allows managers and shareholders to take all the profits and leave the losses to the taxpayer. Under the pretext of protection, the new law gives the treasury secretary the right to dictate terms if the government does have to stump up equity capital and create a new regulator.
The new law might not succeed in reining in the two companies. It has too many loopholes. Loopholes apart, unless lobbying by the two companies is barred, the taxpayer might end up paying a heavy price to save these companies. There is no reason to permit these two companies to lobby Congress when government departments are not allowed to do so.
By Evelyn Black, on August 5th, 2008
 If you aren’t feeling seasick yet from watching financial markets shoot up and then plunge over and over again over the course of the past year, you must be one of those sane people who ignores the market unless a line is spotted extending down the block from your own personal bank and brokers are raining down from rooftops like cats and dogs. If you are one those lucky few, good for you!
The rest of us are a little queasy at this point.
Since November of last year we have witnessed the kind of drama on Wall Street that belongs in a horror movie, not in a field of finance that impacts our 401(k)s. We’ve watched the Fed, Congress, and the President react with this, that, and the other emergency measure, and with each magic trick, we held our collective breath and watched and waited to see what came next.
While it’s great that the Fed and our branches of government are able to think creatively and act nimbly in the face of possible financial systemic meltdown, it would be even more wonderful if it seemed that anyone actually had a handle on how to smooth the waters with consistent policy that is forward-thinking rather than reactive. It strikes me that each emergency fix (the last one being the Fannie/Freddie rescue package) leaves us less confident than before. Lack of confidence in a financial system is, in general, a bad thing. So while we are in a lull here (knock on wood), I’d like to raise the question, “What, if anything, is the hard choice that will get us back on track over the long run?”
On Sunday, the New York Times ran an editorial about ailing banks and a request by private equity firms for the Fed to drop regulations preventing them from running banks into which they invest large sums of money. Currently, federal law prohibits this to prevent conflict of interest and a too-great concentration of economic power into elite hands. With so many banks hurting for capital and in need of cash infusions, it must be tempting for the Fed to take this proposal seriously and quietly allow something that nine out of ten ordinary people won’t notice anyway let alone understand.
The Times makes the point that this is a terrible idea, not the least of the arguments against it being that it is private equity firms and financiers who operate outside the scope of bank regulation who got us into this mess in the first place. By creating and promoting highly-speculative, mortgage-backed investment securities, they nearly crashed the entire system. To back off on regulation right at at time when what we need badly is more, not less, oversight is tantamount to giving the fox the key to the hen house and hoping that it will all just work itself out, somehow.
The real problem of course is, where is the money banks need going to come from?
Congress can pass all the bail-out bills it wants, but the fact remains, the U.S. is not exactly rolling in it. Cash, that is. If regulations are not relaxed so that private equity firms can bail out banks and then run them however they see fit, what will happen to the banks?
The banks will fail, that is what will happen to them. The one possibility that we rarely hear put forward as a serious solution is that maybe that is exactly what needs to happen. Why are we trying to prop up a banking system that made one disastrous greedy decision after another without regard to the consequences of those actions? If the free-market is self-regulating (and that’s another discussion entirely, the question of whether or not it really is), then why don’t we let it regulate itself by weeding out the weak?*
To take an even longer view, at some point the U.S. will have to set actual policy and stop jumping in with wads of emergency-measure chewing gum to plug the financial dikes. Why do we have a private organization (the Fed) calling the shots on regulation and deregulation that directly hits the pocket books of ordinary people? We are all paying for this: all of us except the CEOs and high rollers who jumped with golden parachutes or escaped with cash before the train started to derail. Those people, those few at the very top, are mostly coming out unscathed. That’s wrong. Everyone knows it is wrong. No one is speaking to that injustice much less taking any aggressive action to change it.
Instead, we have vultures hovering and foxes circling, holding out wads of cash and asking for special favors. And Congress, after having very self-righteously accomplished exactly nothing in regards to energy policy (Democrats wanted to slap the hands of oil speculators who aren’t responsible for high gas prices, and Republicans wanted to drill offshore even though it won’t help either), is now adjourned and the country is talking about whether or not Barack Obama has anything in common with Paris Hilton and Brittany Spears.
That is insanity on a plate.
The hard, longterm fix is to find a way to tie money to actual value again. I know this will sound dusty and lame to fast-track types who are energized by leverage, but somebody has to say it, and since I’m already old I don’t mind throwing it out there. You can make money by moving money around, scrambling numbers, and gambling on outcomes for awhile, but eventually the smoke clears, the mirrors crack, and what do you have? You have what we are looking at right now.
I have three modest proposals, none of which will be taken seriously even in my dreams, but here they are:
1) Create a comprehensive and aggressive national energy policy which includes subsidies for development of alternative energy, generous tax rebates for homeowners who invest in it or in energy conservation, aggressive development of alternatively-fueled vehicles, and redesign and rebuilding of infrastructure. This alone will create new jobs and reduce our dependence on foreign oil. It should be our top priority. Right now it isn’t even on the edge of the map. Energy policy? What energy policy?
2) Require lending institutions to reduce the principal on their property-backed loans to a number that is more in line with the actual value of the property, and then take the loss on the difference. This will cause some financial institutions to go under. Oh well.
3) Re-examine and re-work banking regulations so that banks cannot skirt their fiduciary responsibilities by running around Depression Era safeguards using investment houses and third party financiers. The American people should be involved in this, meaning that it should go through Congress and be discussed publicly at length, not hammered out in private at the Federal Reserve.
If we have to foot the bill for misconduct, we should get a say in what the rules are and how they are enforced. It strikes me that this should be the very least we could do in the interest of fairness and longterm success. It distresses and angers me that to date so little has been done.
The next wave of defaults is just around the corner. How about getting a comprehensive plan together before it hits instead of after?
I don’t know how much more nausea I can personally take.
*Editor’s note: For the Austrian economics point-of-view on allowing Fannie Mae and Freddie Mac to fail on their own, see J.D. Seagraves’ article “Fannie Mae and Freddie Mac: It’s Time for the U.S. to Let Go.”
By G.L.C., on August 1st, 2008
In the past lenders held on to mortgage loans as they were made. Today, the situation is very different. Lenders package mortgage loans into securities and sell these securities to investors. This practice gives rise to one issue at the time of foreclosure – who owns the note on the home? This issue can cause a legal headache at the time of foreclosure due to the murkiness surrounding the notes. Many homeowners are now being forced out of their homes by companies that have no right to do so. This is very scary – there are many states that allow non-judicial foreclosure – foreclosure without judicial supervision.
The issue of who owns the note has been highlighted in the case of Mamie Ruth Palmer, a 74-year-old from Atlanta, GA. She had to endure six years of foreclosure hell. She had to file for bankruptcy protection in 2002 to save her home from foreclosure. She continued to make the payments to the bankruptcy court. Her lender had assigned the note securing her home to Bank of America who began levying fees that were not authorized by the bankruptcy court. She sued Bank of America and received a settlement which reduced her loan balance from over $100,000 to a little over $59,000 and also eliminated the foreclosure fees of about $12,000. The issue which made Bank of America offer a settlement was the assignment of the note securing her home, which happened two months after they started foreclosure proceedings against her. So, basically, when Bank of America had started the foreclosure proceedings against Ms. Palmer, they did not have any right to do so.
A major problem which homeowners face when the lender assigns the note is not knowing whom to call when faced with foreclosure. Unlike in the past, today homeowners do not know who holds the note. It could very well be a faceless investor.
A court in Brooklyn, NY, so far this year granted only one lender the right to foreclose. The remaining 13 were not allowed to foreclose. Courts have now started asking lenders to prove their right to foreclose and certify the accuracy of the documents.
Georgia has passed a new law which requires all lenders moving to foreclose to file proof in county records that they own the underlying property. The law also requires that borrowers must be made aware of whom to call when faced with foreclosure. The lender must send a warning letter listing the name, address, telephone number, and other contact details of the entity that can modify the loan or work out repayments.
The message to the lenders is clear – they have to foreclose the right way following the due process of law.
By J.D. Seagraves, on July 28th, 2008
Conservatives talk about how great America’s “free market” is, while those on the political left are critical of the “free market’s excesses.”
What are they talking about?
We have nothing even closely resembling a “free market” in the United States, and the latest news surrounding Fannie Mae, Freddie Mac, and the Federal Reserve underscores that point.
People are generally confused about Fannie and Freddie: Just what or who are they? Well, let’s start with Fannie: Fannie Mae is the nickname given to the Federal National Mortgage Association (FNMA), an agency created four years after the Federal Housing Administration (FHA), which was one of FDR’s New Deal programs. The FHA, born in 1934, sought to “standardize” mortgages by insuring loans that conformed to government guidelines. The FNMA (Fannie Mae) would then buy these mortgages from the originators and pool them into marketable securities – i.e. financial assets that could be bought and sold by investors. An FNMA security might contain 100 mortgages, for example, and that way, if five of those mortgages failed, investors would only lose out on 5% of their investment. In this way, the government sought to lower the “credit risk” premium of mortgages and make homeownership more affordable to average Americans.
Sounds good, right? Well, there’s always a catch. But first, let’s continue with Freddie Mac.
In 1970, the government gave Fannie Mae the authority to purchase and securitize any mortgage – not just those that adhered to FHA guidelines – and created the Federal Home Loan Mortgage Corporation (FHLMC – “Freddie Mac”) to do Fannie’s old job. Now the government had it’s hands in virtually every kind of mortgage imaginable – though exactly where this power was enumerated in the Constitution is unclear.
Of course, Fannie and Freddie aren’t truly government agencies. In rejecting socialism, the government opted for fascism: government partnership with business. Fannie and Freddie are “privately owned” publicly traded stocks on the New York Stock Exchange, so their profits are privatized…but their losses are always socialized.
Since the mortgage meltdown – created by the Federal Reserve’s inflationist monetary policies – Fannie and Freddie’s stocks have been in the toilet. Over the past couple of weeks, each of the firms has lost billions in market capitalization. On July 10, Fannie closed at $13.20 and Freddie at $8 – the 52-week highs for the stocks are $70.57 and $67.20, respectively. During the next day’s trading, Fannie and Freddie hit session lows of $6.68 and $3.89.
And then the Fed intervened.
Chairman Bernanke announced that the Fed would stand by to bail out the firms, and the stocks – down as much as 40% for the day – rebounded, closing at $10.25 and $7.75, respectively.
Think this isn’t a big deal? Consider this: The swing from $6.68 to $10.25 for Fannie Mae represented a change in value worth nearly $3.5 billion, and Freddie’s swing from $3.89 to $7.75 was worth $2.5 billion. In all, $6 billion changed hands on Friday, all based on a few words from the Fed chairman. The investors who threw in the towel, recognizing that, in a free economy, Fannie and Freddie would be done-for, were suckers. Those who stepped in to buy the stocks at that point, confident that the government would intervene, profited by billions.
And they call this a “free” market?
Just imagine if some investors might have had some advance knowledge that Bernanke would make those comments.
By G.L.C., on July 24th, 2008
Record numbers of homeowners are trying to avoid foreclosure. One of the options available to such homeowners is loan modification. A loan modification is a permanent change in one or more of the terms of the loan allowing the loan to be reinstated and resulting in a payment the homeowner can afford.
For a loan modification to be effective, it must reduce a loan’s interest rate or balance or extend its term. Common loan modifications include:
1. Adding missed payments to the existing loan balance
2. Making an adjustable-rate mortgage into a fixed-rate mortgage
3. Extending the number of years you have to repay
The nation’s 27 biggest lenders have formed an alliance called Hope Now to help homeowners facing foreclosure. The biggest mistake here is that society is relying on the lenders to fix the problem – the very problem created by their reckless lending. Very little is known about the success rate of such loan modifications. Very little data is available about its effectiveness.
The loan modification process is simple, fast, and easy and saves the homeowner a significant amount of money compared to the time and costs involved with a traditional mortgage refinancing. At least that is what it is supposed to be. The reality is very different. Many homeowners have found that the modifications they received are unaffordable. The new monthly payments end up only slightly lower than the original monthly payments. According to a report by the State Foreclosure Prevention Working Group, about 32,000 loans which were recently modified are delinquent again.
Majority of the loan modification programs offer temporary and modest reduction in the interest rate accompanied by an increase in the overall principal. The increase is due to fees larded onto the loan. The homeowner has no option but to agree to these fees or risk losing his home. According to the California Department of Corporations, of the total 21,359 loan modifications between January and May this year, only 356 – a mere 1.3% – involved a reduction in the principle balance. The lucky few who did get a loan modification may be imperiled by the new terms. The homeowner desperate to keep his home cannot question the terms of the loan modification.
With foreclosures on the rise, the lenders are now inundated with calls from homeowners who cannot afford the monthly payments. The fact remains that the lenders are not geared to provide this service. Their service staffs were trained only to collect the checks at the end of every month. Most homeowners get no help in renegotiating their mortgages. The Working Group’s report reveals that about 70% of delinquent homeowners did not receive any help in renegotiating their mortgage.
There are no regulations governing loan modification process, nor is it supervised by the courts. The process varies from lender to lender. There is no standard process. It is high time that the government wake up and pass some laws to regulate loan modifications.
By G.L.C., on July 20th, 2008
The subprime crisis in the U.S. has resulted in the decline of many companies. Many banks including large ones had to write off millions. The decline is not limited to banks and home loan companies alone.
Out of the total $12 trillion in mortgage debt today, two companies – Fannie Mae and Freddie Mac – own or guarantee half of the debt. Both were established by Congress to make homes affordable for lower and middle income families. They do not provide home loans. Both buy mortgages from banks and home loan companies allowing them to make even more mortgages. They take on the risk of possible default.
The decline of Fannie Mae and Freddie Mac is not an overnight event. It has been building up over the years. Some experts feel the main reason for the decline is their unfair insulation from the real world – they are not subject to the same financial standards and taxes as their competitors. They are also exempt from state and federal taxes.
To be fair, the government did try to regulate them by setting up the Office of Federal Housing Enterprise Oversight in the early 1990s.
They were required to meet certain capital reserve requirements but still much less than their competitors. When the accounting scandals broke out at both companies a few years ago, the government had the perfect chance to set up a powerful regulator and rein them in, but the fear of stemming the housing boom probably held the government back.
It would be wrong to blame the lack of regulation alone for the decline of these two companies. The Securities and Exchange Commission tried to get more actively involved in regulating them, but both companies stymied their efforts.
Instead of addressing their critics, these companies forged alliances with them and other activist groups and made huge contributions to non-profit groups. These alliances and contributions were made to buy off the activists and groups and to make it more difficult for them to criticize the companies.
Congress is now debating on a legislation which if passed could give these companies even more power and allow them to venture into new mortgage-related businesses. Instead of making these companies more powerful, what Congress needs to do is to set up a regulator who can effectively regulate these companies and, at the same time, decide on some sort of a capital cushion for them.
The value of Fannie Mae and Freddie Mac’s mortgage assets are declining along with home prices everywhere. If these companies fail, the taxpayers could be left with the losses.
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