Fannie and Freddie failing

Feb 9, 2010

Freddie Mac and Fannie Mae were among the first big financial institutions to receive massive federal bailouts after the financial crisis hit in 2008. Government officials have been racing to fix bailed-out car makers and banks and are pushing to reshape the financial-services industry. But Fannie and Freddie remain troubled wards of the state, with no blueprints for the future and no clear exit strategy for the government.

Nearly a year and a half after the outbreak of the global economic crisis, many of the problems that contributed to it haven't yet been tamed. The U.S. has no system in place to tackle a failure of its largest financial institutions. Derivatives contracts of the kind that crippled American International Group Inc. still trade in the shadows, and investors remain heavily reliant on the same credit-ratings firms that gave AAA ratings to lousy mortgage securities.

Fannie and Freddie, for their part, remain at the core of a housing-finance system that inflate d a dangerous housing bubble. After prices collapsed, sending shock waves around the world, the federal government put America's housing-finance system on life support and it has yet to decide how that troubled system should be rebuilt. On Dec. 24, Treasury said there would be no limit to the taxpayer money it was willing to deploy over the next three years to keep the two companies afloat, doing away with the previous limit of $200 billion per company. So far, the government has handed the two companies a total of about $111 billion. The government is "running Fannie and Freddie as an instrument of national economic policy, not as a business," says Daniel Mudd, who was forced out as Fannie Mae's chief executive in September 2008 when the government took control.

Other housing experts contend that prolonged government intervention will make it more difficult and costly to eventually wean the companies off government support. "The more aggressively we continue kicking the can down the road, the larger th e losses become and the harder it becomes" to address the companies' future, says Joshua Rosner, managing director at investment-research firm Graham Fisher Co.
As mortgage delinquencies rise, Fannie and Freddie are required to set aside more capital to cover anticipated losses. Each quarter, if their revenues are insufficient to meet those financial needs, the Treasury has to kick in more money. With delinquencies still rising, the outlook is grim. At Freddie, 3.87% of single-family mortgages were at least 90 days past due at the end of December, up from 1.72% a year earlier. Fannie is worse: 5.29% were 90 days past due in November, up from 2.13% a year earlier.Olick - Obama shifting from HAMP to HAFA (short sales)?Diana Olick picked up on something Seth Wheeler, Senior Advisor to the Treasury Department, said last week. According to Olick: "In discussing the Obama Administration's Home Affordable Modification Program (HAMP), which is arguably less successful than anyone intended, Wheeler made a comment leading some to believe that the Administration may be shifting focus from modifications to another program which simply gets troubled borrowers out of their homes as quickly and cleanly as possible.

Wheeler told ASF members and guests, 'Short sales, deeds in lieu are other ways to prevent foreclosures to help achieve stability in housing. Modifications are only for a certain subset of distressed homeowners.'" Olick points to the widely acknowledged failure of HAMP and suggests that Wheeler's mention of the Home Affordable Foreclosure Alternatives program (HAFA) is indicative of a shift in emphasis for the Obama administration. HAFA specifically targets short sales and deeds in lieu of foreclosure. According to the directive: Servicers must consider possible HAMP eligible borrowers for HAFA within 30 calendar days of the date the borrower: Does not qualify for a Trial Period Plan; Does not successfully complete a Trial Period Plan; Is delinquent on a HAMP modification by missing at least two consecutive payments; or requests a short sale or DIL. According to Olick: "My guess is that last one is the most popular.

The HAFA program offers incentives in this program "upon successful completion of the short sale" or Deed in Lieu. They include borrower relocation assistance of $1500, a servicer incentive of $1000 to cover administrative and processing costs and investor reimbursement of $1000 for subordinate lien releases. That's when the investor allows up to $3000 in short sale proceeds to go to subordinate lien holders. 'It is my belief that the success of HAFA will be vastly greater than HAMP,' sa ys Mark Hanson, a mortgage consultant in California. 'Going forward, figuring out exactly what this means for foreclosures, REO, house sales, housing inventory, values, bank balance sheets, second mortgages, RMBS prices, the builders, the mortgage insurers, and sentiment is where the focus will be.'" Tax rate balloonsCompanies in at least 35 states will have to fork over more in unemployment insurance taxes this year, according to the National Association of State Workforce Agencies. The median increase will be 27.5%. And employers in places such as Hawaii and Florida could see levies skyrocket more than ten-fold. Many of these hikes happened automatically as prolonged joblessness triggered state laws governing their unemployment insurance systems. But at least seven states voted to raise their taxable wage bases, the level of income subject to unemployment tax. And another 10 are looking at upping the wage bases or tax rates. In addition, employers pay federal unemployment taxes. If states don't repay their federal loans, businesses could see their this federal tax go up as well in coming years, said Rich Hobbie, executive director of the National Association of State Workforce Agencies.

Higher taxes dampen employers' ability to hire new workers, crimping any nascent economic recove ry. Companies pay taxes on each employee on the payroll. "There's no doubt it discourages hiring," said Douglas Holmes, president of UWC-Strategic Services on Unemployment and Workers' Compensation, an employers' trade group. "In fact, it leads to increased unemployment." Texas, Hawaii, and Florida are the hardest hit. Consumer credit fallsAccording to the Federal Reserve, total consumer borrowing fell a seasonally adjusted $1.8 billion, an annual rate of 0.8%, to $2.456 trillion in December 2009. Economists predicted a decline in total borrowing of $10 billion in December, according to a consensus survey from November saw a downwardly revised 10.6% decrease, or $21.8 billion, in total consumer borrowing. Sean Maher, associate economist at Moody's said he expected November to be revised upward, but instead it was even more negative -- so December's more upbeat data "doesn't mean we're out of the woods." For all of 2009, consumer debt dropped by 4% to $2.46 trillion from $2.56 trillion in 2008. Revolving credit, which includes credit card debt, fell in December by $8.5 billion, or an 11.7% annual rate, to $866 billion. But nonrevolving credit, which includes car and student loans, bucked the trend. It rose by $6.8 billion, or a 5.2% annual rate, to $1.59 trillion. The data's recent volatility and large revisions make it difficult to make predictions, Maher noted, but he expects revolving credit will fall substantially in the coming months but will start to taper off around June. "Consumers are still finding it tough to get credit, but there are some signs we've reached a bottom," Maher said. The credit crunch should begin easing now, he said, "with breakeven around the middle of the year -- and we're looking for a pretty quick rebound by the second half of 2010." - Home ownership at lowest point in a decadeHome ownership in the United States hit a 10-year low during the fourth quarter of 2009. According to data released by the Census Bureau last week, the homeownership rate fell to 67.2% at the end of last year. Thats down from 67.6 percent the previous quarter and 67.5 percent one year earlier. It represents the lowest percentage of Americans who owned a home since the second quarter of 2000. Homeownership has been on a steady downward slope since 2006, when it became evident that more and more borrowers were put into loans they couldnt afford and housing woes began to eat away at the governments long-time push to make the American Dream a reality for anyone that wanted it.

Regionally, homeownership rates are highest in the Midwest (71.3 percent) and in the South (69.1 percent) where housing is considered relatively affordable. They are lowest in the West (62.3 percent) and the Northeast (63.9 percent) where home prices are on the higher end of the spectrum. Relative to a year ago, the biggest decline, though, was in the South (down 0.7 points) and in the West (down 0.4 points), where you can find the foreclosure hotspots of Florida, California, Arizona, and Nevada. The Census Bureau also reported that the percentage of vacant homes in the U.S. rose from 2.6 percent in the third quarter of last year to 2.7 percent in the fourth. All told, there were 2.09 million homes sitting empty and available for sale at the end of last year, up from 1.99 million three months earlier, the agency said.

As Bloomberg explained, this number includes both listed properties and those that banks have repossessed and have not yet listed.Now on to our real estate investing educational section...Sooner or later every short sale investor encounters a sale in danger of dying. Fortunately, with a few simple steps it's possible to dramatically reduce the risk of spoiling a sale.

1. Get Smart. Prequalify and prepare from first contact. Everyone has an "A" list and a "B" list when it comes to prospective buyers but it's still necessary to put things into proper perspective before spending a lot of time and effort on dead-ends. Remember, the internet helps to eliminate and reject prospects through the use of well placed questions and comments. For example, asking a simple question such as "Is there another home you wished you had bought?" can explain a lot; price range, comfort zone and readiness just for starters.

2. Value-Driven. Tough economic times have led most buyers to become more price conscious than ever; it's no longer enough to simply show a few over-priced homes to prep for an attractive in-house alternative...instead, be prepared to demonstrate real value with low risk. Buyers want to know they won't lose money in the long run by buying a given house or property.

3. Don't Shut Doors on any Deal. Some buyers are just the opposite - they have money and when presented with the right opportunity - are willing to go substantially above and beyond their traditional budget. Don't automatically exclude higher priced properties for those that have the means to make ends meet at a larger than life level. In this situation, recognize the price is not the prime motivator but rather the "right" property. Determine what constitutes a desirable deal then make it happen.

4. Time Right. Timing is everything but it takes time to learn how to distinguish valid help from harassment when working with prospective clients. Too soon and you can quickly cool even the hottest prospect...too long of a delay and you risk having others step in to fill your shoes.
5. Preferred Status. Everyone likes to feel special and as a short sale professional it is your duty to given individualized attention to every prospect....of course, some clients are just a bit more special than others especially when it comes to sealing the deal. Find a few ways to express that little extra something when working with your "A" list clients; meet at a local coffee shop then foot the bill (don't worry - it's a legitimate write-off) or schedule exclusive "preview" showings to the most promising prospective buyers before the big announcement. Remember, it's the thought that counts not necessarily the size of the status symbol.

6. Teach sellers to think like buyers and vice versa. Yes, it's easier said than done but it's all in the wording. By teaching sellers to act like buyers and buyers to act like sellers you assure they will present and demand more reasonable offers. Think of it as a small investment that pays big dividends at closing time.

7. Have a contingency plan in place. Every good investor identifies the "out" long before buying into the given investment - it's no different with short sales. Know when and how you plan to exit the property then have a contingency in place should something go amiss. It's one additional layer of protection that allows short sale investors to sleep easy by knowing they have plenty of outlets for every property.

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