Fannie Mae and Freddie Mac are effectively buying down the mortgages of distressed borrowers to prevent foreclosures

See America’s ‘Buy Now, Pay Later’ Economy by Allysia Finley. Excerpts:

"About 69% of borrowers who took out a mortgage insured by the Federal Housing Administration last year had debt-to-income ratios that are considered risky, compared with 28% in 2012. For Fannie Mae and Freddie Mac, the share was 38%, up from 16% in 2012.

More borrowers are struggling to pay mortgages, yet it isn’t apparent by official delinquency rates. The reason? The government and Fannie Mae and Freddie Mac are effectively buying down the mortgages of distressed borrowers to prevent foreclosures.

The FHA has waived or reduced monthly payments on nearly 1.2 million mortgages over the past two years—about 15% of its portfolio. Without such forgiveness, delinquencies would be near the levels of the 2008-09 meltdown. Fannie and Freddie have also been slashing and deferring payments on hundreds of thousands of mortgages."

The Truth About the CFPB’s Mortgage Rules

Policymakers need to stop pretending that ever-expanding mortgage leverage is the solution

Letter to The WSJ. 

"In their March 13 op-ed “Trump Harms Consumers by Weakening the CFPB,” Chris Dodd and Barney Frank, authors of the act establishing the Consumer Financial Protection Bureau, note that “the law prohibits the granting of mortgages that burden home buyers beyond their capacity to repay.”

The truth is that the CFPB, through its Qualified Mortgage rule and its ever-expanding debt-to-income (DTI) ratio, has enabled the granting of mortgages that exceed home buyers ability to pay, which has helped fuel rising housing costs. When implemented in 2014, it included a hard 43% pre-tax DTI limit. Then came the loopholes. First through the “QM Patch,” allowing Fannie Mae and Freddie Mac to securitize loans with DTIs up to 45% and, later on, to 50%. Then, it granted the Federal Housing Administration, Department of Veterans Affairs and U.S. Department of Agriculture’s Rural Housing Services the authority to set their own QM rules. The FHA set its maximum DTI at 57%.

It doubled down in 2020, when it rewrote the QM definition, scrapping the DTI limit entirely and replacing it with a rate-based test. We warned at the time that this was a deeply flawed measure of mortgage risk, which would do nothing to curb runaway home prices.

As Federal Reserve Board chairman Marriner Eccles pointed out in 1947: “If [expanded credit] calls forth more production it will be desirable. If it only permits one borrower to bid against another would-be buyer for scarce goods and thus adds to upward pressure on prices, it is dangerous.”

In 2013 only 24% of Fannie, Freddie and FHA mortgages had DTIs above 43%. Today that has nearly doubled. Home prices have skyrocketed 130% since 2013, while wages have risen less than 40%. Policymakers need to stop pretending that ever-expanding mortgage leverage is the solution.

Ed Pinto and Tobias Peter

American Enterprise Institute

Washington"

Rising Loan Limits Are a New Federal McMansion Subsidy

 Biden’s housing regulator order taxpayers to underwrite million-dollar mortgages

WSJ editorial.

"The Federal Reserve’s loose monetary policies fueled housing inflation, and now rising mortgage interest rates are pricing out buyers. So what does the Biden Administration do? Guarantee million-dollar mortgages, which will expand the taxpayer liability and housing-market dysfunction.

Congress created government-sponsored enterprises Fannie Mae and Freddie Mac to guarantee middle-class mortgages and make housing more affordable. Now the Administration is turning a government-backed mortgage into an entitlement for the affluent in coastal areas where zoning regulations drive up prices.

The Federal Housing Finance Agency (FHFA) said Tuesday it will increase the maximum size of mortgages that Fannie and Freddie will cover—known as the conforming loan limit—to $1,089,300 in high-cost areas from $970,800 this year and $765,600 in 2020. The conforming loan limit in other areas will rise to $726,200, from $510,400 two years ago.

Home prices surged during the pandemic as record low interest rates and the Fed’s purchases of mortgage-backed securities reduced costs for buyers and fueled demand. But what the Fed giveth to homebuyers, it taketh as it combats inflation. The interest rate on a 30-year mortgage has averaged 6.8% this month, up from about 3% a year ago. 

Higher interest rates have increased the monthly mortgage payment for the median $454,900 home by about $800 in the last year. In metro areas like Boston, Washington, D.C., and California’s Bay Area, where many homes can sell for more than $1 million, new buyers are having to shovel out $2,000 more per month for a mortgage than a year ago.

New home construction is falling, which could weigh on the economy as housing helps drive demand for household goods. But a correction is overdue and would prevent the housing mania that ended in tears in 2008.

Instead, the Administration wants to prop up housing demand and prices by raising the guarantee limit. This will please the Realtors and affluent, especially in California areas where the median home price exceeds the new limit, such as Orange County ($1.2 million), San Francisco ($1.3 million) and San Jose ($1.7 million).

Sorry to state the obvious, but anyone who can qualify for a million-dollar mortgage doesn’t need the government to subsidize it with a guarantee. The average 30-year interest rate on a jumbo loan is 6.8%, which is similar to a government-backed mortgage.

Borrowers with jumbo loans tend to have higher incomes and credit scores. But these mortgages are getting riskier as borrower monthly payments have risen faster than incomes. Layoffs are increasing in higher-paying fields like tech, and a recession could result in foreclosures. The FHFA is expanding the taxpayer liability at an especially risky time.

After Fannie and Freddie went bust during the housing meltdown, they were placed under government conservatorship and received a $190 billion bailout from Treasury. We argued for shrinking the taxpayer backstop by reducing the conforming loan limit. Instead, the limit has increased by 75% since 2015, which has boosted home prices and taxpayer liabilities.

The more the government intervenes in the housing market, the more damage it does."

The Roots of Government Meddling in Mortgages

Federal Land Banks created in 1916 were the Fannie Mae model. They too went belly up.

From the WSJ, by Judge Glock. Mr. Glock is currently a Miller Center Fellow at the University of Virginia and a Ph.D. candidate in history at Rutgers University.

Excerpts:

"government guarantees, implicit or explicit, are a bad idea with a checkered past. Consider the Federal Land Banks, created in 1916 during the Woodrow Wilson administration. Their history shows that any semi-public mortgage company faces the same bad incentives as Fannie and Freddie did"

"created 12 Federal Land Banks, officially private but with the winking support of the federal government"

"Congress allowed the land banks to have less than half as much capital as other banks at the time"

" It also made the banks’ owners, with little worry about their own risk, overly eager to expand, making those losses even more likely."

"Government support meant that the land banks’ regulatory agency—the Federal Farm Loan Board—instead of working exclusively for the land banks’ safety and soundness, saw themselves as the system’s champions. It wanted, as one regulator said in 1927, not only to “assist the banks, but to persuade, if I may use that word, the public to invest in the securities.”"

"When the banks got into trouble in the mid-1920s due to loans given on poor and unproductive land, the Loan Board worked to cover up dire internal reports."

"federal regulators also filled the banks with political patronage."

"Land banks doled out mortgages in congressional districts whose congressional representatives pressured the White House and Treasury for more loans. The land banks made loans to dozens of senators, congressmen and their relatives"

"The land banks, which had substantially higher losses than other mortgage companies at the time, finally went bust in the Great Depression. Congress bailed them out to the tune of $125 million in 1932. The land banks soon required even more funds and were nationalized a year later."

"The land banks were privatized in 1947 but with similar hints as to their federal backing. They were bailed out during the farm bust of the 1980s to the tune of $4 billion. Fannie Mae in 1938 would be modeled directly on the Federal Land Banks system."