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."

Biden’s Mortgage ‘Relief’ Fuels Higher Housing Prices

It has created another subprime housing bubble and put taxpayers at risk. Trump should end it.

By Allysia Finley. Excerpts:

"The problems began when the Obama administration eased underwriting standards by enabling more home buyers whose debt payments exceed 43% of income to qualify for government-backed loans. Such borrowers are risky because they might not be able to make payments if their income drops or expenses rise.

As home prices climbed, the Federal Housing Administration insured more loans to financially stretched borrowers with as little 3.5% down. No skin off lenders’ backs if borrowers later defaulted, since the mortgages were backed by the government.

In 2007, 35% of new FHA borrowers had debt-to-income ratios above 43%. By 2020, 54% did. As housing prices and inflation surged, borrowers became more stretched. The FHA kept insuring mortgages to borrowers who were increasingly leveraged. About 64% of FHA borrowers last year exceeded the 43% threshold."

"The American Enterprise Institute’s Ed Pinto and Tobias Peter estimate that 79% of FHA first-time borrowers have a month or less in financial reserves"

"About 7.05% of FHA mortgages issued last year went seriously delinquent—90 or more days past when a payment is due—within 12 months. That’s more than at the 2008 peak of the subprime bubble (7.02%)."

"Of the 52,531 FHA loans last year that went seriously delinquent within their first year, only nine resulted in foreclosure."

"The FHA instituted a program that pays mortgage servicers to make borrowers’ missed payments for them."

"The FHA made 556,841 “incentive payments” to servicers over the past year to prevent foreclosures—nearly as many as the new mortgages it insured."

"Another result is that home prices keep increasing because borrowers who don’t pay their mortgages—and never should have qualified for loans—can’t get foreclosed on or be forced to sell their homes."

"Taxpayers are on the hook if the FHA insurance fund—financed by premiums on mortgages it backs—goes broke paying off borrowers and servicers to prevent foreclosures. The FHA annual report to Congress doesn’t disclose the cost of such payments, and the agency didn’t furnish them on my request."

Why should the tax code subsidize home buyers over renters?

See Houses of Lobbyists. WSJ editorial.

"The deduction also disproportionately benefits the affluent, who buy more expensive homes with bigger mortgages. A 2013 Congressional Budget Office study found that 75% of the benefit of the mortgage-interest deduction goes to the top 20% of income earners. Two of three American tax filers don’t even itemize, which means they can’t deduct mortgage interest even if they have it.

It’s also not clear the mortgage deduction is as critical to home ownership as advocates contend. Canada and Britain have similar rates of home ownership as the U.S. (nearly two thirds of their citizens) without a mortgage-interest deduction. If the housing industry really depends on a tax subsidy, maybe it’s time we ask why the U.S. tax code should favor buyers over renters."

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."