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2010 Conference on the Future of Housing Finance

Written By Brian Hicks

Posted August 16, 2010

I’m sure Obama and Geithner mean well.

But just how much they hope to accomplish in a mere four hours at a housing finance conference is the big question.

Sure, they’ll discuss Freddie and Fannie and take a look at the housing meltdown. They may even look at the coming flood of four million foreclosures.

But come on… Four hours to talk about a disaster that’s years in the making? 

In that limited time, the Administration hopes to engage attendees as they “consider proposals for reforming the housing finance system,” said U.S. Housing and Urban Development Secretary Shaun Donovan. 

“The need for reform is clear and we want to listen to a wide range of views as we chart a course to a more robust and stable housing market that works for the benefit of the American people.”

While we hope for more meetings, we need a solution now.

Millions of homes are being lost to foreclosure… People are strategically defaulting… People are underwater on their mortgages and can’t afford to refinance… And millions face a battle with higher mortgage rates once Option ARMs reset.

So while this meeting is more for political grandstanding, is right now really the best time to take down Fannie and Freddie — even though they have to go? 

Yes and no…

Fannie Mae and Freddie Mac, both having gone through billions of taxpayer dollars, need more money. Are we supposed to give the “black holes” billions more and hope it’s enough when a plan is solidified months from now? 

I say let them fold — they’re nothing more than societal leeches feeding off taxpayer generosity.

Then again, if they are folded too quickly, whatever is left of housing confidence goes out the window.

Do we risk taking down the mortgage market heavyweights — flawed as they are — and hope Wall Street doesn’t become more discouraged with housing? That alone could be dangerous for the overall health and well-being of a frantic market — and wreak havoc on the Fed’s balance sheet.

According to reports, the two companies could be turned into “wholly owned government agencies that buy and hold pools of MBS, which would return to the original, post-Depression model for Fannie Mae,” according to Reuters. “But analysts say such a move is highly unlikely because it would dramatically increase the government’s role and make a dire U.S. budget deficit situation even worse.”

Others want to privatize the firms. But the same report maintains “that also seems unlikely, as government support for housing is seen by many as akin to a birthright.”

Whatever the case may be, Obama wants to deliver a proposal to Congress by January 2011.

And it’ll be quite an interesting outcome.

A world without Fannie and Freddie

The backbones of our housing market are finally buckling under the weight of a faltering market — even after a $400 billion injection. And taxpayers are still responsible for another $6-$8 trillion in obligations because of them.

These two giants were the biggest reasons why the housing bubble popped in the first place. They made it so easy to get a loan that anyone — whether they could afford a home or not — got a loan. Even Timmy Geithner said the two “bought up subprime mortgages without regard to the risk they posed to the system.”

Now, following the Financial Reform Act, Freddie and Fannie are finally getting the attention they’ve needed for quite some time. And there’s no question that Fannie and Freddie can no longer exist in current form.  

Taking them apart would be the “fun” part; but how would we sell off Freddie and Fannie portfolios and keep the mortgage-backed security market from crashing, and keep the Fed’s balance sheet from disaster?

Since the debt of Freddie and Fannie sit on the Fed balance sheets, here’s where it gets tricky… Near term, nothing bad would happen. Their debt doesn’t face capital requirements like the banks do. Long term is where the problem lies. Any negative impact to the Fed balance sheet — in the restructuring or dismantling of Freddie and Fannie — would kill our credibility for overseas investors, according to Money Central.

And that’s the last thing we need.

And let’s not overlook the fact that housing is nearing a double dip. Why would we dismantle Freddie and Freddie with all of that now, risking whatever confidence is left in housing?

So maybe keeping Freddie and Fannie around a little longer — while painfully expensive — could be a good thing.

No one wants to be seen as pulling the rug out from under homeowners. And we can’t afford any more dings in the U.S. armor during a financial crisis that’s still reverberating.

So who is meeting to discuss the future of housing finance?

A closer look at those attending the Obama-Geithner conference
Note: The names were provided by a press release. All notes next to the names are mine.

Barbara J. Desoer, President of Bank of America Home Loans
In an interview with Fox Business, Desoer was asked if Fannie Mae and Freddie Mac stopped buying mortgages or stopped “putting their stamp on them, how much would Bank of America have to charge on a 30-year fixed for it to make sense to make that loan.” Her response:

I don’t know exactly how much it would be but it would certainly be higher. Without that source of liquidity in the marketplace and without developed alternative sources of liquidity to come into the market, prices would absolutely go higher and then the market would need to re-look at opportunities and re-look to other sources of liquidity to come in.  

Ingrid Gould Ellen, Professor of Urban Planning and Public Policy at New York University’s Wagner Graduate School of Public Service and Co-Director of the Furman Center for Real Estate and Urban Policy

The paper* is essential reading as we go through a period of financial reform. The report is described as a timely assessment of alternative proposals for the future of Fannie Mae and Freddie Mac, ranging from nationalization to dissolution.  The paper explains the role Fannie and Freddie have played, explores the goals a healthy secondary market for both single- and multi-family housing should serve, and develops a framework to help understand and evaluate the various proposals for reform.

*Improving U.S. Housing Finance through Reform of Fannie Mae and Freddie Mac: Assessing the Options was co-authored by Ingrid Gould Ellen

Bill Gross, Co-founder and Co-chief Investment Officer of PIMCO
According to the Financial Times:

The Treasury currently backs the debt of Fannie Mae and Freddie Mac, which in spite of ballooning losses are propping up the housing market by buying or guaranteeing new loans. Some conservative politicians and policy experts have suggested that the agencies should be privatised and the government’s involvement curtailed.

Mr. Gross, the co-founder of the Pimco and manager of its $3.4bn Total Return Fund, said such a move would, in effect, cause him to withdraw from the market. 

“Without a government guarantee, as a private investor, I’d require borrowers to put at least 30 per cent down, and most first-time homebuyers can’t afford that,” said Mr. Gross, who will be one of the most prominent private sector participants at the August 17 conference.

That Gross statement alone could shut down any attempt to reform Fannie and Freddie. You’ve gotta love that.

Other attendees include: Mike Heid, Co-president of Wells Fargo Home Mortgage; S.A. Ibrahim, Chief Executive Officer of Radian Group Inc.; Marc H. Morial, President and Chief Executive Officer of the National Urban League; Alex Pollock, Resident Fellow at the American Enterprise Institute (here’s what he had to say recently in the Wall Street Journal); Lewis Ranieri, Chairman of Ranieri and Company, Inc.; Susan Wachter, Richard B. Worley Professor of Financial Management, Professor of Real Estate, Finance and City and Regional Planning at the University of Pennsylvania’s Wharton School (author of “Restructuring Fannie Mae and Freddie Mac”); and Mark Zandi, Chief Economist of Moody’s Analytics.

The year of Option ARM resets… and why there’s no foreseeable bottom

About a year after the Obama Administration unveiled the housing rescue program, foreclosures continue to hit new records. More than 2.8 million properties were foreclosed upon in 2009 — up some 21% from 2008 and up more than 120% from 2007, according to RealtyTrac.

Another 14 million homes are underwater; 2.3 million homes have less than 5% equity. And there are now, according to the Census, two million vacant homes ready to be sold — plus another seven to eight million are delinquent on loan repayment. Mortgage applications are down 40% since the $8,000 rebate program ended.

Deutsche Bank is out predicting that underwater mortgages will effect another six million to 20 million homes by the tail end of 2011. This alone could see a tidal wave of strategic defaults… especially in states with no bank recourse actions — Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington and Wisconsin, according to Housing Watch.

Now, does this sound like a “recovery” in process to you?

Why smart investors are short housing

Those cheering a recovery are overlooking the fact that tax credits (which fueled buys) have expired.

This is why housing plummeted after the credits expired, and it’s the same reason behind home sales just falling 33% in May. 

Just look at what happened to Cash for Clunkers: It paid people to buy cars and sales skyrocketed; but when the program ended, sales plummeted. People were simply shifting purchase plans forward to take advantage of a government gift.

Even Meredith Whitney thinks housing is heading for its second recession:

The U.S. housing market will experience a second recession, forcing banks to post additional loan-loss reserves. Most investors are not baking in a double-dip in housing. You’re going to see banks post additional reserves associated with this double-dip in housing, and that means weak performance going forward.

The picture I’ve painted of the future certainly looks bleak. But you can make money here by going short anything housing related and by buying the very companies that process foreclosures.

Look for more of my articles as I cover the continuing housing crisis in Wealth Daily, and for investment ideas to help you profit in the midst of a double dip.

Stay Ahead of the Curve,

Ian L. Cooper
Editor, Wealth Daily