The US government has gone from being the biggest player in the mortgage market to being just about the only player. Per recent reports sent by an alert reader, Freddie Mac and Fannie Mae now finance 80% of all mortgages, and the FHA guarnatees another 10%, so these entities now come close to having mortgage finance all to themselves.
Having Fannie and Freddie, be this large, as we mentioned before, is disruptive to the credit markets. The GSE hedging of their derivatives book is pro-cyclical, increasing the amplitude of bond market price moves. Indeed, the Fed was worried that the scale of these operations in 2001, seeing possible systemic risk, but the restrictions imposes as a result of accounting scandals took care of that problem for a while.
First, on Fannie and Freddie, from Associated Press:
Freddie Mac and its fellow GSE Fannie Mae are now financing more than 80 percent of all mortgages in the U.S., up from 40 percent a year ago.
As lenders rely on Freddie Mac to buy their loans, the company is charging higher prices and increasing market share. Freddie Mac, which has a $738 billion portfolio of mortgage bonds and guarantees $1.78 trillion in home loans, is raising prices next month for the fourth time.
“We are nearly the only game in town, and we think we are going to be able to enjoy that position for a number of years,” Piszel said.
On the FHA, from the Washington Post:
For the past few months, nearly every loan that Laura Triplett has closed for customers at SunTrust Mortgage has been backed by the Federal Housing Administration.
“I’ve got another 20 people closing in June and most of them got FHA loans, too,” said Triplett, a branch manager at the bank’s Woodbridge office. “I don’t know what we’d be doing without FHA.”…
The FHA does not lend money directly. It provides mortgage insurance to borrowers through private lenders. That means the FHA will pick up the tab for defaulted loans using premiums it collects from all of its borrowers.
The agency lost relevance when home prices soared and borrowers turned to subprime loans with lower upfront costs. When those loans started defaulting at an alarming rate, many subprime lenders shut down and the FHA started slowly regaining its footing. Its market share is now about 10 percent, up from 2 percent in 2005, according to Inside Mortgage Finance, a trade publication.
Most of FHA’s business now comes from refinancing….
Although the FHA is starting to recapture borrowers it lost to subprime lenders, its loans do not have the features that drew borrowers to subprime loans but later turned problematic.
Only borrowers who can make at least a 3 percent down payment or have at least 3 percent equity in their homes and who can document their income can qualify for FHA loans….
Guy Cecala, publisher of Inside Mortgage Finance, said the FHA remains bureaucratic. “But if your choice is vanilla ice cream or no ice cream, vanilla starts looking good.”