So Much For Free Markets: Federally Sponsored Mortgages at 90% Share

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.”

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  1. burnside

    Yves, since your post begs the question, I’ll pose it:

    Is a three percent down payment or equity position sufficient in the present housing market climate?

  2. RK

    IMHO, 3% is less than the price of a 1 year option on
    an underlying asset. Depending on whether closing costs are folded into the price, or paid direct, that could rise another 2 or 3 percent. In either case, it’s still an option-like price of entry, and as such, the only difference in its behavior will be that, unlike options on securities, there is some initial emotional attachment to it.

  3. Anonymous

    I wish all this blogs were more accurate:
    The US government has gone from being the biggest player

    Should read:
    The US taxpayer has gone from being the biggest player

  4. Anonymous

    It will be interesting to see if this becomes an issue in the election. Is it accurate to say that GSE have an implied government guarantee? Isn’t this a bit like the reliance on the monoline insurers?

  5. etc

    The USG’s unenforceable obligation with respect to GSE securities is as reliable as the prime brokers’ unenforceable obligations with respect to auction rate securities. If you don’t pay for an unenforceable comfort letter, rather than an actual guarantee, it’s hard to complain about nonperformance.

  6. Anonymous

    the politics of revoking the agencies de facto guarantee — domestically and globally, as central banks hold a ton of agencies — makes it next to impossible, for better or worse. Russia would argue it is a form of expropriation.

    yves — i think you left out the last part of the story, namely that the main buyers of the securities that the agencies issue are foreign central banks. the US government and Chinese government have developed an efficient system for channeling Chinese savings into the US housing market …

  7. Anonymous

    The GSE are keeping SFH from falling to levels beyond what anyone can imagine. Not a good omen for future real estate pricing.

  8. etc

    anon 8:48am,

    Never say never. In the past, the US has restricted private ownership of bullion, ownership of foreign stocks and other securities, and imposed windfall and war profits taxes. And best of all, prior to the beginning of the debt bubble in 1979, prevented bankruptcy judges from reducting mortgage debt on primary residences. Lots of countries have explicitly defaulted on large debts explicitly (Argentina) or implicitly through inflation (Germany).

    It is childs play to enhance debtors rights in bankruptcy by allowing judges to reduce debt on primary residences (after all, other types of debt can be restructured, including corporate debt), by increasing exemptions to, say the generous levels provided in Florida, and let FNM and FRE go belly up.

    And as for people crying expropriation. Investors (foreign or domestic) didn’t pay for a guarantee, so they can’t complain about interference with property rights. As everyone knows, only Ginnie Mae securities actually have an enforceable guarantee.

  9. Anonymous

    And Fannie and Freddie are masters of accounting games and definition changes. Lowest delinquency rate, no problem, we’ll just change the definition again. Let homeowners extend payment for another 120 days, but because we spoke to them, they’re not considered delinquent…. tuck it all under the rug. The public is either too apathetic or too stupid to realize it.

  10. Flow5

    JUNE 1980: Dr. Leland James Pritchard, Ph.D. Chicago 1933, M.S. Statistics, Syracuse:

    “One of the principal purposes of the Act (DIDMCA) was to provide the housing industry with a reliable source of funds. That may be achieved through various governmental and quasi-governmental corporations. But the role of the S&Ls in housing finance will probably diminish significantly.

    By becoming commercial banks and having a larger spectrum of loans to choose from, the S&Ls will act like banks and whenever possible eschew “borrowing short and lending long”. Sources of mortgage funds will shift from the subsidized rates heretofore provided by the small saver to “bond-backed” sources which will reflect the higher interest rates prevailing in the loan-funds markets. These factors combined with higher trend rates of inflation should result in a pronounced upward trend in mortgage financing costs.”

    So it took you all 28 years to figure this out?

  11. Ken Houghton

    3% is fine if you can qualify for all the other FHA requirements—which are more stringent than those of WaMu or MoziiloWide or The Big C.

    There’s a reason their share has gone up: FHA only takes worthy credits, and the we-don’t-give-a-**** (to quote Patti Smith) crowd is effectively out of business.

    More FHA should be viewed as a GOOD thing—it means credit is important in the market again.

  12. Tom Lindmark

    The Post article has some misinformation concerning FHA downpayments. The standard is 3% down, however, one third of FHA’s loans were extended under down payment assistance plans. These allow a non-profit to gift the 3% down so in effect you have a 100% loan. Additionally, FHA allows seller contributions equal to 6% of the loan balance.
    In Arizona, the home builders are flogging the down payment assistance program to death. All new advertisements for new homes feature 100% financing. Additionally, the builders are advancing the extra 6% to cover closing costs or pay off judgments and collections in order to qualify for the FHA loan.
    The downpayment assistance program is a circular financing scheme. The seller makes a donation to the charity plus a “handling fee” and the charity makes the gift to the homeowner at the closing table. For the record, FHA would like to see this program go away as the default rate is triple the default rate of its 3% down program.

  13. daveNYC

    If their increase in market share is due to all other players running for the hills, I’m not sure there’s anything that could be done that wouldn’t be even worse for the whole home loan business.

  14. Anonymous

    Forgive what must be a stupid question, but I honestly don’t know: How does this affect private mortgage insurers? Do people not have to get it when their loans are insured by the GSEs? Or is the opposite true?


  15. Sion

    Does this mean that the banks with all the mortgage derivatives on their sheets are betting on loans held by FM and FM?

    Who stands to lose all their money if the meltdown continues?

    Are we looking at a dollar crisis ultimately?

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