Sept. 7, 2008
NEWS ANALYSIS: Crunch Time for Freddie and Fannie as U.S. Housing/Foreclosure Crisis Continues
By David M. Kinchen
Huntingtonnews.net Real Estate Writer
This could be weekend when the federal government finally does something drastic about two mortgage giants that are on life support. News reports indicate that as early as Sunday morning, Sept. 7, 2008, Fannie Mae and Freddie Mac could be taken over by the feds under "conservatorship" arrangements that could cost taxpayers tens of billions of dollars.
Shareholders have already lost billions of dollars as the stocks in the two so-called government sponsored enterprises (GSE) -- translation, neither fish nor fowl -- have plunged more than 80 percent this year. After stock markets closed on Friday, the shares of Fannie and Freddie plummeted. Fannie was trading around $5.50 -- down from $70 a year ago. Freddie was trading at about $4 -- down from about $65 a year ago.
A conservatorship would allow for uninterrupted operation of the companies, crucial players in the mortgage market. It's a case of two giants that are too big to be allowed to fail, observers have noted.
The news of what would be the federal biggest bailout in U.S. financial history comes right after the Mortgage Bankers Association (MBA) reported the delinquency rate for mortgage loans on one-to-four-unit residential properties was the highest in MBA survey history. It stood at 6.41 percent of all loans outstanding at the end of the second quarter of 2008, up six basis points from the first quarter of 2008, and up 129 basis points from one year ago on a seasonally adjusted basis, according to the MBA's National Delinquency Survey, released Friday, Sept. 5, 2008.
* * *
News stories in more than 900 outlets on Google News, including Forbes and the New York Times, reported that Fannie Mae and Freddie Mac -- the mortgage finance giants that fund half the U.S. housing market -- are about to become subsidiaries of the U.S. government.
The Treasury Department late Friday was putting together final details of a plan to take the two into conservatorship, a fancy name for government takeover, at a potential cost of tens of billions of dollars to taxpayers.
A Treasury spokeswoman said in an email late Friday, "We've been making progress" on work with Morgan Stanley, its adviser, Fannie and Freddie's regulator, and the Federal Reserve. "As we've said for weeks, we're not going to comment on market speculation."
As part of the conservatorship, the handsomely -- lavishly might be a better description -- paid chief executives of both companies would lose their jobs, but the companies could continue to operate, with quarterly infusions of capital from the Treasury depending on losses. Fannie Mae is headed by Daniel H. Mudd, son of retired newscaster Roger Mudd. Richard F. Syron, chief executive of Freddie Mac, has collected more than $38 million in compensation since he joined the company in 2003.
Fannie Mae was founded as a government agency in 1938 to provide liquidity to the mortgage market. For the next 30 years, Fannie Mae held a virtual monopoly -- until the creation of Freddie Mac in 1970 -- on the secondary mortgage market in the United States.
In 1968, to remove the activity of Fannie Mae from the annual balance sheet of the federal budget, it was converted into a private corporation.
* * *
The increase in the overall delinquency rate was driven by increases in the number of loans 90 or more days past due, primarily in California and Florida. The 30 day delinquency percentage remains below levels seen as recently as 2002.
“The national foreclosure numbers continue to be driven by the hardest hit states continuing to get much worse. The increases in foreclosures in California and Florida overwhelmed improvements in states like Texas, Massachusetts and Maryland,” said Jay Brinkmann, MBA’s Chief Economist and Senior Vice President for Research and Economics. “For the quarter, a majority of the states saw relatively little change one way or the other. California and Florida alone accounted for 39 percent of all of the foreclosures started in the country during the second quarter and 73 percent of the increase in foreclosures between the first and second quarters.”
Only eight states had rates of foreclosure starts that were above the national average: Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana, and Ohio. The remaining 42 states plus the District of Columbia were below the national average. Recent surveys show West Virginia second to last among the 50 states in foreclosures, bested only by Vermont.
“The other factor that continues to drive foreclosure rates is loan type,” continued Brinkmann. “Subprime ARM loans accounted for 36 percent of all foreclosures started and prime ARMs, which include option ARMs, represented 23 percent. However, the increase in prime ARMs foreclosure starts was greater than the combined increase in fixed-rate and ARM subprime loans. Thus the foreclosure start numbers will likely be increasingly dominated increasingly by prime ARM loans.
California and Florida accounted for 58 percent of all prime ARM foreclosure starts in the second quarter and 78 percent of the increase in prime ARM foreclosure starts. The foreclosure starts rates on prime ARMs were 2.47 percent for California and 3.20 percent for Florida, versus the national median of 1.06 percent. The foreclosure starts rate for subprime ARM loans in California was 9.5 percent and in Florida 9.1 percent, about double the national median rate for subprime ARMs.
“Perhaps the question most asked these days is whether we are close to a bottom, in other words, when will delinquency and foreclosure rates begin to head down. The simple answer is that the idea of a national bottom is somewhat meaningless. Real estate markets are local and some markets are already improving. For example, even Michigan, one of the worst hit markets in the country, has now gone three quarters with little to no increase in its rate of foreclosures. Likewise, Massachusetts showed a very large drop in foreclosure starts, perhaps signaling a bottom. Because of the sheer size of California and Florida, an improvement in the national numbers, whether delinquencies, home prices or any other measure, is unlikely until we see some turnaround in those two states,” Brinkmann said.
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NEWS ANALYSIS: Crunch Time for Freddie and Fannie as U.S. Housing/Foreclosure Crisis Continues
By David M. Kinchen
Huntingtonnews.net Real Estate Writer
This could be weekend when the federal government finally does something drastic about two mortgage giants that are on life support. News reports indicate that as early as Sunday morning, Sept. 7, 2008, Fannie Mae and Freddie Mac could be taken over by the feds under "conservatorship" arrangements that could cost taxpayers tens of billions of dollars.
Shareholders have already lost billions of dollars as the stocks in the two so-called government sponsored enterprises (GSE) -- translation, neither fish nor fowl -- have plunged more than 80 percent this year. After stock markets closed on Friday, the shares of Fannie and Freddie plummeted. Fannie was trading around $5.50 -- down from $70 a year ago. Freddie was trading at about $4 -- down from about $65 a year ago.
A conservatorship would allow for uninterrupted operation of the companies, crucial players in the mortgage market. It's a case of two giants that are too big to be allowed to fail, observers have noted.
The news of what would be the federal biggest bailout in U.S. financial history comes right after the Mortgage Bankers Association (MBA) reported the delinquency rate for mortgage loans on one-to-four-unit residential properties was the highest in MBA survey history. It stood at 6.41 percent of all loans outstanding at the end of the second quarter of 2008, up six basis points from the first quarter of 2008, and up 129 basis points from one year ago on a seasonally adjusted basis, according to the MBA's National Delinquency Survey, released Friday, Sept. 5, 2008.
News stories in more than 900 outlets on Google News, including Forbes and the New York Times, reported that Fannie Mae and Freddie Mac -- the mortgage finance giants that fund half the U.S. housing market -- are about to become subsidiaries of the U.S. government.
The Treasury Department late Friday was putting together final details of a plan to take the two into conservatorship, a fancy name for government takeover, at a potential cost of tens of billions of dollars to taxpayers.
A Treasury spokeswoman said in an email late Friday, "We've been making progress" on work with Morgan Stanley, its adviser, Fannie and Freddie's regulator, and the Federal Reserve. "As we've said for weeks, we're not going to comment on market speculation."
As part of the conservatorship, the handsomely -- lavishly might be a better description -- paid chief executives of both companies would lose their jobs, but the companies could continue to operate, with quarterly infusions of capital from the Treasury depending on losses. Fannie Mae is headed by Daniel H. Mudd, son of retired newscaster Roger Mudd. Richard F. Syron, chief executive of Freddie Mac, has collected more than $38 million in compensation since he joined the company in 2003.
Fannie Mae was founded as a government agency in 1938 to provide liquidity to the mortgage market. For the next 30 years, Fannie Mae held a virtual monopoly -- until the creation of Freddie Mac in 1970 -- on the secondary mortgage market in the United States.
In 1968, to remove the activity of Fannie Mae from the annual balance sheet of the federal budget, it was converted into a private corporation.
The increase in the overall delinquency rate was driven by increases in the number of loans 90 or more days past due, primarily in California and Florida. The 30 day delinquency percentage remains below levels seen as recently as 2002.
“The national foreclosure numbers continue to be driven by the hardest hit states continuing to get much worse. The increases in foreclosures in California and Florida overwhelmed improvements in states like Texas, Massachusetts and Maryland,” said Jay Brinkmann, MBA’s Chief Economist and Senior Vice President for Research and Economics. “For the quarter, a majority of the states saw relatively little change one way or the other. California and Florida alone accounted for 39 percent of all of the foreclosures started in the country during the second quarter and 73 percent of the increase in foreclosures between the first and second quarters.”
Only eight states had rates of foreclosure starts that were above the national average: Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana, and Ohio. The remaining 42 states plus the District of Columbia were below the national average. Recent surveys show West Virginia second to last among the 50 states in foreclosures, bested only by Vermont.
“The other factor that continues to drive foreclosure rates is loan type,” continued Brinkmann. “Subprime ARM loans accounted for 36 percent of all foreclosures started and prime ARMs, which include option ARMs, represented 23 percent. However, the increase in prime ARMs foreclosure starts was greater than the combined increase in fixed-rate and ARM subprime loans. Thus the foreclosure start numbers will likely be increasingly dominated increasingly by prime ARM loans.
California and Florida accounted for 58 percent of all prime ARM foreclosure starts in the second quarter and 78 percent of the increase in prime ARM foreclosure starts. The foreclosure starts rates on prime ARMs were 2.47 percent for California and 3.20 percent for Florida, versus the national median of 1.06 percent. The foreclosure starts rate for subprime ARM loans in California was 9.5 percent and in Florida 9.1 percent, about double the national median rate for subprime ARMs.
“Perhaps the question most asked these days is whether we are close to a bottom, in other words, when will delinquency and foreclosure rates begin to head down. The simple answer is that the idea of a national bottom is somewhat meaningless. Real estate markets are local and some markets are already improving. For example, even Michigan, one of the worst hit markets in the country, has now gone three quarters with little to no increase in its rate of foreclosures. Likewise, Massachusetts showed a very large drop in foreclosure starts, perhaps signaling a bottom. Because of the sheer size of California and Florida, an improvement in the national numbers, whether delinquencies, home prices or any other measure, is unlikely until we see some turnaround in those two states,” Brinkmann said.
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