Winning: A “Gut Job” Rehab Of Fannie...

Fannie Last week at the National Association for Business Economics convention, acting FHFA Director Edward J. DeMarco delivered the most important speech on the housing market since the crisis.

DeMarco began with a sobering assessment of the current housing market, then introduced a series of bold reforms that offer a clear and realistic path toward the unwinding and closure of Fannie Mae and Freddie Mac.

I am preparing a comprehensive briefing on Director DeMarco's remarks within the context of my lobbying efforts in the next Distressed Property Coalition newsletter. Before I delve into the content of his speech from last week, it is worth addressing two issues briefly. freddie

The first: Why should you care? Isn't this just another speech from a political person that will end up lost in the chaos of Washington politics?
And second: Why is such dramatic reform necessary?

I’ll answer the second question first, because I have discussed it in these articles and in briefings to my clients and subscribers.

Why is Such Dramatic Reform Necessary?

As of today, over 90% of all mortgage originations are supported by the Federal government (Fannie and Freddie). The potential taxpayer liability, as we learned during the housing crisis, is insane. The Federal government cannot guarantee anything if keeping that guarantee leads to a meltdown of the economy. The status quo is untenable and despite the several positive contributions Fannie and Freddie have made to the housing market, they are simply too big to exist in this economic environment, or any for that matter.

Housing reform of this magnitude will impact everyone involved in the industry, and that certainly includes residential investors.

We have fought, and continue to fight, for the role of the small investor in the broader housing market, REO valuation reforms, and government support to expand essential investor transactions such as short sales. If investing is your business, you need to know about seismic shifts coming in the housing market, and we not only provide that information, but are also a key contributor in shaping policy.

Ups and Downs

Mr. DeMarco's assessment of the housing market centered on a list of positive developments, and potential threats to recovery. On the positive side, he discussed recent increases in home prices, higher demand and lower inventory, the historically low mortgage rates, increases in housing starts, and a slight dip in the shadow inventory. He also made some comments about the resurgence of the rental market, noting that rental prices are increasing and vacancies are down.

As for potential threats to recovery, he cited the still substantial percentage of 7.4% of mortgages past due, the large number of underwater homeowners (Florida 40% and Nevada over 50%), the delays in processing foreclosures resulting in vacant properties that cannot be sold, and the potential issue of building new homes in areas with so many vacant properties.

Ultimately his conclusions were neither rosy nor doom and gloom, but simply a fair assessment of where the recovery stands today.

A Much Needed Changing of the Guard

Mr. DeMarco then outlined the blueprint for the future of the housing market. The centerpiece of his proposal is the creation of a new entity that will serve as the foundation of the future of the mortgage market.

The new secondary market will have directors independent of Fannie and Freddie, and could ultimately exist without them. This platform for issuing mortgage backed securities would end the monopoly and risk posed by Fannie and Freddie.

As noted earlier, Fannie and Freddie still completely dominate this market. DeMarco plans to address that issue by:

Raising guarantee fees,
Bringing in private investment into the single-family portfolio, and
Cutting the multi-family portfolio.

The two mortgage giants cannot, and should not, be unwound overnight, but this plan addresses the risks to taxpayers that the status quo presents.

Mr. DeMarco also mentioned continuing to foster existing programs such as the short sale effort and refinancing programs offered by FHFA.

Our Final Assessment

A couple weeks ago I wrote about the obstacles of reforming and eliminating Fannie and Freddie. Past Congressional proposals would not work in my opinion because they failed to address what amounts to the “plumbing” of the housing market.

As I said before, if the depths of our housing crisis have taught us anything, it’s that allowing behemoths Fannie and Freddie to continue propping up 90% of our market is reckless and should not be allowed the continue. The potential taxpayer liability of “too big to fail” is simply insane and a ticking time bomb.

However calling for the elimination of Fannie and Freddie without a viable plan to replace them would also not only be irresponsible, but politically impossible.

Mr. DeMarco's speech is a game-changer, because he has outlined a path of realistic reform and offered Congress and the Administration the foundation to create a much healthier housing market infrastructure.

Rest assured, we will continue to diligently and strategically push for our reform agenda within the context of this transition. We also plan to be heavily involved in the reform process. Our goal is to not only continue to shape the immediate landscape, but work to ensure the new housing infrastructure properly recognizes and protects small investors across the country.