The Mortgage Corner

WASHINGTON (MarketWatch) — This headline just out.  Mortgage-finance giants Fannie Mae and Freddie Mac won’t be directed to lower the limits for mortgages that they back, the new head of their federal regulator said Tuesday. In a departure from his predecessor, Mel Watt, director of the Federal Housing Finance Agency, is generally seen as favoring efforts to maintain borrowers’ access to credit, rather than focusing on winding down the government sponsored enterprises.

This is terrific news for the housing market, needless to say. One of the first actions by President Obama’s appointee to run the Federal Housing Finance Authority (FHFA) is to make it easier for home borrowers and buyers to obtain conforming mortgages—mortgages that are guaranteed by Fannie Mae and Freddie Mac, and which comprise more than 60 percent of mortgages issued these days.

The conforming limits will therefore still be $417,000 for the best conforming rates—3.875 percent with 1 origination point for 30-year fixed rates in California today—and $625,500 for so-called Hi-Balance conforming loans—now at 4.125 percent for 0 points origination in California.

“This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market,” Watt said Tuesday at a Brookings Institution event.

This is while Congress and the White House work on housing-finance reform, with the Obama administration still trying to shut down Fannie and Freddie, even though they are the only agencies willing to guarantee 30-year fixed rate mortgages for middle class homeowners and buyers, and thus are the reason housing is recovering at all.

It is the misguided belief that allowing Fannie Mae to disappear—the Federal National Mortgage Association formed during the New Deal—and Freddie Mac, or the Federal Home Loan Mortgage Corporation, formed in the 1970s to further affordable housing—will no longer make the government responsible for keeping a viable housing market for most Americans.

delinguencies

Graph: Calculated Risk

But that is flatly wrong. Without some kind of federal ‘backstop’ that guarantees both mortgage quality and assurance that banks will continue to lend mortgages, we would not have the housing market and a homeownership rate of today. The early 1980s were the best example of banks and lenders refusing or unable to issue new mortgages when then Fed Chairman Volcker raised interest rates above 16 percent to combat inflation.

The foreclosure rate for conforming loans has always been the lowest of any conventional loans. Fannie Mae reported recently that the Single-Family Serious Delinquency rate declined in March to 2.19 percent from 2.27 percent in February. The serious delinquency rate is down from 3.02 percent in March 2013, and this is the lowest level since November 2008.
And Freddie Mac also reported that the Single-Family serious delinquency rate declined in March to 2.20 percent from 2.29 percent in February. Freddie’s rate is down from 3.03 percent in March 2013, and is at the lowest level since February 2009. Freddie’s serious delinquency rate peaked in February 2010 at 4.20 percent.

So their foreclosure rates are close to the historical average of 1 percent, whereas other ‘private label’ mortgages (those mostly portfolio loan issued and held by banks) have remained above 4 percent.

The FHFA is looking at making sure that the companies operate safely in the current environment, Watt said. Watt, who has been noticeably absent until now from the debate over how to reform the U.S. housing market, said Tuesday that the FHFA has three goals: maintain, reduce and build.

“Since any stumbles along the way could have ripple effects in the $10 trillion housing finance market, there’s a lot at stake in getting this right,” Watt said. But getting it right doesn’t mean the federal government shouldn’t have the responsibility to maintain the viability of homeownership, a responsibility it has kept since the 1930s.

Harlan Green © 2014

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