FHA Mortgage Guide

JDJ writes and says:

“I’d like to hear your thoughts on the effectiveness of the “world-class regulator” for the GSEs that this legislation would create.

“It seems to me that a strong regulator looking at the Fan and Fred is going to want them to lever way, way down. That would entail buying fewer mortgages and holding onto fewer in their portfolio. Moving away from their current 65 to 1 leverage to something in the high teens.

“This flies in the face of the stated need for the two GSEs to save the housing market by soaking up all the loans they can.

“Also, the provisions that expect the GSEs to pay into affordable housing funds seem to have been written last year at a time when Fan and Fred weren’t losing billions of dollars every quarter. With house prices expected to fall even more, is it really believable that these two are going to be able to sustain funding anything other than themselves (with govt. backstops, of course).

“Once this strong regulator comes out and tells the GSEs that they are in precarious financial shape and need to drastically cut back — and Barney Frank’s head explodes, then what?”

Peter responds and says:

Thanks for your comment.

What we have today is a regulatory blank slate. I am troubled by the speed and haste to “do something” in the absence of hard evidence suggesting a real problem.

Yes, Fannie Mae and Freddie Mac have reported losses. They also have enormous reserves. The important point is that they continue to function, as they are supposed to do.

Now, in response to Bush Administration pleas for more oversight, an ability to lend without limit and an ability to invest (again without limit) the Congress is about to pass a measure which — to me — essentially nationalizes the secondary market without any compensation to private-sector shareholders.

A number of conservatives on Capitol Hill have opposed the FHA reform measure for various reasons. Some now oppose the bill because of the Fannie Mae and Freddie Mac provisions. While I disagree with them on most issues associated with the FHA mortgage reform measure, in terms of Fannie Mae and Freddie Mac they have a very strong case.

There is something strange about the haste to change the nature of Fannie Mae and Freddie Mac with little debate. Let me give one quickie example:

The headlines have repeatedly said that it could cost $25 billion to bail-out Fannie Mae or Freddie Mac according to a study by the Congressional Budget Office. The study says that — but that’s not all it says.

“On July 22, 2008, CBO transmitted an analysis of the Administration’s proposal to provide temporary authority to the Secretary of the Treasury to purchase any obligations and other securities in any amounts issued by the GSEs. CBO estimated that enacting that proposal would increase direct spending by $25 billion over the 2009-2018 period. CBO’s estimate for section 1117 of this legislation is unchanged from its estimate of the administration’s proposal. That estimate reflects a greater than 50 percent chance that the government would provide no financial assistance to the GSEs over the next 17 months, and nearly a 5 percent chance that such assistance would need to cover as-yet unrecognized losses greater than $100 billion.”

In other words, the possible $25 billion expense is the cost over the period of a decade. How possible? There is “a greater than 50 percent chance that the government would provide no financial assistance to the GSEs over the next 17 months.”

Basically, the rush to re-regulate seems curious — at best.

Check out these FHA resources for more information

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