Under Scrutiny, Fannie, Freddie Shake Things Up

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Fannie Mae

Source: US Progress

It’s almost like the boyfriend who keeps messing things up in his relationship, only to promise his girl that if given another chance, he will pay to have her carpet cleaned and never, ever let another Superbowl party get out of hand. It’s similar to what Fannie Mae and Freddie Mac are hoping for. Like the boyfriend that’s been given one opportunity too many, some say this offer is little more than avoiding the inevitable.

Band Aids

It’s been five years since the mortgage crisis kicked off with a bang and ultimately sent the economy into a downward spiral. You don’t have to be a financial whiz to understand that while it’s better, we, as a collective nation, aren’t even remotely recovered from those dark days. One of the bigger and most controversial decisions came when the government had to bail Fannie Mae and Freddie Mac out of trouble. Nothing has been the same since.

Tom Schatz, president of Citizens Against Government Waste, said on Thursday during an interview,

The biggest problem with Fannie Mae and Freddie Mac is that they are financial institutions with a social mission.

Many agree with him and say folks who aren’t financially equipped to handle their mortgages are the ones – and the only ones – benefiting from the consistent loop of government helping hands. This, coupled with high unemployment and even pay cuts are preventing real change from happening. Now, many are saying it’s time to cut those losses and rethink the entire mortgage industry.

Prime First, Then SubPrime

There was a time when the two financial bodies were beneficial to only those with the highest credit scores. It’s not been that way for a number of years, though and it was the passage of the Safety and Soundness Act that many blame. They also say that’s when the problems really began for the two bodies, but only increased with the passing years. Further damage was caused when the National Home Ownership Strategy was put into place that allowed consumers to buy homes with no down payments, which meant there were a lot of 100% LTV (loan to value) mortgages being written. Both Fannie and Freddy got in on the risky practices. And it cost all of us.

Two years ago, taxpayers shoveled out more than $148 billion to the two and worries are that it could go as high as $350 billion. There were warnings things could get bad, though. In 2003, Bush Secretary John Snow told Congress that there lacked a “strong, world class regulatory agency” that could ensure these two mortgage servicers were sound. Because those warnings were taken seriously, this is where it led us. Since being placed into U.S. conservatorship five years ago the two have prevented foreclosures for 2.7 homeowners, including 1.3 million loan modifications. The two entities own or back about 60 percent of U.S. mortgages.

Now, though, there is a growing number who believe it’s time to rethink both bodies completely. Neither Fannie Mae nor Freddie Mac are pleased and as a result, they’re pulling out all the stops to prevent it from happening.

Last Ditch Effort?

An announcement was made today that both would begin offering different mortgage modifications that would benefit many homeowners. The requirements are few. First, the reasons for requesting these modifications don’t have to include any kind of financial hardship documentation. The goal with that is to remove some of the problems that always accompany efforts of collecting the right financial documents. Homeowners must be at least 90 days past due and they must owe at least 80% of the value of the home. Also, it must currently be guaranteed or owned by either of the two.

It’s being called “Streamlined Modification” and it’s slated to kick off on July 1. It will expire two years later on July 31. FHF Director Edward DeMarco explains that the program will simply provide another avenue consumers could use to avoid foreclosure. He also said the agencies would continue to encourage providing certain documentation that could benefit them further, but it won’t be requested simply to qualify a borrower.

Cause & Effect

So does this have anything to do with the nine state attorneys general that sent letters to President Obama and Senate leaders demanding the regulator with Fannie Mae and Freddie Mac be fired? They said he was refusing to allow principal write-downs for borrowers holding Fannie or Freddie mortgages.

Edward DeMarco argues against mortgage principal forgiveness and says the potential costs to taxpayers would outweigh any other benefit and that a ripple effect could occur that included more homeowners ceasing to meet their payment obligations in order to gain their own debt forgiveness.

In their March 15, the state attorneys general in effect joined many lawmakers and consumer advocates who have been requesting DeMarco to be replaced. They say allowing reductions for millions of homeowners would prevent more foreclosures.

Unfortunately, under the leadership of Acting FHFA Director Edward DeMarco, Fannie Mae and Freddie Mac remain an obstacle to progress by refusing to adopt policies that will help maximize relief for homeowners,

the state AGs wrote.

For the past four years, DeMarco has managed to stay under the radar. This is when he took over FHFA and it’s only been in recent months he’s butted heads over the policies. Not only that, but last year, DeMarco seemed to contradict a review by his own agency. He has conceded that write-downs could save Fannie and Freddie an estimated $1.7 billion, which made him appear uncertain or lacking a grasp on how bad these problems truly are.

Many are wondering if this latest program announcement is showing that the agencies are doing little more than damage control. It could be that it is a case of “too little, too late”. At any rate, the program, which as we mentioned goes into effect in a matter of months, could provide much needed relief to homeowners around the country.

Do you think Fannie and Freddie should be disassembled? Do you agree or disagree with DeMarco’s theory that it could result in a ripple effect? Share your thoughts with us.

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About Author

David is a CPA and has spent the past decade as a financial adviser helping clients meet their fiscal objectives. With an appreciation for journalism, he has spent the past few years overseeing several financial columns as well as writing two previous finance blogs. He resides on the East Coast with his wife and two sons and has guided many through the recent recession while providing a no-nonsense approach to spending and saving.


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