FHFA Monthly Home Prices: October 2011

Today, the Federal Housing Finance Agency (FHFA) released the latest results of their monthly house price index (HPI) showing that, nationally, home prices declined 0.21% since September and declined 3.16% below the level seen in October 2010.

The FHFA monthly HPI are formulated from home purchase information collected from mortgages that have been sold to or guaranteed by Fannie Mae and Freddie Mac.

FHFA Monthly Home Prices: August 2011

Today, the Federal Housing Finance Agency (FHFA) released the latest results of their monthly house price index (HPI) showing that, nationally, home prices declined 0.11% since July and declined 4.16% below the level seen in August 2010.

The FHFA monthly HPI are formulated from home purchase information collected from mortgages that have been sold to or guaranteed by Fannie Mae and Freddie Mac.

Tackling Distress with More Flimflam Policy

While the housing market is continues to weigh on the broader economy, the Obama administration is contemplating its next move in its ongoing attempt to mitigate the economic pain and suffering so duly deserved by the generation of speculative “homeowners” who got caught holding the bag at the top of the market.

Given the sheer enormity of the financial abyss dug by the federal government over the many decades of policy blunders and big government flimflam and in light of the escalating battle between the parties over spending cuts, revenue increases and the debt ceiling, it would seem now would be the most unlikely of times to spin up a new policy designed for saving bankrupt homedebtors from themselves.

But in typical fashion the policy junkies in Washington can’t pass up a “problem” that they think can be “solved” with another helping of federal largess despite the fact that they are simply proposing solutions the problems big-government policy created to begin with.

In the latest round of sham government dealings, the administration is pondering how the federal government can help to clear the nation’s overhang of distressed properties held primarily in the portfolios of the two government sponsored rejects Fannie Mae and Freddie Mac.

There’s speculation that the feds may implement measures designed to encourage investment in distressed properties bringing everyone from “mom and pop” to institutional investors into the fray in hopes that they will be able to mop up the distress.

Others suggest that Fannie and Freddie should convert their massive holdings of foreclosed properties into the largest rental portfolio the country has ever seen.

Imagine it now… the housing market being righted by investors picking up distressed properties using government assistance and then renting them to the very same communities that lost the homes in the first place… what could go wrong?

Who knows but considering the utter failure of past policy such as Fannie-Freddie, the homebuyer tax credit, HAMP, etc. it would seem that another blunder is in the making.

Fannie Mae Delinquencies: May 2011

The latest release of the Fannie Mae Monthly Summary indicated that for data through May, total serious single family delinquency declined notably while still remaining at distressed levels.

In May, 3.17% of non-credit enhanced loans went seriously delinquent while the level was 9.84% of credit enhanced loans resulting in an overall total single family delinquency of 4.14%.

The following charts (click for larger ultra-dynamic and surf-able chart) show what Fannie Mae terms the count of “Seriously Delinquent” loans as a percentage of all loans on their books.

It’s important to understand that Fannie Mae does NOT segregate foreclosures from delinquent loans when reporting these numbers.

Winding Down Fannie and Freddie Starts with Loan Limits

There is probably no better representation of the insanity that swept the nation during the housing mania and just after the collapse than the treatment of the conforming loan limit.

To recap, let’s recall that the “conforming” loan limit sets the maximum loan amount, for which the GSEs (Fannie and Freddie) are allowed to purchase an individual loan.

If a loan is larger than this limit, it is considered a “jumbo” loan and is automatically disqualified from being sponsored by Fannie and Freddie, thus it would have to be handled by the private market (private banks/lenders).

This was a simple enough system whereby one basic piece of underwriting criteria was one of several (there are many other bits of criteria that qualify a “conforming” loan… here we are just concerned with the loan size limit) straightforward qualifying factors dictating whether the government would sponsor a home loan or not.

Now, using the system that was in place before the collapse, this limit would be recalculated once a year using source data from the FHFA… in short, the FHFA would take the October median sales data and use it (along with other procedures) as the basis for the conforming loan limit for the following year.

This meant that, in theory, the conforming loan limits could rise and fall based on the trend of the FHFAs median home price… in theory that is…

Throughout the boom the median prices were rising substantially year after year and, like a good little policy mechanism, the conforming limit was being adjusted up to match the historic run-up in prices and by the peak the limit stood at $417K.

When the housing market soured in 2006 and 2007 though, OFHEO (the Office of Housing Enterprise Oversight… the former regulator of Fannie and Freddie) had to face up to the task of decreasing the loan limit as median prices fell nationwide.

Well, as is typical of this period and of government in general, OFHEO was unable to stand the pressure coming from misguided lawmakers and those with private real estate interests, and simply choose to postpone and decision leaving the conforming loan limit at the prior level.

Then from this point on things really ran amuck… OFHEO came up with a series of haphazard procedures that somehow justified the current limit and stalled further any downward adjustment.

Then, to make matters worse, lawmakers simply refashioned the whole process dismantling the original mechanism entirely and installing a different system whereby a different limit was set for each metropolitan area in the country.

By this point there were areas across the country that had loan limits well over $700K…

So, the dilemma started with OFHEO needing to reduce the limit from $417K and after Washington lawmakers got through with it, the limit was increased to over $700K.

This was a prime example of policy gone wild… While regulators were happy to raise the limit with accuracy each year as prices were rising, they had flatly refused to decrease it as the market soured and finally completely went haywire as the housing collapse stirred panic.

Lawmakers and regulators might say that they were doing the work of the people, stepping in to fill the shoes of a private Jumbo market that refused to lend as the housing market crumbled.

I counter that they worked to encourage the boom by increasing the loan limit (thus pushing up conforming and jumbo loan sizes) continually and supplying endless liquidity for speculators (typical homebuyers and investors) to use to sink themselves in mountains of debt and needlessly inflate the prices of an essential service.

When the market turned, which simply represented reality re-materializing, the housing markets didn’t need more liquidity, they needed less.

The whole public government sponsored scheme of housing debt markets has been an abysmal failure and the conforming loan limit tomfoolery outlined above is but one example of government idiocy run amuck.

The Obama administration is doing the right thing in proposing the winding down of the GSEs and coming out in favor of allowing the elevated conforming loan limit policy to expire this fall.

Lower limits will mean higher interest rates for many homebuyers, particularly those buying homes in excess of $500K, but the intention of the original GSE policy was never to liquefy the top of the market, it was supposed to bring liquidity to the middle class and below.

Fannie and Freddie Must Go

Yesterday’s NPR “On Point” program featured a segment titled “Fannie Freddie and the Sinking Housing Market” which is well worth a listen if only to witness the handwringing that will likely become far more common as the administration moves closer to making real changes in government sponsored housing finance.

Make no mistake, there are many interests that would align firmly against any plan to withdraw government subsidy (which is exactly what mortgage guarantees are) from the nation’s housing finance scheme but most are only now strategizing and determining the best way to position their case in favor of government sponsored housing in light of the fact that Fannie and Freddie are largely viewed as colossal failures.

Longtime readers of this blog should know the drill fairly well at this point… Fannie Mae’s original goal was to help expand and democratize housing finance by creating a secondary mortgage market of insured or guaranteed mortgages but what may have started out as an exercise in basic command-economic policy morphed into a series of reckless actions on the part of the GSEs, multiple administrations, Congress, lobbyists and private financial institutions that ultimately contributed greatly to the collapse of the nation’s housing markets and the major macro-economic decline that ensued.

Let’s recall that while the private label mortgage market (and all the financial engineering involved in the complex synthetic mortgage finance products etc.) was responsible for much of the shoddy underwriting that corroded housing finance during the housing bubble era, many of these private institutions were originating mortgages just to sell to Fannie and Freddie.

For example, in the peak years of 2006 and 2007, Countrywide Financial… probably the poster-boy for shoddy underwriting… was originating 25% of Fannie Mae’s book of business.

In this way, housing finance, in the days building up to the great housing collapse, had become an ever wilder circus of interests and policy with both government-sponsored and private institutions becoming inseparable and mutually responsible for the disaster that ensued.

In proposing the wind-down of Fannie and Freddie, the administration is taking the exact right course… clearly recognizing the mistakes of the past and the inherent weaknesses and instability that is created by having government such a major actor in the nation’s housing finance and restructuring policy to dramatically reduce the government's footprint.

Will this mean that there will be no 30-year fixed rate mortgage or a minuscule private mortgage market with loans directed only at affluent families as was insinuated during the NPR program?

Well… while you will get used to hearing fear-mongering along these lines coming from all the usual organizations (and other lunatics) that have blind interests in simply expanding home ownership at any cost… the reality is that any government guaranteed function in housing finance is simply more of the same and ultimately doomed to disaster.

There is no convincing evidence that the 30-year fixed rate mortgage would fall by the wayside if not guaranteed by a colossal government sponsored train-wreck and, quite to the contrary, there was a very robust market in Jumbo mortgages (primarily 30-year amortizing non-insured non-guaranteed) prior to the massive home price slide that sent investors racing for the sidelines.

When home prices begin a lasting stabilization and the fundamentals of price-income ratio’s rule once more, there will be more than enough investment money for a robust private mortgage market.

Will anyone with a pulse be able to lock-in a 30-year fixed rate mortgage with good terms and a low interest rate? … of course not.

The lending standards by which many millions of Americans (a generation or more) grew to rely on and consider “normal” were simply a distortion created by reckless government policy and overzealous and often fraudulent privateers.

Expanding homeownership at all costs was a failed intuitive embraced by both government and private housing industry groups and we need to recognize it as such.

While zero-entry housing might have been good for home sales and political pandering, its consequences were millions of financially wrecked households struggling through foreclosure and bankruptcy, devastated financial institutions and an economic system teetering on the brink of collapse.

FHFA Monthly Home Prices: November 2010

Today, the Federal Housing Finance Agency (FHFA) released the latest results of their monthly house price index (HPI) showing that, nationally, home prices were flat at 0.06% since October but dropped a notable 4.42% below the level seen in November 2009.

The FHFA monthly HPI are formulated from home purchase information collected from mortgages that have been sold to or guaranteed by Fannie Mae and Freddie Mac.