Why You Should Care about the Future of Fannie and Freddie Presented by C.A.R. CEO Joel Singer and C.A.R. Federal Government Affairs Manager Matt Roberts
Items for Discussion Overview of Fannie Mae, Freddie Mac, and Mortgage Finance System Current Legislative Proposals C.A.R. s Position on Proposals Impact of proposals on REALTORS and Clients Questions and Answers
Overview of Fannie and Freddie Government Sponsored Enterprises (GSEs) created by Congress Ensure availability of affordable and stable flow of capital Cannot originate loans, only purchase or guarantee mortgages Under conservatorship since 2008
Mortgage Lending Pre-Great Depression
Securitization
Who Benefits from Securitization? Investors Investment Variety Liquidity Diversification Rating and Transparency Lenders Leverage Reduce Funding Costs Liquidity Risk Transfer Capital Relief Borrowers Lower Borrowing Costs Greater Variety Greater Access to Capital
Financial Timeline 1934 National Housing Act (Creates FHA) 1938 Fannie Mae 1944 GI Bill; VA Mortgages 1995 Affordable Housing 1968 Fannie Mae Publicly Goals Traded 2006 National Home 1968 Ginnie Mae Prices Decline 1970 Freddie Mac 2008 FHFA 1971 Freddie offers first conventional MBS 1987 Freddie Mac Publicly Traded 1992 OFHEO Created 2008 Conservatorship Source: FHFAOIG
Outstanding Mortgage Credit (Fannie Mae)
Fannie Mae & Freddie Mac did NOT Cause the Bubble The numbers show GSE loans outperformed Private Label Securities (PLS) PLS loans defaulted at three- to five-times the rate of GSEs GSEs never should have purchased subprime loans, but they were late to the game
What Caused the Bubble? Regulation Lending Market Rating Agencies Secondary Market Synthetic Market Low Interest Rates Cheap Capital Faulty Beliefs Race to the bottom
Current Legislative Proposals
Protecting American Taxpayers and Homeowners Act of 2013 (PATH)
What s in the PATH Act Elimination of Fannie Freddie over five-year period Removal of a government role in secondary mortgage financing Reduction in loan limits Increases in the Guarantee-Fee Mandatory risk sharing Extreme reform of the FHA finance program
Impact of PATH on FHA Limits FHA financing to only first-time, or low- and moderate-income home buyers Increases downpayment to 5-percent for low- and moderate-income home buyers Lowers loan limits for FHA borrowers Reduces FHA coverage from 100 percent to 50 percent of a loan Mandatory risk sharing
Impact on Conventional Loans During Wind down of GSEs Increasing the G-fee will increase the cost of mortgages on homebuyers Reducing loan limits will make getting a loan more difficult for more buyers in California Mandatory risk sharing will have an unknown impact on the mortgage market
Impact of PATH on Home Buyers Home buyers will pay more for their mortgages with higher interest rates and higher mortgage costs Qualified buyers will not get mortgages because banks simply won t have the money to lend. 30-year, fixed-rate mortgage will be only for FHA loans, or buyers with 20+% down and 760+ FICO scores
Impact of PATH on Financing FHA will be the ONLY counter cyclical form of financing California will be severely impacted as loan limits decrease and less capital is available for your home buyers
C.A.R. s Position on PATH Strongly opposed to the PATH act Remove FHA Reform from the PATH act Ensure adequate government guarantee in secondary mortgage market Ensure equal access to affordable capital by maintaining current loan limits
Share of Mortgage Origination
Mortgage Originations by Product $4,000 $3,500 $ Billions $3,000 $2,500 $2,000 $1,500 $1,000 $500 Alt A Subprime Jumbo Gov GSE Total $0 Source: Inside Mortgage Finance
FHA Share of Purchase Market (New and Existing Homes)
FHA 5-Percent Down Payment Requirement Nationwide statistics
30-Year FRM vs 5-Year ARM
Current Status of PATH Voted out of Housing Bill pushed through Financial Services with no substantive Committee along amendments allowed party lines in July (two Could be moved to Republicans voted floor before the end of No including Gary the year Miller)
Housing Finance Reform and Taxpayer Protection Act (CorkerWarner bill)
PATH Act vs. Corker-Warner PATH Act Would wind down Fannie Mae and Freddie Mac Replaces GSEs with Mortgage Market Utility, no governmentguarantee Corker-Warner Would wind down Fannie Mae and Freddie Mac Replace GSEs with governmentguaranteed Federal Mortgage Insurance Corporation (FMIC)
PATH Act vs. Corker-Warner PATH Act Lowers loan limits Mandatory risk sharing Increases G-Fee Silent on access to home equity loans Drastically reforms the FHA home loan program Corker-Warner Lowers loan limits Mandatory risk sharing Creates a G-Fee for affordable housing fund Limits access to home equity loans Does not address the FHA home loan program
Current Status of CorkerWarner Bill Senate Banking, Housing and Urban Affair Committee has not taken up bill Committee has not addressed mortgage finance reform Committee addressed FHA separately and has voted out that bill which provides FHA with greater flexibility
C.A.R. s Concerns Reform or replacement of GSEs without explicit government guarantee Proposed methods to wind down Fannie and Freddie Continued increase in the GSE guarantee-fee Decrease in loan limits Mandatory risk-sharing of any governmentbacked replacement for the GSEs
Mortgage Finance Reform Efforts House Moving the PATH Act as fast as possible Must address budget and debt ceiling first, but wants to address PATH before end of year Senate Committee Chair Johnson (D-SD) has not committed to when he will move the issue White House Making general public statements, but working behind the scenes to move a bill
Why You Should Care
Impact On Clients Mortgage availability susceptible to market fluctuation Lenders could cherry pick where they make loans Cost to borrowers would increase Home affordability will decline Availability of 30-year fixed-rate mortgages at risk for majority of buyers No countercyclical mechanism for next down market, credit tightening, or market slowdown
Final Thoughts
Questions & Answers
Thank you! A recording of this webinar and this presentation will be available online by end of day Friday, Aug. 23 at http://www.car.org/newsstand/hottopicswebi narseries/