The news this week that Bank of America had settled with the nation’s two giant mortgage securitizers, Fannie Mae and Freddie Mac, by agreeing to repurchase $2.8 billion tanking mortgages was seen by some as a pyrrhic victory for Fannie and Freddie, and a relatively easy out for the bank.
Fannie and Freddie, whose purchases of mountains of bad loans would have put the two government-sponsored enterprises out of business a couple years ago but for the more than $150 billion in taxpayer assistance they have received since, originally had demanded that Bank of America buy back more than $21 billion in risk-laden mortgages. The GSEs said the loans were created by the bank using substandard evaluation methods. Representative Maxine Waters, a California Democrat, told reporters that the settlement “may have been both premature and a giveaway.” Bank of America’s investors may or may not have agreed, but they had a more cheerful response to the situation. As Bloomberg news service noted the other day, the bank’s stock rose 6.4% on Monday, its biggest gain in eight months, shortly after it announced the agreement.
Like breaking eggs, and then putting them back together
While their functions are not always well understood by borrowers, Fannie Mae and Freddie Mac are so hardwired into the nation’s home-loan infrastructure it will be a tricky business for lawmakers to figure out whether and how to dismantle them, restructure and privatize them, or otherwise reshape them, especially since their role as buyers and bundlers of loans that conform to the GSEs’ requirements is still critical to keeping money available for yet more home purchases.
The GSEs’ financial problems have naturally made them more prickly to deal with. As Washington Post housing columnist Kenneth Harney noted on Friday, Fannie and Freddie have both introduced fee hikes intended to help offset the risk inherent in the mortgages they buy. The fees can range from several hundred dollars for borrowers with excellent credit and enough cash for hefty down payments to several thousand dollars for those with merely OK credit and more-modest down payments. Still, the National Association of Home Builders sees as essential the GSEs’ role as a backstop for the housing finance system, even if that role is taken over by other entities, such as the “conforming mortgage conduits” that NAHB suggests could be chartered to provide the same services.
Playing politics with housing finance
If politicians on Capitol Hill manage to keep their minds on their work, this year may tell us a lot about what transformations are in store for the housing finance system. Virtually everyone who takes housing-finance reform seriously realizes that while many voters might not understand the system, changes to it could affect them in major ways and, ultimately, have major political implications. Ideally, lawmakers will create a smooth transition from the Fannie-Freddie era to whatever system they develop. But don’t count on it.
As explained in a recent feature by TheStreet.com, the system has a lot of moving parts, and even longtime advocates of reform realize the fix won’t be easy. “The housing-finance debate,” the story notes, “promises to be ugly and may not be resolved by year-end. In that case, Fannie and Freddie will become yet another campaign issue for the big 2012 election. Much like the financial-reform bill — which led more than a few lawmakers to stake their re-election campaigns on issues as obtuse as trust-preferred securities and derivatives — the electorate may end up learning more than it ever wanted to know about how the mortgage sausage gets made. Yet the dialogue represents more than just politicking; it has the potential to re-stitch the fabric of American culture.”
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