A perfect storm is coming in the housing market. Millions of mortgages are in default or foreclosure, mortgage rates are firming and mortgage issuers are significantly raising both borrower requirements and fees. The Federal Reserve, which has been propping up the housing market by buying mortgage-backed securities, says it plans to stop buying at the end of March. The $8000 first-time and $6500 homebuyer tax credits are scheduled to end for mortgages that close after June. Meanwhile stocks are up and economists talk about the recession being technically over, which might be true, but for how long?We're in big trouble and, so far at least, nobody seems to have a plan.
And then there's the mystery of Fannie Mae and Freddie Mac, those Government Sponsored Entities that House Finance Committee chairman Barney Frank says have effectively become policy tools of the federal government and ought to be reorganized to reflect that. Yet, in the Fiscal Year 2011 federal budget released this morning there is no sign of Fannie and Freddie's combined $7.2 trillion total corporate debt and mortgage obligations.
"What the Hell is going on? " I asked my friend Jack, the world's smartest mortgage banker.
"It doesn't look good, nor does it make any sense, " said Jack, who talks all day long to other mortgage professionals. "Nobody knows where this is going. "
Fannie and Freddie aren't going away soon, according to Treasury Secretary Timothy Geithner. They are still needed to back more than half of U.S. mortgages, and any replacement entity would probably take at least the three-year shelf life of an average mortgage to be implemented.
So we're stuck with Fannie and Freddie for now, essentially unchanged, the home market is likely to deteriorate as foreclosures accelerate this year... an election year. Absent a miracle, the housing market is going to get ugly, very, very ugly.
If all this seems crazy there is plenty of precedent. When the housing market was imploding in 2008, Fannie and Freddie responded by stiffening lender requirements and raising fees, which would seem to have been exactly the wrong thing to do. But that happened because those changes were already in the works, the decisions made months before the severity of the mortgage crisis became clear. Couldn't Fannie and Freddie have adjusted to the changing conditions?
No. These are bureaucracies. They don't adjust to anything fast.
And that probably gives us a clue to one possible way to soften the coming mess.
Jack, the world's smartest mortgage banker calls it, "Don't Ask -- Don't Tell. "
"Nothing in the short term is going to change the way Fannie or Freddie or FHA do business, " says Jack. "The best they can do is fudge the rules a little bit, which is what I think they will do in this election year. Fannie and Freddie, for example, aren't allowed to back refi mortgages that are for more than the property is presently worth. At the same time there is some precedent that allows them not to require an appraisal at all, and that is where I think things will head when the government begins to panic. "
'Don't Ask -- Don't Tell' would mean you could get out of that Option ARM and into a fixed-rate mortgage at today's rates by having everyone involved pretend that it isn't today's market.
"It's crazy, " says Jack, "but it is within the rules. They can stop asking for a credit score, too -- and will. The minimums won't change and they might even be tightened, but by not asking for an appraisal or a credit score the loans won't technically be out of compliance. "
Don't Ask -- Don't Tell.
