Three years after the housing market collapsed, efforts to clean up the financial mess created by Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC) - the government agencies that largely inflated the bubble - remain stuck in limbo as Washington policymakers bicker over the details.
Meanwhile, the market continues to suffer through the aftermath.
The total value of U.S. single-family homes plummeted by roughly $798 billion in the final three months of 2010. For the year, values fell by more than $2 trillion to $22.3 trillion, according to Zillow.com.
More than 27% of all homeowners are now underwater and mortgage rates are swiftly starting to move up - threatening to kill any chance the market has to rebound from the worst disaster in its history.
Obama's Reform Proposal
The White House on Friday took a tentative first step towards reforming Fannie Mae and Freddie Mac when it put forth a proposal to wind down theagencies, which are now controlled by the federal government.
The administration's "white paper" proposal for replacing the mortgage giants broadly outlines alternative possibilities to reduce the government's role in the mortgage market, including:
- Gradual increases that will eventually raise to 10% the minimum down payment for any loan Fannie and Freddie could buy. Currently, borrowers can make smaller down payments if they purchase mortgage insurance.
- Shrinking the size of the portfolio of mortgages held by government housing finance agencies by at least 10% a year.
- Removing all government loan guarantees beyond those already in place with the Federal Housing Administration, turning most of the market over to the private sector.
The paper also recommends gradually raising fees that Fannie and Freddie charge to lenders in order to make mortgages that aren't government-backed more competitive.
Any of the actions are likely to raise borrowing costs and limit access to affordable home loans for consumers. Administration officials said the transition to a new system could take five years or longer.
It's taken this long for Washington to take on the problems surrounding Fannie and Freddie because there are no simple solutions. Fannie and Freddie buy mortgages from banks and other originators, repackage them for sale as securities and make investors whole when borrowers default.
Shutting them down likely would just add to the $150 billion Fannie and Freddie have already taken from taxpayers' pockets to cover bad loans.
"Someone has to pay it," John Taylor, president and chief executive officer of theNational Community Reinvestment Coalition told msnbc.com. "It doesn't miraculously disappear. We sponsored these loans and now, with the companies going under, we have to make good on the loans."
A shutdown also would leave homebuyers with reduced access to affordable loans. So many private lenders shut down or stopped lending when the housing bubble burst that the two agencies guaranteed more than 90% of home loans written last year, The Wall Street Journal reported.
"We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market," U.S. Treasury Secretary Timothy Geithner said in a statement.
The proposal outlines a series of steps to shrink the government's participation in the mortgage market that could be taken without seeking congressional approval, although the administration would prefer legislative action.
Politicians in Washington have been fighting over how to reform the housing-finance system, with both parties reluctant to propose detailed legislation.
Most Republicans believe Fannie and Freddie were key players in the financial crisis and oppose any solution that would keep them in the business of backstopping most home loans. Democrats have said the government must play a prominent role in ensuring public access to homeownership.
By advancing multiple proposals, the administration could be trying to build consensus around one option, according to The Journal. Some analysts say it may help build the case for a continued government backstop that many administration officials are said to privately favor.
"Most people in Congress understand that this is a very political, contentious issue," said David Berson, a former Fannie Mae chief economist. "It's going to be a very volatile ride as we move toward what ultimately will be the future of Fannie and Freddie. It's hard to know what that's going to be."
More Homes Underwater
As the politicians continue the debate over how to stabilize the loan market, the number of U.S. homes worth less than their outstanding mortgage jumped to 27% in the fourth quarter of 2010, according to Zillow.
Roughly 15.7 million homeowners were saddled with negative equity in their homes at the end of the year, also known as being underwater. The figure was up from 13.9 million in the third quarter, the Seattle-based real estate information company said in a report last week.
Home prices will fall as much as 5% this year, putting even more homeowners underwater, as foreclosed properties sell at discounts and 9% unemployment curtails buyer demand, Stan Humphries, Zillow's chief economist told Bloomberg News.
"These seem like fairly grim numbers," Humphries told Bloomberg in a telephone interview. "We're still expecting a bottom in home values later this year. And this, if anything, makes me a bit more confident because I'm seeing very large corrections now, which means the market can start to repair itself."
Home seizures fell in the fourth quarter as Bank of America Corp. (NYSE: BAC) and other lenders imposed a moratorium after accusations they failed to process documents correctly and hurried the review of paperwork. All 50 states are investigating the banks and may sue to recover unpaid fees.
The sheer number of defaults is also slowing the time it takes for the banks to repossess properties after buyers stop payments. It took an average of 507 days for lenders to reclaim homes in foreclosure in December, 25% longer than in 2009, Lender Processing Services reported this week.
Las Vegas had more than 81% of its mortgages underwater, the highest percentage in the United States, Zillow said. Phoenix was second at 69.9%, followed by Reno, Nevada with 67.9%, and Orlando, Florida at 61.7%.
The median value for a U.S. single-family home was $175,200 in the fourth quarter, down 5.9% from a year earlier, according to Zillow. Values have fallen 27% from the June 2006 peak.
The company's figures exclude homes that are resold after foreclosure, which usually fetch at least 20% less than similar properties, Humphries said.
Mortgage Interest Rates Spike
Yet another challenge to the housing market recovery surfaced last week when 30-year mortgage rates pierced the psychologically-important 5% level for the first time since last spring.
The average rate on 30-year fixed-rate mortgages jumped to 5.05% in the week ended last Thursday, according to a closely-watched survey by Freddie Mac, up from 4.81% a week ago. It was the highest rate in the survey since April.
The spike in rates has been unusually swift. In just three months, the national average mortgage rate has jumped to more than 5% from a record low of 4.17%, according to Freddie Mac data.
The increase in borrowing costs is a direct reflection of a large jump in the yields of U.S. Treasury bonds in recent weeks. The yield on the 10-year Treasury note closed Thursday at 3.712%, up almost 140 basis points over its October low of 2.318%. The increase comes despite buying by the Federal Reserve, which has employed a second round of quantitative easing to keep rates down and sustain the economic recovery.
The higher cost of buying already is discouraging some buyers from entering the market. Mortgage applications have fallen 12% in two months as rates have surged, according to an index compiled by the Mortgage Bankers Association.
But some analysts say the increase may be healthy because it will motivate buyers to take the plunge before rates go even higher.
"The latest rate rise has kicked a few people off the fence; also, it's given a little bit of a wake-up call for real-estate agents to connect with clients who may have been sitting on the fence or arguing over small differences between the bid and ask" home prices, Stephen Calk, chairman and chief executive of Chicago Bancorp, which does mortgage business in 35 states, told The Journal.
But other analysts say another critical element of the market -- refinancing activity -- has already been hard-hit.
"Once mortgage rates reached the 4¾ level in December, refinance activity stopped altogether," said Lou Barnes, a mortgage banker at Premier Mortgage Group in Boulder, Colo. Mortgage applications for refinancing are down 59% from their peak in August, according to research firm Zelman & Associates.
Barnes told The Journal that many buyers think prices have farther to fall, keeping them from stepping up.
News & Related Story Links:
- Wall Street Journal:
Views of Life After Fannie, Freddie
White House wants Fannie, Freddie to go
Home-Price Drop Leaves 27% of U.S. Owners Underwater on Loans, Zillow Says
- Money Morning:
What You Don't Know about "Mortgagegate" Could Crush the U.S. Banking System
- Wall Street Journal:
Rise in Rates Is Headwind for Housing