Fannie Mae-No Politics (FNMA)

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Regulatory Backpedaling

President Obama has done it. Former Fed Chair Ben Bernanke has done it. I think that we all have done it……backpedaling that is. Well if we have done it, it hasn’t had the same consequences as with the aforementioned figureheads. To state one thing, have the masses react negatively, and then nuance your way out of it with verbal spin control is a skill that not many have perfected. Both the President and the ex-Chairman had to learn quickly, as the physical and financial safety of the free world depended on it. Now we have our mortgage market. A lot has been said about how the powers that be were going to reign in the market before it got too hot and implement new procedures to insure that borrowers had more skin in the game, but they weren’t anticipating a 15% fall off in housing activity. Accordingly, the backpedaling has begun.

Former Congressman, Mel Watt, is the new head of the Federal Housing Finance Authority (FHFA). FHFA has regulates both Fannie Mae and Freddie Mac. Recently Mr. Watt was said that the mortgage giants should direct their focus toward making more credit available to homeowners. This was a wet towel to the face moment because just a couple months prior his predecessor stated that Fannie and Freddie needed to get out of the mortgage game and that the private sector needed to increase its percentage share of the marketplace. What a U-turn! Capitol Hill vowed to tamper the easy flow policies, rein in overly aggressive mortgage programs, and find a way to shutdown Fannie and Freddie. This is shocking news indeed.

The Treasury Department and the Fed both have made clear note of the fact that the lackluster housing market is major contributor to the tepid recovery. Recently sales of both new and pre-existing homes fell off of a proverbial cliff. New refinancings are almost non-existent and whole mortgage units at various banks across the country have been shuttered. Moreover, the new regulation requiring borrowers to put down 20% was a dagger to the heart, particularly in high cost states where the average home may be $450,000 or more. A $90,000 down payment is not readily available for the average borrower whose income doesn’t keep pace with the increase in housing prices. Maintaining this requirement forced banks that didn’t measure up, to hold 5% of the loan on its books to “share in the risk,” which most banks don’t want to do.

In the end, HUD got mad. The banks got mad and obviously the borrowers got mad too, as over 10,000 letters deluged the regulator’s offices. As such, they capitulated, and the FHFA backpedaled after having spoken so forcefully about making the market less reliant on Freddie Mac and Fannie Mae. It isn’t Mr. Watt’s role to “contract the footprint” of the two giants, but in effect that’s what FHFA did. Now they have to inform the American citizenry that loan sizes won’t shrink, but instead will grow. It’s a welcome announcement, but it gives the people less security in knowing when a regulator’s statement has any teeth.

I have seen a lot of people get in front of a microphone and talk tough. I am seen a lot of people make big claims about what they are going to do and to whom it will most certainly be done. However, I have also seen many a tough talker eat crow and it applies to the Federal government with regards to the availability of financing needed in our mortgage market. Many forms of poultry are quite savory, but I have heard that eating crow has no flavor whatsoever.

Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance; he can be reached at [e-mail].

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