September 4, 2007: Ick! The Ownership Society of crap mortgage lending that President Bush pushed so assiduously has gone and done an Iraq on the carpet. Attention taxpayers and homebuyers dumb enough to save for real down-payments. The roar you hear at the door is Dubya with a wallet-sucking subprime bailout vacuum. Get ready to do your bit (maybe billions of bits) to clean up after borrowers who put little or no skin in the game, signed dotted lines without reading usurious fine print, gambled that the housing bubble would cover outsize debt, or falsified income and places of residence on no doc liar loans. Then there are the organized mortgage fraudsters who became a white collar crime wave. They're already running foreclosure rescue scams and are dying to dig into a full tilt taxpayer bailout. Not that they don't do enough public money. The U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) have contributed mightily. As have the secondary mortgage market giants, the Government Sponsored Enterprises (GSE).
Look sharp at all those acronyms. Right before the Labor Day weekend, when everyone was busy firing up grills for the last Summer blast, President Bush announced that HUD, the FHA and GSEs will suck up the subprime crisis. Albeit in a “limited” way.
Gee say ye, what's a GSE? Government Sponsored Enterprises are odd birds-- neither government agency nor private sector entity. Fannie Mae and Freddie Mac are the biggest birds. GSEs were originally chartered by Congress. Their mission? To keep mortgage lending and home ownership on an even keel by providing lenders with greater liquidity. As in, a larger and more reliable cash flow. The GSEs create the liquid liquid via a secondary market for residential mortgage loans. Buying bundles of loans from lenders and marketing them as mortgage backed securities (MBS). The secondary market puts buckets of liquidity in lender hands, allowing them to make more home loans and more profits.
Numerous private sector entities also move MBS. Think Bear Stearns et al. The difference is that GSEs are government poodles, exempt from state and local taxes (except property taxes) and with access to a humongous line of credit from the U.S. Treasury. Plus, investors assume Uncle Sam won't let the GSEs fail-- even if their MBS turn rancid. On the GSE down side are restrictions which don't apply to the private sector. For instance, Fannie Mae and Freddie Mac can't buy and sell subprime.
The GSE secondary mortgage market also had a downside: it tended to divorce lenders from responsibility for the quality of their loans. Bad mortgages could be smoothed over by bundling them with good ones. And since bigger mortgages made better MBS, appraisers increasingly found themselves being pressured by lenders to “meet the numbers”. As housing prices climbed past what many people could reasonably afford, underwriting standards sank. Private sector subprime mortgage lending boomed. Subprime turned people with little money and lousy credit into homebuyers via mortgages ripe with EZ credit allure. Bankruptcy OK! No proof of income or down-payment needed! If a down-payment had to be made, interested parties could provide it. Best of all, subprime loans could be based on a borrower's projected future income. Adjustable rate mortgages (ARMs) were a popular subprime product. They start low but explode down the road-- after buyers discover gold in their new backyards.
Subprime mortgages were ultra profitable for lenders and investors. The inability to do subprime diminished GSE secondary mortgage market clout. But as of 2006, Fannie and Freddie still controlled roughly a quarter of the market. And their mission has grown to include numerous HUD based initiatives re “affordable” single and multi-family housing. HUD is official watchdog over Fannie Mae and Freddie Mac through the Office of Federal Housing Enterprise Oversight (OFHEO). HUD's inability to oversee anything effectively is a fact of modern life. In 2004, Fannie Mae and Freddie Mac were discovered to have extensive accounting issues of the Enron variety. Numbers were juggled from year to year to cover rough spots. Freddie Mac is still behind with its financial statements. The accounting scandal caused shake-ups at executive levels and congressional tongue clicking. At one point, it seemed as if GSE oversight might be transferred to the U.S. Treasury Department. But ultimately, HUD hung on to Fannie and Freddie. That HUD never relinquishes anything is another fact of modern life.
HUD also oversees the FHA, which insures mortgage loans made by approved lenders to low and middle income borrowers. FHA mortgages did good things post WW2, but became increasingly subprime-esque over time. Like subprime, FHA mortgages are ripe with EZ credit allure and hidden gouges. (Ask about FHA Downpayment Assistance Programs.) They also run neck and neck with subprime for percentage of defaults. Lucky for taxpayers FHA mortgages lost market share during the subprime blow out. The 3% down-payment requirement and mortgage insurance cut-off point of $362,790 weren't housing bubble friendly enough, and buyers jumped at the chance to avoid lectures by non-profit housing councilors. Still, mortgage fraudsters did manage to party down with FHA mortgages in inner cities, particularly when non-profits with hidden interests kicked in HUD funded downpayments.
As said, President Bush wants his subprime bailout to revolve around HUD, the GSEs and FHA. The initial surge will come from the FHA Secure program. FHA Secure will rescue some 80,000 delinquent borrowers from the threat of foreclosure by insuring their refinanced mortgages. Most of which will be former ARMs, both subprime and non. Only folks with credit histories and verifiable income and assets which meet FHA rigorous standards and scrutiny will become FHA Secure. Those who qualify will receive protections and mandatory loan modification opportunities* from lenders.
“I love feeling FHA Secure” says Joan Doakes “Thank goodness I heard about the program before we lifted our ARM with another job or a loan from Mother!”
“That's right” chimes in husband Joe “My brother Jed is kicking himself for making mortgage payments.”
Also part of the Bush bailout: an FHA Modern surge. Bush and various Dems (including Senate Banking Committee Chairman Christopher Dodd) and HUD head Alphonso Jackson, are pushing FHA modernization. Mod moves would include dropping the 3% down-payment requirement and jacking the limit of insured loans to $417, 000. Both are cutting edge modern at a time when private sector lenders, in response to the subprime tsunami, are tightening standards on down-payments and the size of loans to borrowers with limited finances.
“Zut alors” exclaimed Alphonso as he splashed acid green liquidity on the canvas “these philistines know nothing of how free one can be when taxpayers hold ze bag.”
Future rescue actions will include efforts by Treasury Secretary Henry Johnson and HUD modernist Alphonso Jackson to get private lenders and Fannie Mae and Freddie Mac to develop favorable loans for borrowers who might default if they can't find “more flexible terms”.**
“F--- me” said Jed Doakes as his foot kicked his ass again and again “now they tell me!”
These are just a few of the strategies President Bush will use to battle the subprime crisis. Incidentally, the prez has made it very clear that he means to save hardworking homeowners-- not lenders or the MBS crowd. If the latter are rescued from foreclosure blowback it's merely accidental damage control.
One strategy not mentioned by Dubya: increased funding to the FBI for mortgage fraud investigations.
As for the limited nature of the subprime rescue, it's important to remember that HUD never surrenders territory and President Bush is the guy who once said “mission accomplished”. Also consider that the foreclosure wave is still cresting, a presidential election looms, and candidates are jostling to be dubbed Saviour of the American Dream of Subprime Home Ownership.
Carola Von Hoffmannstahl-Solomonoff
Sources include but are not limited to:
Stop the Subprime Bailout, Patrick.net
U.S. Plan for Subprime Loan Susceptible to Fraud, Neil Roland, Bloomberg.com, 04/12/07
Fannie, Freddie, fight for mortgage market share, Neil J. Morse, Inman News, 05/15/06
Property Flipping: HUD's Failure to Curb Mortgage Fraud, Senator Susan M. Collins, Committee on Governmental Affairs, 09/25/01
*Bush Pledges Help from the FHA for Delinquent Subprime Borrowers, Kenneth R. Harney, Realty Times, 09/03/07
**Bush Moves to Aid Homeowners, Deborah Solomon, Wall Street Journal, 08/31/07
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