Are Sweeping Changes Coming for Mortgage Finance?

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By Kevin G. Hall

RISMEDIA, Dec. 8, 2008-(MCT/RISMedia)-Adding to a mounting chorus in the nation’s capital that the Bush administration must do more to reverse the nationwide housing slump, Federal Reserve Chairman Ben Bernanke on Thursday spelled out several aggressive steps that government could take to fix the main cause of the recession.

“Despite good-faith efforts by both the private and public sectors, the foreclosure rate remains too high, with adverse consequences for both those directly involved and for the broad economy,” Bernanke said, addressing a Fed conference on the housing and mortgage markets. “More needs to be done.”

His comments came the day after reports surfaced that the Treasury Department is weighing new steps that could knock some mortgage rates below 5%, and a day before the Mortgage Bankers Association reported record mortgage delinquencies and foreclosures from July to September.

“We are pleased to see that the leadership of the Treasury Department is seriously considering the actions we discussed to lower interest rates. The result of such action will help the nation’s economic recovery and bring stability to the housing market,” said 2009 National Association of Realtors® President Charles McMillan in a statement. “NAR estimates that lowering the mortgage interest rate by 1 to 2 percentage points can result in up to an additional 800,000 home sales. Housing has always led our economy out of downturns and lower interest rates are key to bringing home buyers back to the market.”

According to the MBA, the delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 6.99% of all loans outstanding at the end of the third quarter of 2008, up 58 basis points from the second quarter of 2008, and up 140 basis points from one year ago on a seasonally adjusted basis, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the third quarter was 2.97%, an increase of 22 basis points from the second quarter of 2008 and 128 basis points from one year ago. The percentage of loans in the process of foreclosure set a new record this quarter.

The percentage of loans on which foreclosure actions were started during the third quarter was 1.07%, down one basis point from last quarter and up 29 basis points from one year ago on a non-seasonally adjusted basis.
The seasonally adjusted total delinquency rate continues to be the highest recorded in the MBA survey. The increase in the overall delinquency rate was driven by increases in the number of loans 90 or more days past due, primarily in California and Florida. The 30 day delinquency percentage remains below levels seen as recently as 2002.

What’s more, “While much of the mortgage problem in some states continues to be overbuilding, poor underwriting and incorrect credit pricing, fundamental economic factors are becoming more important,” said Jay Brinkmann, MBA’s Chief Economist and Senior Vice President for Research and Economics. “The 30-day delinquency rate is still lower than it was in the 2001 recession, but job losses are mounting. We have not gone into past recessions with the housing market as weak as it is now so it is likely that a much higher percentage of delinquencies caused by job losses will go to foreclosure than we have seen in the past.”

Usually, the job of the Fed chairman is to fight inflation and ensure that the economy is growing. However, problems in housing have contaminated financial markets and the broader economy, and they help explain why Bernanke took the unusual step of calling for aggressive steps to end the housing slump.

“Significant efforts have been taken in this direction, but more can be done,” he said.

Here’s a closer look at the housing mess and Bernanke’s fixes:

Q. Why is Bernanke worried about housing?
A. The Fed chairman said that as many as 20% of homeowners now might be “underwater” or have negative equity; that is, they owe more than their homes are worth. In addition, he said, lenders are expected to have started 2.25 million foreclosures this year, a staggering number when compared with the pre-crisis average of fewer than 1 million foreclosures a year.

Q. What’s the Fed doing about it?
A. The Fed said last month that it would begin buying up to $100 billion in debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and would buy up to $500 billion in mortgage-backed securities issued by Fannie and Freddie, the mortgage finance giants that the government seized in September. These mortgage-backed securities are the pooled and packaged mortgages that are sold to investors in a secondary market. Since investors want no part of them, the government is stepping in as the buyer of last resort in hopes of thawing this frozen market.

Q. Is the executive branch doing anything?
A. The Federal Housing Administration is offering FHA Secure, which enables some homeowners with adjustable-rate mortgages that are about to jump to higher rates to get long-term, fixed-rate loans. Congress recently passed the Hope for Homeowners Act, which allows some troubled mortgages to be refinanced into FHA loans if the lenders are willing to take losses and write down the mortgage balances. The FHA Secure program is limited in reach, and Hope for Homeowners hasn’t proved to be very attractive to lenders, who’re unwilling to take losses.

Q. How about the Treasury Department?
A. Industry sources suggest that the Treasury is weighing an idea that would have Fannie and Freddie purchase new government-guaranteed mortgages that carry interest rates as low as 4.5%, a full percentage point below the current rate for 30-year fixed-rate mortgages. This could help borrowers take out larger loans at lower rates, potentially arresting the fall in home prices in areas such as California and the Northeast, where home prices are higher. The plan could prove to be controversial because it would exclude refinanced mortgages from these low rates.

Q. Could anything more be done?
A. Bernanke called for more principal write-downs by lenders, on the presumption that more homeowners are finding themselves with negative equity the longer the national housing skid continues. He suggested changes to the Hope for Homeowners effort, such as lowering the upfront insurance premium that lenders pay, by law 3% of a home’s principal value. Congress also could lower the 1.5% annual premiums that borrowers pay.

In addition, he said, Congress could reduce the interest rates that borrowers would pay under the new Hope for Homeowners loan, now set at 8%. The rate is high because the mortgages are underlying collateral in securities issued by Ginnie Mae, and there’s limited demand for this government-issued debt. The Treasury could buy the Ginnie Mae securities, thus creating space for lower mortgage rates.

Q. Aren’t all these ideas expensive?
A. Bernanke didn’t offer any price tags, but he signaled that any approach is going to be costly and probably will favor some homeowners over others.

Q. Isn’t the Federal Deposit Insurance Corp. helping troubled borrowers?
A. Yes, and Bernanke thinks that this effort, too, can be expanded. The FDIC is modifying distressed mortgages held by the troubled banks it’s taken over, creating a standardized approach called “Loan Mod in a Box.”

Although it’s a limited universe of mortgages, the approach gets mortgage payments to within 38% or less of a borrower’s monthly income, often by stretching a loan into a 40-year fixed-rate mortgage. FDIC Chairman Sheila Bair wants this to become a nationwide approach, but she faces resistance from the Treasury, which thinks it’s too costly.

Bernanke suggested that this effort could be expanded to have the lender modify the mortgage and reduce costs to 38% of income, and where necessary the government would eat the cost of reducing the loan-to-income ratio down to 31%. Bair and Bernanke seek to make existing loans more affordable so that homeowners stay out of foreclosure and don’t drag their neighborhoods’ home values down further.

Q. Why doesn’t the government just buy up all the troubled loans?
A. That’s yet another option suggested by Bernanke, who said the government could simply buy up all delinquent mortgages or those considered at risk because of sliding home prices in hard-hit areas.

These loans would be bought at depressed market value and could make money for the government when home prices rebound. The Treasury already has studied this, the Fed chief said, since the original purpose of October’s $700 billion Wall Street rescue was to help get bad mortgages off bank balance sheets.

© 2008, McClatchy-Tribune Information Services.

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