The GSEs made many bad loans during 2008 and 2009. Loan buyback clauses in mortgage-backed securities deals insured by the GSEs is how these loans will become the responsibility of US taxpayers.
Irvine Home Address … 28 BELMONTE Irvine, CA 92620
Resale Home Price …… $675,000
Oh baby, baby
How was I supposed to know
That something wasn't right here
My loan losses are killing me
I must confess, I still believe
When I'm not in homes I lose my money
Give me a sign
Hit me baby one more time
Britney Spears — Baby One More Time
Fannie Mae, Freddie Mac, Ginnie Mae and the FHA all insure loans against default. Investors that buy mortgage-backed securities pools from the GSEs or other governmental agencies know that if the loans in the pools go bad, the insurance will kick in and the insuring entity will either make up the payment or buy the loan back from the pool and make the investor whole. This buyback clause is the mechanism by which bad loans become the responsibility of the insurance pools covered by the US taxpayer.
Ever since the GSEs were nationalized in 2008 — an occurrence preceded by decades of official denial of the implicit guarantee given by the US Government — the GSEs underwrote loans during the crash of the Great Housing Bubble. The government enticed buyers to overpay for real estate with tax incentives. The Federal Reserve agreed to overpay for the bad government paper to lower mortgage interest rates and make affordability possible at very high debt-to-income ratios. As a result, many knife-wielding borrowers caught the market in 2008 and 2009 and prices have at least temporarily stabilized.
Most of the crash buyers will fall underwater over the next several years as the slow decline in prices continues. Rising interest rates and the overhang of distressed properties will pressure market prices. Many of the loans securitized and insured by the GSEs in 2008 and 2009 will go bad. When they do, the GSEs will have to repurchase these loans and eat the losses. Since the US taxpayer is now responsible for the GSEs, the US taxpayer will absorb all GSE losses. These losses will be very significant.
By Lynn Adler
NEW YORK, May 7 (Reuters) – Fannie Mae (FNM.N), the largest buyer of residential home loans, said on Friday its March mortgage portfolio was inflated by buyouts of seriously delinquent loans repurchased from securities pools.
The company's total book of business, gross mortgage portfolio, commitments to buy loans and net and new business acquisitions included about $40 billion of loans it bought back from the pools.
Forty billion in seriously delinquent loans, meaning those over 120 days late. That is a lot of bad loans.
Excluding those repurchases, which will not be reflected as liquidations from the mortgage-backed securities that Fannie Mae holds until April data, the total book of business would have declined 2.3 percent in March. Including them, there was a 2.8 percent increase to a total book of business of $3.263 trillion.
The company, like its counterpart Freddie Mac (FRE.N), is in the process of buying back tens of billions of dollars in troubled home loans that now collateralize its securities. The loans being repurchased are at least 120 days late and are a capital drain.
The serious delinquency rate on Fannie Mae single-family loans rose 7 basis points in February, the latest month for which data is available, to 5.59 percent. The rate rose 4 basis points on multifamily loans to 0.73 percent.
If 5.59% of their portfolio is seriously delinquent. That is a lot of bad loans.
A year earlier, the single-family rate stood at 2.96 percent and the multifamily rate at 0.32 percent.
Fannie Mae also said in its March portfolio summary that the unpaid principal balance of its gross mortgage portfolio spiked by 87.1 percent to $764.8 billion due to the repurchases that were not reflected as liquidated from the MBS trusts yet.
As of March 31, the gross portfolio end balance, taking into account $25.5 billion in net commitments to sell mortgage assets, stood at $739.3 billion, Fannie Mae said.
Retained holdings were $725.9 billion in February and $783.9 billion in March 2009.
Fannie Mae's total debt outstanding grew to $800 billion in March from $767 billion the prior month. A year ago, the company had $869.3 billion outstanding.
Fannie Mae has yet to report first quarter earnings.
But Freddie Mac on May 5 reported an $8 billion first-quarter loss, which included a dividend payment on senior preferred stock owned by the Treasury Department, and asked the government for an added $10.6 billion in aid.
That draw would bring federal aid for Fannie Mae and Freddie Mac to more than $136 billion.
The Treasury has provided an open credit spigot for the two companies through 2012.
Your potential losses are unlimited. During the Christmas holidays last year when nobody would notice, the $400 billion cap on assistance was removed. No matter how large the bill gets, the US taxpayer will take on the losses. That is a lot of bad loans.
Fannie and Freddie were taken under government control in September 2008, in the midst of the deepest housing crisis since the Great Depression, as loan defaults and record foreclosures slashed their capital.
Fannie Mae is spreading its larger amount of loan buyouts over several months whereas Freddie conducted the lion's share in a single month.
In the aftermath, Freddie reported on April 30 the first decline in the single-family delinquency rate in three years. Still, the 4.13 percent rate in March was well above 2.41 percent a year earlier.
Freddie Mac reports a statistical blip after three years of constant, significant, and unprecedented rises in its delinquency rate. Happy days are here again, right?
The takeover the GSEs was engineered as a stealth bailout of the banks. If bank loans can be redone and repacked with government backed insurance, the losses are transferred from the banks to taxpayers. The losses from the GSEs and the FHA will mount. Some of these losses will be hidden on the Federal Reserve's balance sheet, but most will be covered by the general obligations of the US Treasury. That's you and me.
Now that we are all absorbing these losses, perhaps we should go along with whatever the banks want? Or worse yet, perhaps underwater homeowners should keep paying their oversized mortgages and "take one for the team?" Our leaders made poor decisions. We should not be liable for the bailout of banks either directly through TARP or indirectly through the GSEs. The poor decisions of our leaders does not mean we have some collective obligation to make the bad decisions of lenders go away. Besides, no matter how bad the losses are, twenty years from now the government will produce an accounting report showing that we made money on the deal.
This whole situation sucks. The banks give large amounts of money to irresponsible people who blow it. When the Ponzi scheme collapses and both the Ponzis and the lenders are suffering, the government is called in to take money from the prudent to bail out the reckless. I don't feel good about it.
More equity-stripping HELOC-abusing Ponzis
It was suggested in the comments recently that Irvine house prices have held up because fewer borrowers here are in distress. We do have fewer underwater homeowners because the banks haven't caught up with their foreclosures, but we still have many borrowers who stripped the equity from the walls and spent themselves into oblivion. I profile these every day, and I don't need to hunt and cherry pick to find these people.
- Today's featured property as purchased on 12/8/2003 for $600,000. The owners used a $400,000 first mortgage, a $170,000 second mortgage, and a $30,000 down payment.
- On 7/26/2004 they opened a $196,000 HELOC and got back most of their small down payment.
- On 1/26/2005 they refinanced with a $585,000 first mortgage and a $99,900 second mortgage.
- On 3/31/2005 they refinanced the first mortgage with a $585,000 Option ARM with a 1% teaser rate.
- On 12/14/2006 they refinanced the first mortgage for $710,000.
- On 5/7/2007 they obtained a $131,000 HELOC, and with their previous pattern of borrowing, we can assume they took it out and spent it.
- Total property debt is $841,000.
- Total mortgage equity withdrawal is $271,000.
- The stopped paying the mortgage early this year or late last year.
Recording Date: 04/28/2010
Document Type: Notice of Default
Irvine Home Address … 28 BELMONTE Irvine, CA 92620
Resale Home Price … $675,000
Home Purchase Price … $600,000
Home Purchase Date …. 12/8/2003
Net Gain (Loss) ………. $34,500
Percent Change ………. 12.5%
Annual Appreciation … 1.8%
Cost of Ownership
$675,000 ………. Asking Price
$135,000 ………. 20% Down Conventional
5.01% …………… Mortgage Interest Rate
$540,000 ………. 30-Year Mortgage
$139,925 ………. Income Requirement
$2,902 ………. Monthly Mortgage Payment
$585 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$56 ………. Homeowners Insurance
$0 ………. Homeowners Association Fees
$3,543 ………. Monthly Cash Outlays
-$710 ………. Tax Savings (% of Interest and Property Tax)
-$648 ………. Equity Hidden in Payment
$263 ………. Lost Income to Down Payment (net of taxes)
$84 ………. Maintenance and Replacement Reserves
$2,534 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,750 ………. Furnishing and Move In @1%
$6,750 ………. Closing Costs @1%
$5,400 ………… Interest Points @1% of Loan
$135,000 ………. Down Payment
$153,900 ………. Total Cash Costs
$38,800 ………… Emergency Cash Reserves
$192,700 ………. Total Savings Needed
Baths: 2 full 1 part baths
Home size: 2,144 sq ft
($315 / sq ft)
Lot Size: 5,000 sq ft
Year Built: 1979
Days on Market: 3
Listing Updated: 40309
MLS Number: S616799
Property Type: Single Family, Residential
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Spacious home on a quiet cul-de-sac location. Living room with fireplace. Dining room with wet bar. Kitchen overlooks family room. Oversized master bedroom. Large private backyard. Three car attached garage.
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.
Have a great weekend,