Legal Analysts

Saturday, February 12, 2011

Winding down Fannie Mae and Freddie Mac

On February 11, 2011, the Obama Administration (through the Department of the Treasury and the Department of Housing and Urban Development) delivered a report to Congress that provides a path forward for reforming America’s housing finance market - LOANS WILL NEVER BE THE SAME.

To read the report, click here.

Key in the report is the need for:
  1. More rental options through lending to the multifamily market
  2. Increased coordination between governmental finance options
  3. Increased availability of low income housing
  4. Consumer protection
  5. Lowering the maximum LV Ratios
    1. Minimum of 10% down payment for governmentally backed loans
    2. Lower conforming loan limit (highest loan amount for governmentally backed loans)
    3. Decreased maximum loan size that can qualify for FHA insurance (goal - lowering market share of FHA from 30% to 15%)
  6. Transparancy for investors through disclosure of information on the credit, geographic, and demographic characteristics of the underlying loans that are packaged into securities
  7. Higher capital retention by lenders (originators retaining 5% of loan risk in securitization)
  8. More conservative underwriting standards
  9. Regulation of mortgage originator and servicer standards
  10. Private guarantees of mortgages and public guarntees with increased cost to reflect risk
Interestingly, this is a small government report coming from a democratic administration. Yet, remember this is just the administration's views and will require legislation from the Congress before its enacted. In fact, it only offers 3 options into the future, not a clear direction. Nonetheless, real estate professionals should start hedging their strategies based upon this report as those who leverage change in market principles will get ahead financially.

My takeaway is to concentrate on the rental markets because the administration's plan is ultimately to eliminate a homeownership option for speculators - individuals without the means to afford a mortgage without appreciating home values. Therefore, many potential homeowners will be pushed out of the market to purchase and placed into the rental market.

Of note, the report makes frequent mention of the The Dodd-Frank Act as the first steps towards the administration's goals. Therefore, a careful review is required by real estate professionals.

Lastly, the report discusses loan steering and a new requirement that loan originators will have to perform due diligence of borrowers' claimed finances to determine a borrower's ability to repay a loan. These are many of the topics that are being heavily litigated in the foreclosure world today and I believe that this report will strengthen the position of homeowner who seek a modification in foreclosure. If nothing else, the report requires national standards for loan servicing, which is the entity charged with negotiating a mortgage workout with a borrower - this will HELP!

Short sale professionals; the report also addresses working with second liens in mortgage workouts, this is a must read.