Fannie and Freddie Reflate Housing?

The Federal Housing Finance Agency (FHFA) says in a new report that Fannie Mae and Freddie Mac have to date conducted 1.1 million permanent loan modifications.

The FHFA’s report, which provides a state-by-state breakdown of assistance from Fannie and Freddie, comes on the heels of a Congressional letter sent last month to FHFA head Ed DeMarco from Massachusetts Democrats Barney Frank, Michael Capuano and Stephen Lynch pressuring the FHFA to let Fannie and Freddie do more to rescue housing.

The three Democrats are members of the House Financial Services committee and helped pass the law which defines the authority of the FHFA. It was Rep. Frank who famously said in 2003: “I do not want the same kind of focus on safety and soundness [in the regulation of Fannie Mae and Freddie Mac] that we have in the Office of the Comptroller of the Currency and the Office of Thrift Supervision. I want to roll the dice a little bit more in this situation towards subsidized housing.”

Rep. Frank, who is retiring this year, also noted later that Fannie and Freddie were “fundamentally sound” and that “they are not in danger of going under.”

Fannie and Freddie have been heavily criticized for aiding and abetting the housing crash. Their combined balance sheet now surpasses $5.5 trillion, equal to about 36% of U.S. GDP, or about double the size of the economy of France.

Late in 2009, the Obama Administration lifted the $400 billion cap on Treasury funding to Fannie and Freddie, which critics said was a step toward nationalizing the home loan market.

Wall Street analysts have since joked that Fannie and Freddie are now “government-mandated mortgage brokers.” Because the two continue to post massive losses, and because the federal government gave Fannie and Freddie an unlimited pipeline into the U.S. Treasury, their taxpayer costs continue to mount to nearly $190 billion.

The Democrat legislators wrote to FHFA chief DeMarco that they “share” Massachusetts Attorney General Martha Coakley’s “great concern about Fannie Mae’s and Freddie Mac’s unwillingness to increase the availability of all modification programs.”

The Democrat letter writers said they also agreed with the Massachusetts’ AG that “the refusal of an important government agency, under your direction, to join in the effort to alleviate the great distress caused by the current mortgage situation in America is ‘so troubling.’”

And the elected officials also used the law they helped write to pressure the FHFA, noting they “flatly disagree with the notion there is anything in that statute – or any other federal law – that requires you to withhold your cooperation from this effort to the extent that you have”

(Read the letter here.)

Late last month, the FHFA released a plan that stopped short of dissolving the two companies, but acknowledged the need to limit taxpayer losses. The FHFA said: "A central issue remains: whether a government guarantee is essential to a functioning mortgage market.”

Congress chartered Fannie and Freddie, and by law, Congress retains the power to modify or abolish their charters.

The end game here -- which appears to be likely at taxpayer expense -- is to stop the estimated 11 million homes in negative equity from tipping into foreclosure, with some $700 billion in possible losses there, according to estimates from research firm CoreLogic.

Since their government rescue, Fannie and Freddie have been enlisted by the government to help out with a number of housing bailout programs, including loan modifications and refinancings.

Last December, members of Congress debated whether to use the two to help pay for a temporary payroll tax cut, by raising the fees Fannie and Freddie charge on loans.

Critics of the federal government’s spending have argued that using Fannie and Freddie as part of domestic spending policy should mean the two ought to be put permanently on the government’s balance sheet. Doing so would raise the U.S. federal deficit to well beyond $20 trillion.

State attorneys general recently won a $26 billion mortgage settlement with top U.S. banks over alleged robosigning allegations, which also involve loan modifications and refinancings,

The fear is the push is now on to potentially move more mortgages off of bank balance sheets and onto the books at Fannie and Freddie. Effectively, the goal would be to reflate the U.S. economy by transferring the risk from banks to taxpayers, by letting delinquent and underwater homeowners refinance at taxpayer expense.

Fannie and Freddie are only one part of the federal housing bailout programs. The Treasury Department announced this week it made a $25 billion profit on its purchase of $225 billion in mortgage-backed securities. The Treasury says it sold them for $250 billion.

The Federal Reserve also owns $846.2 billion in mortgage-backed bonds. When mortgage bonds gapped nearly two percentage points higher than the U.S. Treasury 10-year note during the financial crisis, the Treasury and the U.S. central bank stepped in to ensure loan liquidity and to stop mortgage loan rates from spiking higher.

The Fed’s $846.2 billion mortgage bond holdings are about 30% of its $2.9 trillion in reserves, and fall just shy of the amount of currency in circulation, $1.1 trillion.

The FHFA’s new report shows that Fannie and Freddie have conducted about 304,600 short sales, which “resulted in borrowers leaving their homes without going through” foreclosure.

The FHFA also says that less than a fifth of the loans modified as of year-end 2011 missed two or more payments in the nine-month period after the loans were modified, an improvement over prior years. The FHFA data also show detailed information about states with the biggest five-year decline in house prices and the highest number and rate of seriously delinquent loans:

*In rank order, Florida, California, Illinois, New York and New Jersey had the most number of delinquent loans guaranteed by Fannie and Freddie as of year-end 2011. Delinquent loans are the first step towards foreclosure and possible government help. *Florida had 230,058 severely delinquent Fannie/Freddie loans past due; California had 99,406, Illinois had 77,028; New York had 59,425 and New Jersey had 57,112. *Nevada posted 24,233 loans seriously delinquent, and had the country’s second highest rate of severe delinquencies, at 8.3%--surpassed only by Florida’s 11.3% rate. *One alarming statistic: The FHFA says in its new report that, “in Florida, the number of loans that have been delinquent for one year or more exceeds the total number of delinquent loans in every other state except California.” *”California had the largest number of completed foreclosure prevention actions since” the government seized Fannie and Freddie in 2008.   *Half of all borrowers who received loan modifications in the fourth quarter had their monthly payments reduced by over 30%, and one-third included principal forbearance, the FHFA says. *"Serious delinquency rates for Fannie Mae and Freddie Mac loans remain below industry levels and continue to decline,” the FHFA says.