DC Dispatch: Lockhart on the Future of Fannie and Freddie, Foreclosure Prevention
About one hour after hearing from Secretary Shaun Donovan of the U.S. Department of Housing and Urban Development, which has seen loan volume skyrocket over the past year to account for about 24 percent of the mortgage origination market, a small group of real estate editors and writers heard from the man who oversees the government lenders that account for almost all of the remainder of the market.
James Lockhart, CEO and Chairman of the Oversight Board of the Federal Housing Finance Agency, regulator of Fannie Mae and Feddie Mac, told attendees at the National Association of Real Estate Editors 43rd Annual Real Estate Journalism conference in Washington that loans insured or owned by the two government-backed lenders represent 73 percent of the mortgage market.
News about the two former Government Sponsored Enterprises (GSEs) has died down since the government took them under conservatorship in September 2008, a move that was critical to ensure the stability of U.S. housing market and overall economy, according to Lockhart, a holdover from the Bush administration who orchestrated the move to conservatorship, along with then-Treasury Secretary Henry Paulson. A key provision in the conservatorship plan, which was made possible by the Housing and Economic Recovery Act (HERA) that former President George W. Bush signed into law in July 2008, was that it gave the Treasury Department the ability to lend capital to the cash-strapped Fannie and Freddie.
"Without that ability we would have had to put them into receivership ... which would have had a draconian effect on the U.S. housing market and the economy," Lockhart said, noting that there is still a deep well of capital available for the two entities to draw from. "There's over $900 billion that has been pumped in and there's a commitment of over $2 trillion."
Lockhart sees a few options for the future of Fannie Mae and Freddie Mac. One is nationalization, which he said he doesn't think is probably the right option. Another is an improved GSE model based on the principles laid out in HERA, and a third is to establish private-sector firms to supply liquidity to the mortgage markets. Lockhart emphasized that whatever the future of Fannie and Freddie, there should be a clear demarcation of private and public sector roles and a well-defined mission that is centered on avoiding excess risk.
"We need to figure out how to sort of dampen the boom and bust," he said, adding that this may result into Fannie and Freddie focusing on insurance rather than maintaining portfolios of loans. "I think more and more Fannie and Freddie are insurance companies now. The portfolios were really a distraction."
Lockhart also took a shot at the high homeownership goals set earlier this decade, claiming they pressured Fannie and Freddie into taking excessive risks.
"HUD set these goals and it really made risk taking a necessity and that really came home to roost."
Lockhart also touched on President Barack Obama's foreclosure prevention efforts, noting that he's hopeful the loan modification program that is part of the president's plan will result in fewer redefaults than previous loan modification programs. He identified the capacity of mortgage servicers to handle the high volume of loan modification applications as a possible stumbling block.
"The servicers are stretched really thin," he said, adding that it will be in their best interest to hire more staff to handle the additional volume. "If they don't modify mortgages, and they go into foreclosure, the cost will be a lot more."
Another stumbling block is the 105 percent maximum loan-to-value ratio allowed for the refinancing piece of the program, which Lockhart admitted may not be sufficient in hard-hit states where many distressed homeowners are much more deeply underwater on their mortgages.
"We're looking at going significantly higher than 105 percent," Lockhart said, noting that even with the higher threshold in place the success of the program is dependent on a positive response from homeowners targeted. "There's a lot of people just not answering their mail and we need to get them to say, 'gosh, a 2 percent interest rate isn't so bad. Maybe I'll take that.'"
New short sale and deed in lieu of foreclosure incentives, which are slated to be rolled out in July, are also a key part of the overall foreclosure prevention program, according to Lockhart.
"Short sales are not as good as loan modifications or refinancings, but they're certainly better than foreclosure," he said.