Freddie Mac, Rent Controls and Predatory Contracts

New Orleans  Freddie Mac is the popular name for the Federal Home Loan Mortgage Company.  It is a government sponsored entity or GSE.  It’s main purpose since 1970 has been to buy and finance mortgages on the secondary market, making in safer for banks and savings and loans to issue the initial paper.  It’s hard to tell the difference between Freddie Mac and Fannie Mae, the other major GSE with almost the same purpose, established in 1968, except that Fannie is traded publicly on the stock exchange as a private company.  Both of these GSE’s are seen by investors and Wall Street slicks as safer, more secure investments because of an “implied governmental guarantee,” though no such thing legally exists.  Both were effectively  bailed out during the Great Recession of 2008 though, which would seem to make the “implied” have more than the usual meaning.

Anyway, Freddie Mac has in recent years become the largest financier of apartment loans for developers and landlords.  Recently, they were also in the news in the financial pages for becoming the largest financier/owner of single family homes that are used as rental units, but we’ll come back to that accomplishment.

They also have been knocking on the door of offering incentives to something that looks and tastes a bit like rent controls.  In a recent announcement they are offering financing anywhere in the country with a lower interest rate to owners who agree to cap rent increases for the length of their loan term with Freddie.  According to the Wall Street Journal, developers “who receive the low-cost loans must have at least 50% of the units affordable to households making the local median income or below.  Borrowers must then agree to limit rent growth on 80% of units.”  Earlier, Freddie Mac had experimented with a similar program more focused on affordable housing with rent caps on annual increases, but this is a broader program with perhaps a little less emphasis on affordable housing, but more rent controls.  It is impossible to know what the take-up might be from developers, but given the rental availability and affordability crisis for tenants in cities throughout the country, seeing a government sponsored entity move toward rent control is a very good thing.

I am still troubled by the fact that when ACORN’s Home Savers Campaign demanded that both Fannie Mae and Freddie Mac not issue loans or allow any investors to participate in auctions who intended to sell them using contract-for-deeds or any predatory instrument in the rent-to-own space, Fannie Mae did follow through with a ban.  Freddie Mac never did, which worries us about their position in the market with such a large inventory of loans in single-family homes, and whether or not they are in effect also becoming the largest financier of predatory practices, whether explicitly or implicitly.

When you have two hands, the best thing is to keep both of them clean.

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Promises Broken and Settlements Sidetracked for Homeowners Facing Foreclosures

Fannie-Mae-and-Freddie-MacLittle Rock           I’m sorry. Here we go again spinning like a broken record on the amazing and devastating ineptness of the US government and its various agencies and branches to seriously solve the problem of bank intransience and offer real relief to borrowers needing loan modifications to escape foreclosure and right size their loans.

The government announced another multi-billion dollar settlement for fraud in packaging mortgages. This time it was Citi agreeing to pay $7 billion with $4 billion going to the  government in fines and whatever and $3 billion going supposedly to help homeowners with principal reductions or refinancing. Of course that means $3 billion they get to essentially backwash and return to their own accounts. Using a fraud settlement for a modification means that if they reduce principal by $100000 for a homeowner in Phoenix, they count that $100000 on the ledger allowed by the fine print on this big settlement. If the average modification or adjustment per homeowner averaged $100,000, then on the high side this might help 30,000 borrowers of the millions caught in the mess. Experience says it will be a whole lot fewer, since that has been the case with everything announced over the last 5 years that was supposedly going to impact millions of homeowners.

We also have a pattern established on these settlements now. Outfits like Bank of America, whose time is still coming, may pay their Wall Street lawyers millions to delay, shuffle, and stall on future settlements but pretty much any of us now could pull up a chart on what percentage of the mortgage business and bundling a bank had in 2007, and calculate the amount they are going to have to pay to make this go away in 2014. B of A will pay a truckload because of its own activity and its Countrywide purchase, but the number of people helped will also be a small piece of the load.

And, at the same time that we could read the report on the Citi settlement, we were also able to read about another government agency that promised much in terms of homeowner relief and delivered almost nothing. This time it’s the FHA or Federal Housing Administration and their highly touted program to help homeowners that were underwater, owing more than the value of their homes.

“…only about 4,600 F.H.A. loans have been originated under the program, a far cry from the 500,000 to 1.5 million borrowers the Department of Housing and Urban Development estimated could be helped when it announced the program in 2010.”

Yes, four years of trying and less than 5000 borrowers helped. What’s the math there? Something like 1 out of 1000 projected to be assisted actually benefited.

Why?

Well, the right hand of the government didn’t care what the left hand might have been trying to do to help homeowners.

“Fannie Mae and Freddie Mac, the government-sponsored enterprises that hold a majority of the country’s mortgages, decided early on not to participate, because the program requires lenders to reduce the borrower’s principal balance. This strategy is not condoned by the Federal Housing Finance Agency for loans backed by Fannie and Freddie.”

But, what goes around comes around. I’m not just saying this was the feds dropping the ball. They also made participation by our friends, the bankers and lenders, voluntary, which means they didn’t have to do anything, and there’s little doubt that in fact they did anything then, nor are the planning – or being forced by these settlements – to do much of anything still.

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