Fannie Mae & Freddie Mac now hold $24 billion in foreclosure inventory:
Fannie Mae and Freddie Mac’s combined inventory of foreclosed residential property has quadrupled in just three years and now stands at a record $24 billion. The number of properties on their rolls -- now at nearly 242,000 -- has increased fivefold.
That’s roughly a third of the total U.S. portfolio of repossessed homes.
So far, Fannie & Freddie have been holding those foreclosures to not flood the real estate market. With foreclosures projected to increase 20% in 2011, eventually they are going to have to sell those foreclosed properties, which will cause home prices fall. On top of Fannie & Freddie there is a glut of shadow inventory, all being held back to avoid the inevitable foreclosure dump. Bottom line, housing prices must fall and you can't pay for a house when don't have a paycheck or a shrinking one.
Now, Banks want to securitize mortgages held by the GSEs, yes those derivatives which caused the financial crisis, plus have the government guarantee them.
The Banks have set their lobbyists upon this socialize the risk, privatize the gain Freddie and Fannie agenda and notice how lobbyists write white papers full of spin to met their objective of more taxpayer subsidies.
Right now, a cottage industry of analysts, lobbyists, regulators, financiers and elected officials is hard at work formulating a future course for the mortgage finance giants, which have been under government conservatorship since September 2008. White papers are now spewing from think tanks and trade associations, and the Treasury is set to issue its recommendations early next month, to be followed by a round of congressional hearings.
One solution proposed is for Fannie & Freddie to raise their fees for guaranteeing a mortgage. Of course this recommendation is not coming from a banking or finance lobbyist, so no doubt it will be promptly ignored.
I have the free market solution to the Fannie and Freddie situation – and – I hate to say it – it is dead obvious.
Answer: raise Frannie’s pricing.
At the moment there is nobody doing conforming mortgages except Fannie and Freddie. Indeed there is almost nobody doing mortgages of any kind except Fannie and Freddie. If the free market wants the business they can have it. (They just don’t want it at this sort of interest rate spread – and I don’t blame them.)
All the government need to do is tell Frannie to raise their price a little each quarter. Currently they charge 20-25bps for guaranteeing mortgages. (The free market won’t take credit risk at that price.) So it is entirely open to the FHFA (and hence the Treasury) to tell Fannie and Freddie to raise their prices by 5bps. The government will get paid better for the risk they are taking (and what free market ideologue will disagree with that) and the private sector can compete if they want to.
I doubt the free market will. But then in a quarter or two Frannie can raise their pricing by another 5 bps. And a quarter or two later Frannie can raise by another 5bps.
At some stage you will get to a level where the private sector chooses to compete. Frannie should not set its price competitively though. In another quarter they should raise the price another 5bps. And in another quarter they should raise again.