Explaining Southern California's economy

Bank of America continues to end its Countrywide problem

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Bank of America has agreed to a $10 billion deal with Fannie Mae, related to the charge that its Countrywide loans were bogusly represented.

Oh, what a difference five years makes! Back in 2008, Bank of America bought Countrywide Financial — then based in Calabasas, Calif. — for $4.1 billion, a fire-sale price at the time given the heights to which the now notorious subprime lender had soared.

But even at that price, Countrywide eventually became a giant concrete-filled truck tire around BofA's neck. In 2011, BofA saw its stock price plummet. CEO Brian Moynihan hadn't done the Countrywide deal, but he was dealing with the ugly aftermath. At one point, when the entire financial services sector was swooning, billionaire investor Warren Buffett swept in to support BofA and put a floor under the fall.

That didn't stop speculation about BofA putting Countrywide into bankruptcy — which would have led to the first big test of a major bank failure in the post-"To Big to Fail" era. I blogged about it at the time:

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FHFA's Edward DeMarco doesn't give an inch on mortgage principal reductions

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California Attorney General Kamala Harris has called for FHFA head Edward DeMarco's termination over the agency's refusal to reduce principal on underwater loans.

Edward DeMarco, the acting director of the Federal Housing Finance Agency, isn't backing down when it comes to his long-held view that the two government mortgage giants, Fannie Mae and Freddie Mac, shouldn't reduce loan principal for underwater borrowers. 

In March, Fannie and Freddie produced an analysis that ProPublica's Jesse Eisinger wrote about. It suggested that the FHFA should be empowered to do principal reductions. 

But now the FHFA has released a new study, titled "Review of Options Available for Underwater Borrowers and Principal Forgiveness," that argues against principal reductions and in favor of another option, which I explained in a post that I wrote when I covered Eisinger's reporting:

DeMarco favors principle forbearance. The difference is simple: principal reduction takes a $400,000 mortgage on a home that's only worth $300,000 and writes it down to be a $300,000 mortgage. The $100,000 difference becomes a loss to the taxpayer, but it enables the homeowner to avoid default and provides him with an incentive to stay in the game.

Principal forbearance involves reducing the borrowers monthly obligation, much like in a writedown, but the size of the loan doesn't change. You have a $400,000 mortgage. House is worth $300,000. You can't make the payments and can't refinance because you're underwater. So you get to operate like your have a $300,000 mortgage for a while, but you're still responsible for the $400,000 total.

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FHFA battle: Mortgage principal reductions versus forbearance

Number Of Foreclosures

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The foreclosure crisis continues to rage in America. Could mortgage giants Fannie Mae and Freddie Mac do something about it?

NPR and ProPublica have been pressing forward with their reporting on the doings at Fannie Mae and Freddie Mac, the two mortgage giants that were put into government conservatorship during the financial crisis. Jesse Eisinger remains the lead reporter on the case. In January, he detailed how Freddie was allegedly structuring its investment portfolio to profit from mortgages that it refuses to refinance (I and others thought Eisinger misinterpreted Freddie's motives here). Now he's looking at why the Federal Housing Finance Administration (FHFA), Fannie and Freddie's regulator, won't support principal reductions.

Here's a salient section:

New analyses by mortgage giants Freddie Mac and Fannie Mae have added an explosive new dimension to one of the most politically charged debates about the housing crisis: Whether to reduce the amount of money beleaguered homeowners owe on their mortgages.

Their conclusion: Such loan forgiveness wouldn’t just help keep hundreds of thousands of families in their homes, it would also save Freddie and Fannie money. That, in turn, would help taxpayers, who bailed out the companies at a cost of more than $150 billion and are still on the hook for future losses.

The analyses, which have not been made public, were recently presented to the agency that controls the companies, the Federal Housing Finance Agency, according to two people familiar with the matter. Freddie Mac’s meeting with the FHFA took place last week.

The decision of whether to allow such reductions rests with Edward DeMarco, the acting director of the FHFA, who has steadfastly opposed so-called principal reductions on the grounds that it’s a bad business decision for the companies and would cost taxpayers money.

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How long does the government expect borrowers to stay underwater on mortgages?

While Sales Of Existing Homes Rise In July, Prices Continue To Fall

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A recent ProPublica/NPR report on Freddie May refusing to refinance mortgages for struggling homeowners shows that the market is still coming to terms with new ways of measuring risk.

There's a battle looming between Congress and the Federal Housing Finance Agency, the entity that's been responsible for mortgage giants Freddie Mac and Fannie Mae since the two were taken over by the government during the financial crisis. California and New York are also in the fray, given that those states' attorneys general have been resisting a mortgage settlement with big banks. But that resistance may be collapsing, now that principal writedowns are on the table. Meanwhile, the FHFA remains opposed to writedowns.

So what would principal writedowns entail? Well, the problem many homeowners are up against is that they owe more than their homes are worth. If they paid $300,000, with a 10 percent downpayment, the principal is $270,000. That's what they financed through the mortgage at whatever interest rate they were able to obtain. The monthly expense is made up of a payment that applies to the principal, the interest, and in may cases, insurance and property taxes. (And my example is boilerplate — in some regions, much higher loans, so-called "jumbo loans," make the situation more difficult.)

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Freddie Mac scandal, part II: Choosing sides

Foreclosures

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Refinancing is a key way for homeowners to improve their bottom lines. But did Freddie Mac prevent borrowers from pursuing refis so it could make more money?

Yesterday's NPR/ProPublica story about Freddie Mac's refusal to refinance mortgages so that it can make more money on some high-risk parts of its investment portfolio has divided the blogosphere. As I noted yesterday, Matt Levine at Dealbreaker thinks that Freddie was absorbing a refinancing risk that it would find difficult to pass on to investors. Felix Salmon at Reuters disagrees and disagrees profoundly, basically saying that we should call a duck a duck and conclude the Freddie was putting its own returns above the needs of homeowners.

Arnold Kling thinks not, dismissing the idea that Freddie was engaged in pure speculation:

The authors describe this as only being bad. It is bad for homeowners because it reduces Freddie's incentive to refinance loans. It is bad for Freddie Mac because it means taking on more risk from these instruments. 

There is another possibility. In its normal course of business, Freddie Mac buys mortgages and issues debt, giving it a duration mismatch. These inverse floaters seem to have negative duration, which helps to offset that mismatch.

The article does not discuss the duration issue at all. Instead, it acts as if inverse floaters were a pure speculative play by Freddie Mac, which I think is unlikely to be the motivation.

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