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Uncle Sam Guarantees New U.S. Housing Loans, Stands on Sidelines With Old, Toxic Loans
Last year, the U.S. government seized control of Freddie Mac and Fannie Mae, the two largest mortgage finance companies in the world. As a result, nearly 90 percent of all new home loans are funded or guaranteed by taxpayers. Without the federal government’s active intervention, lending would be as rare as time-outs on Lord of the Flies island (or as frequent as public spankings in a Park Slope playground). The outlay has already reached about $1 trillion over the past year and is rising.
Fannie Mae and Freddie Mac were chartered by Congress four decades ago to create a marketplace where mortgage lenders could sell the loans they made and use that money to make more loans. The two companies were owned by private shareholders and for a fee guaranteed investors in mortgage loans that they would get paid. After the government seized Fannie and Freddie, it offered them an unlimited line of credit and pledged to inject up to $400 billion to keep them solvent.
While the government is purchasing these new mortgages, it is not actively working to help the current homeowners who are (or are about to be) underwater. This is a tsunami in the making: Half of U.S. residential mortgages will be underwater by 2011. Interest-only loans allowed people to buy homes they otherwise couldn’t afford. The plan was to refinance after property values continued to soar. Now that they’re plummeting, homeowners and lenders are in for a rude awakening. According to a recent NYT article, in the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.
A recent analysis by First American CoreLogic put the amount of Interest Only mortgages at $908 billion with 2.8 million loans active. Fitch Ratings came out this week showing that there are still $189 billion in option ARMs in the system. For all you folks who thought that all the option ARMs were modified, the data shows only 3.5 percent of the nearly 1 million loans have been modified. And those that have been modified still re-default at incredibly high rates.
Even if banks foreclose quickly on these houses, which they are not, these folks are not going to be potential tenants for multifamily owners. If anything, they will be deemed poor credit risks, with other accumulated debts. Moreover, the growing froth of shadow housing inventory will outpace a potential housing shortage from this growing tenant supply.
The Government needs to help homeowners and multifamily owners by more aggressively working with homeowners and lenders to modify existing loans. It also needs to forcefully encourage banks to mark its toxic loans to market, instead of keeping them on the books with values that have no basis in reality. This will curtail the growing residential mortgage defaults, allow for better evaluations of multifamily and commercial properties, and lessen housing supply.
Its incredible how many people will soon owe more than their house is worth. It seems I heard that around 10% of all present mortgages are at least one month behind on payments. Frightening!!