Government Seeks to Shut Down Fannie and Freddie

The FHFA, who oversees GSEs Fannie Mae and Freddie Mac as a conservator, has a plan to shrink their involvement in the housing market over time. They want to create a new market for mortgage-backed securities; something more privately-owned rather than government-backed. Fannie and Freddie have had a major part in keeping the housing finance market going during the country's recession and economic hardship. They currently represent 75% of all new home loans, which equals to nearly $100 billion a month in mortgages.

However, President Obama and Congress seek to shut down Fannie and Freddie so they can ultimately reduce the role that the government plays in the mortgage market. There is not yet an official plan on how to squeeze out the GSEs without causing further damage to the housing market, but the goal is to transition in a new structure of how the housing finance market works.

This all relates to the story we reported on earlier about the FHFA's acting director Edward DeMarco's new plan. It involves building a new infrastructure for the mortgage market, shrinking Fannie's and Freddie's presence in the market, and doing whatever it takes to reduce the amount of foreclosures. It is not possible to simply bring an end to Fannie and Freddie, however. Doing so without implementing a new structure would drive up interest rates and limit the availability of loans.

A year ago, a plan was proposed to slowly shut down the GSEs over a span of 5-10 years. It suggested doing this in one of three ways: providing limited government guarantees of some mortgages, providing an emergency backstop role but only during a recession, or completely pulling the federal government away from the mortgage market. A decision regarding these options has not been made.

Fannie and Freddie have relied on bailout money in recent years, and it is hindering the country's economic recovery. The housing market will continue to have issues until these government-backed mortgage-finance companies are replaced with a private-market solution. Once this is accomplished, the government hopes that efforts to repair the damage to homeowners and the housing market will boost in effectiveness.

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Greece Stable For Now; Impact on U.S.?

Europe's Finance ministers have officially given Greece 130 billion euros. As we reported last, Greece was given enough debt relief to help them not default on their bond repayment due in March. Greece is holding steady for the moment, but this in no way fixes their long-term problems. Additionally, the bailout has certainly had an impact on the overall European market. The euro has fluctuated since a whopping 386 billion euros have been spent to rescue not only Greece, but also Ireland and Portugal.

Greece is now forced to abide to these strict austerity measures and economic reforms that come with the deal. Adhering to these rules, however, might prove to be too rigorous for the Greek citizens which could ultimately lead to social unrest and more rioting, something that the Greek politicians do not want to deal with, especially with elections around the corner.

While Greece is currently not defaulting on its debt in March, officials find it unlikely that they can avoid default in the near future. Greece has implemented numerous spending cuts, and adding the austerity measures and the unhappy citizens, the conditions of the bailout may cause more problems to arise in the coming years. Greece will find it hard to stick to the rules, which could be a problem for the market down the road.

The reason we focus so much on Europe's debt crisis is that the US equity market is based everyday on how Europe's market is doing. If their market falters, it will have an affect on our economy. In fact, on the back of Greece's news, the US interest rates slightly rose today. 30-year fixed-rate mortgages (FRM) were averaging at 3.87 percent but are now at 3.95 percent. However, this is not a bad increase. The mortgage markets have held strong despite the weak markets overseas.

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FHFA's Next Step Regarding GSE Conservatorship

In February 2010, the FHFA's Acting Director Edward J. DeMarco wrote a letter to Congress regarding conservatorships of the GSEs Fannie Mae and Freddie Mac. Recently, he has also released the next phase of his plan that builds on what he wrote in that letter 2 years ago. It is meant to update and extend the goals of these conservatorships.

First of all, what is a conservatorship? The FHFA is the conservator, or an organization that has legal control over another entity, which would in this case be the GSEs. Fannie Mae and Freddie Mac have received $180 billion in taxpayer support since they have been placed into conservatorship in September 2008.

DeMarco's plan will establish objectives that the FHFA is to take in order to meet its obligations as a conservator. It consists of three strategic goals. First of all, the FHFA will build a brand new infrastructure for the secondary mortgage market that will be consistent with existing policy. Second, they hope to contract the GSEs' dominant presence in the marketplace by simplifying and shrinking their operations. And lastly, they will work to maintain foreclosure prevention activities and credit availability for mortgages, both new and refinanced. The end goal is to come to a resolution for the conservatorships and to review the housing finance system.

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Retirement Growing Increasingly Difficult for Americans

In this rough economy, most people cannot afford to be unemployed. This is especially the case when these people have mortgages to pay. However, money woes do not discriminate against age. More and more, people are finding themselves unable to retire at the traditional age of 55. In fact, surveys have shown that just over 40% of Americans 55 and older are still working. Comparatively, this figure was below 30% in the early 1990s.

Granted, there are people in this age range that choose to work. But overall, people don't have much of a choice otherwise. The economy can take the blame for that. Fortunately, there are more jobs today that are not physically demanding as compared with past decades, so those who are forced to work are at least able to do so relatively well. Those who have held onto a job throughout the recession are reluctant to give them up quite yet.

This economy has made it increasingly difficult to save money in a retirement plan. Even those who had a significant nest egg in the past are finding that it has dwindled due to drops in the stock market. Wisely, people are holding on to every penny they can. Specifically, it is women between 55 and 64 who are now working more often to make up for child raising years when they may not have worked, and therefore did not have retirement savings during that time.

There is also the issue of health insurance. Those who worked full time for years may have had health insurance through their employer that took care of most of their medical needs. It would be very expensive for someone at retirement age to purchase private health insurance and pay on it every month, so this has also had an affect on the decision to retire. Health care coverage is very linked to employment, and many have depended on this over the years. In fact, it is almost vital for some people to continue working until they've become eligible for Medicare.

Additionally, many older homeowners have refinanced in recent years expecting to sell their home at a profit so they could downsize and not have a mortgage. However, they are now finding themselves unable to profit, which forces them to continue making monthly mortgage payments. This of course, leads to a greater need for a job despite being near or past retirement age.

Overall, people are afraid to give up their jobs despite their age, or simply cannot afford to retire in this economy.  Are you in a similar situation?

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Greece Bailout Update

For months, citizens of Greece have been protesting against the possibility of very strict austerity measures being placed upon them. There have been riots that have occurred because of these measures as well as the potential bailout that Greece had requested.

Now, a deal has finally been reached. The eurozone and the International Monetary Fund (IMF) have agreed to supply Greece with €130 billion ($170 billion) in additional bailout loans. The fear was that Greece would default in March without these additional funds. According to the terms of this new program, private bondholders have agreed to take greater losses on their end, while Athens is forced to commit to these very severe but ambitious austerity measures that the citizens have long been against.

These austerity measures including cutting wages, pensions and jobs. Officials are hoping that this new program will get the country started on its long road to recovery. At the very worst, the new program could push the country into even deeper debts and prolong the recession since wages are indeed being cut. Nobody ever said the program would be an easy fix. But the general outlook is optimistic that between the bailout and these cuts, Greece will be able to slowly return its economy to one that can grow again.

In addition to the bailout, Athens is also seeking debt forgiveness from banks and other investors in the sum of €107 billion. This would cause the European Central Bank and other similar banks to lose profits on their holdings. However, this would help Greece to reduce its massive debt. The goal is to cut their debt to 120.5% of gross domestic product by 2020.

It will take significant effort from the Greek citizens as well as the government to get the economy back on a path of growth and recovery.

Now that this bailout deal has been made and the austerity measures have been put into place, the U.S. market is expecting the stocks to rise. The market has been strong lately in anticipation of Greece's deal and the hope is that the market will continue in this way.

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Obama's Optimistic Economic Recovery Budget Plan

We have reported about Obama's Economic Recovery plan in the past. Here is a breakdown of what it entails.

Basically, he wants to start decreasing debt by spending more money. It goes without saying that many people have a problem with this theory. Congressional Republicans in particular have been tearing this plan to pieces claiming that spending money we don't have is not the way to help the economy recover.

First of all, the President has very optimistic hopes for the economy. In a proposed budget plan, he expects to cut $4 trillion out of the country's deficit over the next ten years. The deficit would fall to $901 billion in 2013 and then $575 billion by 2018. However, in order to achieve this lofty goal, the administration wants to raise spending on programs that will supposedly kick-start the recovery process. The main focus is to build a "solid foundation of educating, innovating, and building," according to the administration.

This involves the following spending:

• $476 billion for transportation projects such as inner-city rail services
• $30 billion to modernize some 35,000 schools
• $30 billion to help states hire more teachers, police, rescue workers and firefighters
• Potentially $8 billion more for businesses and community colleges to train more workers in high-growth industries

According to a poll taken, however, most people do not care about lowering the deficit. Americans are more concerned with job growth. The White House is actually predicting that job growth will remain weaker than normal for the next several years, but they are optimistic that unemployment rates will fall below 6 percent by 2017.

Additionally, the budget does not include anything regarding revising the tax code. It is widely acknowledged and accepted that fundamental tax reform is vital, but the President continues to side-step the issue by leaving it out of budget proposals. Despite this, with former President Bush's tax cuts expiring this year, President Obama may have a chance to oversee one of the biggest changes to the tax code in nearly a decade. He will be able to either raise taxes by doing nothing, or he could issue a veto to extend them.

Do you think it would be smart for the President to raise taxes to help balance his budget plan? What would this do regarding the deficit problem? Leave your thoughts below!

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FHA Saved from Needing a Bailout

Several months ago, the Federal Housing Administration (FHA) asked for a bailout. The White House Office of Management and Budget (OMB) crunched the numbers and found that the FHA needed $688 million. This would mark the first time in the FHA's 78-year history that a bailout was ever needed.

However, some good news has surfaced for the FHA.

We previously reported about the $25 billion settlement between attorneys general and the nation's five largest banks over fraudulent foreclosure agreements. We also mentioned the problem with Bank of America and Countrywide handing out mortgages to unqualified homeowners which brought about a $1 billion settlement. Because of these, and increased insurance premiums, the estimate that the OMB gave to the FHA regarding their bailout request is no longer necessary.

FHA premiums were recently raised ten basis points to pay for the extension of the payroll tax cut. The FHA says the premiums will be raised even beyond the budget proposal in an attempt to strengthen their fund and to insure that private capital continues returning to the housing market. Their budget was calling for increasing these premiums by 25 basis points for loans priced over $625,000. However, the FHA says that if the afore settlements had not happened, they no doubt would have implemented even larger premium increases to try to pull themselves out of the financial hole they were in.

While the FHA is saved from needing a bailout, they are still implementing premium increases in the near future.

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HUD's Plan to Improve Public Housing

The U.S. Department of Housing and Urban Development (HUD) has recently given $1.8 billion to public housing authorities that will allow these agencies to improve their public housing units. This will have an effect on all 50 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands. These grants are supplied through HUD's Capital Fund Program which annually provides funds for public housing communities to be able to build, repair, renovate and upgrade features such as roofs, plumbing and electrical systems to enhance efficiency.

HUD's budget for 2012 will ultimately help to preserve and enhance America's affordable housing, which includes public housing. They have been given the go-ahead by Congress to test a comprehensive demonstration tool to begin this preservation process. As part of President Obama's plan to keep HUD homes more affordable, HUD will initiate a Rental Assistance Demonstration (RAD) program. Public housing authorities say that they will need $26 billion in order to keep these homes safe for its inhabitants.

RAD will enable public housing authorities to continue improving and modernizing homes. This is expected to ready more than 60,0000 properties for long term rental assistance contracts. In turn, public housing authorities will then be able to raise around $6 billion in private financing to reduce the amount of capital repair needs to the homes.

Capital repair needs are defined as large-scale improvements required to make housing decent and economically sustainable, and ultimately more energy efficient. According to a study that HUD performed last year regarding Capital Needs in Public Housing, they found that of the nation's 1.2 million public housing units, it would take approximately $25.6 billion to make these much-needed capital repairs. This also includes overdue repairs such as accessibility improvements for the disabled, and water and energy conservation to make the homes more cost effective.

Many families rely on public housing in order to afford a home. Sadly, the nation loses thousands of units every year because of disrepair. Obama proposed RAD as a way to keep these homes maintained and available for rent. The federal government has invested billions in these units and keeping these in working order is fundamental for the overall housing market's stability. HUD will be announcing in the coming months the final details on RAD's timeline and application.

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Economy Impacting News from Around the World

Here on our own turf, President Obama is proposing a new "Seven Step" budget plan to Congress in hopes of cutting the country's deficit by $4 trillion over the next 10 years. He will do this by raising taxes and cutting expenditures. However, this plan is likely to cause a larger deficit first before it reduces it. The expectation is $1.33 trillion in 2012 and $1 trillion in 2013. This is mostly due to the government trying to pull the struggling economy out of the gutter, such as helping homeowners to refinance at lower rates across the board to clear up much of the underwater housing market. Here's to hoping this plan really will help the citizens and in turn reduce the deficit which is currently at a staggering $15 trillion.

Moving on to Greece. As you may know, its outraged citizens have been rioting and burning down buildings in protest to Greece's "Austerity Plans". The Greek Parliament is currently in the process of trying to receive a fresh bailout from these austerity measures. This move means that mortgage bonds will be trading lower. These plans are not yet set in stone, however. The Finance Ministers of the Eurozone will meet on Wednesday to discuss the approval of Greece's austerity plan. Greece is hoping to receive these bailout funds by the March 20th deadline, but it will not be a quick fix for all of their problems.

Lastly, we look at the Middle East. Iran is building up their nuclear capabilities against Israel. The countries are feuding and it is expected that Israel may make a pre-emptive strike on Iran because they do not appreciate Iran pointing their weapons in their direction. This affects oil prices. Now at $100 a barrel, this feud is partially to blame for that. If they go to war, who knows what may happen to the prices and how it will effect the rest of the world. It may even bring about some safe haven buying of US bonds.

The current of the Federal National Mortgage Association (FNMA) 3.5% Bonds are $103.41, + 3bp. Because of this, we do want to encourage that you exercise caution while floating.

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$1 billion False Claims Settlement Against Bank of America

The government has been investigating the lending practices of Bank of America since 2009. The bank, and Countrywide Financial Corporation which it acquired in 2008, had knowingly been giving FHA-insured loans out to unqualified home-buyers. This has resulted in hundreds of millions of dollars in damages to the FHA. The investigation also looked into whether or not BofA and Countrywide had been defrauding the FHA insurance fund with mortgage loans that were based on inflated appraisals.

Finally a settlement has been reached. Bank of America will have to pay $1 billion to correct this wrongdoing. They must pay $500 million upfront to provide a recovery fund for the damages done to the FHA. The second $500 million will be used to fund a loan modification program for Countrywide borrowers with underwater mortgages. Bank of America is expected to modify the loans of anyone who is eligible and who accepts this offer. The bank has 3 years to apply the full $500 million toward this relief effort, and if they fail to meet this obligation, any remainder must be paid directly to the U.S. government.

This goes down as the largest ever False Claims Act settlement relating to mortgage fraud. Because they abused the FHA, Bank of America, Countrywide Financial and their subsidiaries are mainly to blame for the country's financial crisis. It goes to show that lenders need to be careful about following the FHA's rules, or else they too will face serious financial consequences for any violations.

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Obama's Foreclosure Prevention Plan

How would you like to save $3,000 per year on your mortgage? That's exactly what President Obama is working to do for American Homeowners. He announced on February 1st that he has a plan to help homeowners like you to refinance your mortgage. Why? The goal is to help stabilize and boost the housing market again. Although, this plan is expected to cost between $5 billion and $10 billion to put into effect. Obama plans to get the funds for this by putting a fee on large banks.

The programs associated with this plan will give lenders and other stakeholders the tools they need to help borrowers with their mortgage woes and to ultimately increase the country's confidence in the real estate finance system.

The Obama Administration, Congress and the National Association of Home Builders will continue looking for ways to increase refinancing opportunities, to reduce the inventory of foreclosed homes and to hopefully prevent additional homes from falling into foreclosure.

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Mortgage Rates Reach NEW Record Lows

According to Freddie Mac's Primary Mortgage Market Survey, mortgage rates have dropped even more! They are now at NEW all-time record lows. This includes all rates except for the 1-year ARM which didn't reach a new low.

30-year fixed-rate mortgages (FRM) are averaging at 3.87 percent. This time last year it was at 4.81 percent. The 15-year FRM averaged 3.14 percent which is down from 4.08 percent last year. The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.80 this week and was at 3.69 last year.

These new record lows make it a great time to get a mortgage. However, economic growth has fallen short of market projections which is why these rates have eased. Although, both residential construction spending and fixed residential investment have increased.

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FHFA's "Pilot Phase" for REO Initiative

Here is some more information about the Federal Housing Finance Agency's new REO Initiative regarding turning REO's into rentals. They are starting off simple with a "pilot phase" that is excepted to include 500 to 1000 homes provided by Fannie Mae. The GSEs have more than one million foreclosure properties in their possession.

The purpose of this pilot phase is to examine:

• Investor interest in various types of assets
• How investors can maximize the participation of experienced local firms and organizations that can provide the types of services and support needed for stabilization in the community
• The types of structures and financing that would improve returns to the sellers as well as the value of the homes
• The process that qualifies these investors and how they participate in sales transactions

There is no indication of a timetable for beginning bulk REO sales yet. The FHFA is hoping that this pilot phase will prove beneficial to investors, homeowners, GSEs and also to the economic status of the housing market and the country as a whole. Their focus is on the nation's hardest-hit areas first. They'd also like to improve REO sales for homeowners and small investors that will enhance the existing retail sales strategies of the GSEs.

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REO Initiative to Rent Out Foreclosed Properties

The FHFA has announced the first step of an REO initiative that will aim to help the cities that got hit the hardest nationwide. Investors can pre-qualify to establish eligibility so they can bid on transactions during this initial phase. Qualified investors will be allowed to purchase foreclosed properties but they are required to rent these out for a specified number of years. The hope is that this rental period will provide relief for depressed housing markets that are overwhelmed by foreclosed properties, and will also provide more rental options. This should put the country one step closer to stabilizing communities and maximizing the value of homes.

This REO Initiative is partnered with the U.S. Department of the Treasury, the HUD, the FDIC, the Federal Reserve, Fannie Mae and Freddie Mac. They worked together to find options for selling single-family REO properties that are currently held by Fannie Mae, Freddie Mac and the FHA. During this first phase, Fannie Mae will offer pools of rental properties, vacant properties and non-performing loans focusing on the areas that were hit the hardest.

Those that have pre-qualified to receive more information about these properties must meet the following criteria: (a) financial wherewithal to acquire the assets; (b) sufficient experience and knowledge in financial and business matters to analyze and bear the risks of the investment opportunity; and (c) agreement to keep certain information about the REO and related matters confidential.

Investors can register at the FHFA's REO Initiative page.

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