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Move to Ease Mortgage Credit Crunch Not Bold Enough
With the nation’s housing industry caught in the grips of a difficult mortgage credit crunch as the peak home building season fast approaches, regulators in Washington, D.C. last week took an encouraging step to put Fannie Mae and Freddie Mac to work to stabilize housing and the financial markets. But considering the severity of the problem and its dire implications for the U.S. economy, home builders said that it is not enough.
The Office of Federal Housing Enterprise Oversight (OFHEO) announced on March 19 that it was reducing the capital surcharge levied on the two housing government sponsored enterprises (GSEs) to increase immediate liquidity to the mortgage-backed securities market by up to $200 billion.
OFHEO estimated that Fannie Mae and Freddie Mac would now be allowed to purchase or guarantee about $2 trillion in mortgages this year. “This capacity will permit them to do more in the jumbo temporary conforming market, subprime refinancing and loan modifications areas,” OFHEO said.
OFHEO said that it was reducing the 30% capital surplus required of the GSEs to 20% so that they could invest the difference in mortgages and mortgage-backed securities. Based on reports in the news media, NAHB and others had expected to see a greater cut in the capital requirement, although OFHEO did say in its announcement that it would consider further reductions in the future.
“While we appreciate this action, it falls short of providing the liquidity required to stabilize today’s credit-squeezed mortgage market,” said Jerry Howard, NAHB’s executive vice president and CEO. “We were expecting a much bolder step by OFHEO, with a greater reduction in the capital surcharge in light of the severity of the mortgage credit crunch.”
To get the most mileage out of these additional funds, he said, “Fannie Mae and Freddie Mac must target borrowers who have been shut out of the mortgage market by the financial sector meltdown. This action is a partial step to getting Fannie Mae and Freddie Mac back on the road to meeting their housing mission. Developing a proper balance between their housing mission and the interest of their stockholders is a key provision of the pending GSE regulatory reform legislation, which further underscores the urgent need for quick Senate action on the bill.”
In addition, Howard said that the two GSEs “should use this opportunity to eliminate the market delivery fees that were recently added to loans to provide a reserve against future losses. These fees are a counterproductive tax on homeownership and will work against efforts to stabilize the nation’s housing market.”
Following the OFHEO announcement, Daniel Mudd, president and chief executive officer of Fannie Mae, noted that the reduction in the capital surplus requirement would enable his company to “harness about $3 billion in additional capital to stand ready to purchase and guaranty mortgage assets.”
“We plan to harness this additional capital by making purchases in segments of the mortgage market where liquidity is needed most,” Mudd said. “These segments include affordable loans; loans that refinance borrowers out of subprime ARMs and into safer prime, fixed-rate products; jumbo-conforming loans; and multifamily mortgages that finance affordable rental housing. More broadly, we will purchase and guaranty additional conventional, conforming mortgage-backed securities to help keep mortgage rates down and ensure stability in the center of the market.”
Wider Action Needed in Washington
In his March 19 “Eye on the Economy,” NAHB Chief Economist David Seiders noted that housing is continuing to go down hill and the core problem is falling house prices.
“The problem is symptomatic of stubbornly weak home buyer demand and an extremely large supply of vacant homes on the for-sale market, and the upswing in mortgage foreclosures in piling more and more vacant homes onto the for-sale market,” he said.
“This critical situation calls for government policies to stimulate home buyer demand and to stem the flow of foreclosed homes onto the market,” Seiders said.
While the Federal Reserve has clearly been “on the job,” he noted, “major responsibilities also lie with other federal regulators, the government sponsored enterprises, the Congress and the Administration.
When Congress returns from its Easter recess at the start of April, NAHB will be pushing aggressively for prompt action on a number of legislative fronts to correct current weakness in the housing market. That agenda includes comprehensive reform of the GSEs, modernizing the Federal Housing Administration, enacting a temporary tax credit for home buyers, expanding the mortgage revenue bond program and allowing businesses to carry back net operating losses for five years.
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