At the recent National Association of Real Estate Editors (NAREE) annual meeting in Washington, D.C., James Lockhart, director of the Federal Housing
Finance Agency spoke about how to fix the housing market, including secondary mortgage market leaders Fannie Mae and Freddie Mac. Lockhart is also Chairman of the oversight board of FHFA, and was previously the deputy commisioner of the Social Security Administration.

How the Housing Market Changed from 2007 to 2009

Lockhart began his speech discussing how the housing market over the past two years has changed: “Serious delinquencies of 90 days or more have risen across the board to record levels. For subprime mortgages, serious delinquencies are almost 25 percent, and those subprime adjustable rate mortgages (ARMs) are more than 36 percent seriously delinquent. Serious delinquencies are far lower at Fannie Mae and Freddie Mac at about 3 percent, which is even lower than the prime market at 4.7 percent or the whole market at 7.2 percent. Serious delinquencies across all categories are continuing to rise rapidly.

Federal Housing Finance Agency’s Strategy to Stabilize the Mortgage Market

Lockhart said that the Federal Housing Finance Agency has a four-pronged strategy for stabilizing the mortgage market:

  1. Fannie Mae, Freddie Mac, and the Federal Home Loan Banks must support the market in a safe and sound manner.
  2. Work with government partners to get mortgage interest rates down.
  3. Work with the GSE Enterprises and other groups to set best practices for the whole mortgage market. We are all keenly aware of how badly underwriting and other practices slipped from 2005 to 2007.
  4. Work with the Administration, U.S. Department of the Treasury, the Department of Housing and Urban Development (HUD), the Federal Deposit Insurance Corporation (FDIC), and the GSEs on foreclosure prevention to help homeowners in trouble.

Foreclosure Prevention and the Homeowner Affordability and Stability Plan

In his speech, Lockhart said that the biggest challenge facing the Federal Housing Finance Agency is to stabilize the housing market. “Keeping people in their homes has to be the cornerstone of all efforts to stabilize the housing markets,” he said, adding “It is clear that the more empty foreclosed homes, the more damage to neighborhoods, business, and the markets.”

Lockhart said the Federal Housing Finance Agency believes the Administration’s new Home Affordable modification and refinance programs are a major step in reducing preventable foreclosures and stabilizing the housing market. “FHFA staff spent months working with Treasury on developing these programs—I’m very proud of the work my staff has done on this. It also aggressively builds on FDIC’s foreclosure prevention efforts. Lower mortgage rates already helped spark a miniature boom in refinancings this spring,” he said.

“In the Home Affordable Refinance program (HARP), Fannie Mae and Freddie Mac will provide access to low-cost refinancing for responsible homeowners with loans the Enterprises already own or guarantee. Up to 4 to 5 million homeowners could see their monthly payments reduced. Borrowers will be eligible for a refinanced mortgage with a current loan-to-value (LTV) of 80 percent to 105 percent. Because Fannie Mae or Freddie Mac already hold the credit risk on these mortgages, no additional credit enhancements, such as mortgage insurance, will be required. Existing mortgage insurance will be rolled into the new mortgage. Servicers should already have most of the needed documentation. In many cases, appraisals will not be needed. The idea is to make the refinancing process quick, relatively easy, and cheaper for both the homeowner and the mortgage lender and reduce delinquencies and foreclosures. For the Enterprises, that will reduce their credit risk, and in many cases, increase their guarantee fees. Over the last three months, they have done 1.8 million refinancings. The HARP refis, just starting, are 80,000, a quarter of which are over 80 percent LTV.

“The Home Affordable Modification initiative is a comprehensive $75 billion loan modification plan designed to reach up to 3 to 4 million at-risk homeowners. It will be paired with the expanded and improved FHA Hope for Homeowners plan. It will reduce a borrower’s monthly housing expense to 31 percent of his/her gross income through a combination of capitalization of past due payments, interest rate reductions, term extensions, principal forbearance, and/or principal forgiveness. Servicers can lower rates to as little as 2 percent, and extend loan maturities to 40 years. After five years of reduction, payments will increase gradually—at no more than 1 percentage point per year up to the Freddie Mac rate at the time of the mortgage origination. This program includes performance incentives for borrowers, servicers, lenders, and investors to encourage the willingness of all industry participants to engage in aggressively modifying mortgages to assist borrowers at risk and to encourage those borrowers to keep their accounts current.

“Fannie and Freddie are making good progress on loan modifications. The big challenge is mortgages held in private-label securities. As you can see in these pie charts, while Fannie Mae and Freddie Mac own or guarantee almost 31 million single-family mortgages, about 31 million single-family mortgages, about 57 percent of all single-family mortgages. The mortgages they own or guarantee only represent 22 percent of serious delinquencies. On the other hand, private-label mortgage-backed securities represent only 13 percent of the mortgages but 42 percent of the serious delinquencies.

“Let me pause on these pie charts for a moment, because they represent the problem we face in foreclosure prevention. If we are going to stabilize the housing market, we have to address that 42 percent in private-label securities. Fannie Mae and Freddie Mac have to return to their previous status as leaders in setting, promoting, and enforcing industry standards and best practices for all mortgages.

“Even before the implementation of the Home Affordable refinance and modification programs, our push to increase loan modifications as a means of reducing preventable foreclosures had been really picking up steam. In the first quarter of this year, the number of loan modifications increased by nearly 14,000 from the last quarter of 2008. Very importantly, the type of loan modification has changed dramatically. Some 52 percent of modifications during the first quarter of this year reduced the borrowers’ monthly payments by more than 20 percent, while a year ago, it was only 2 percent. With only 16 percent receiving any reduction last year, versus 83 percent last quarter, no wonder there was so high a redefault rate.

“On April 28, Treasury announced the Second Lien Program component of the Making Home Affordable programs to make it possible for people with second mortgages to modify or refinance. Statistics show that about half of all at-risk mortgages have second liens—some have more than one additional lien. Now when a modification is initiated on a first lien, participating servicers in the second lien program will automatically reduce the second lien’s payments.

“As agents of the Treasury, both Fannie Mae and Freddie Mac are playing major roles in and assume responsibilities in the implementation and ongoing oversight of the modification program. Those responsibilities include transaction processing, distribution of cash flows, payment of incentives, and program compliance oversight and on-site reviews.

“Although the Home Affordable programs are still in their early stages, the [GSE] Enterprises have reached some key milestones already. The Enterprises have signed up 16 servicers representing 75 percent of the market to participate in the programs. A special Internet portal has been set up for servicers to help them find information easily.
Before leaving the topic of mortgage modifications, I want to make one point that seems to be lost. Although these programs may have a short-term cost from an accounting standpoint to the Enterprises, foreclosures are much more costly directly and indirectly. With a $5.4 trillion mortgage book, stabilizing the mortgage market is critical to the long-term profitability of Fannie Mae and Freddie Mac. With the adoption of the Financial Accounting Standards Board’s 166 and 167 in January, which will consolidate their mortgage-backed securities on their balance sheets, even the short-term adverse accounting impact of loan modifications will disappear.”

Read More: At the end of the speech, FHFA boss James Lockhart answered questions.