Freddie Mac Betting Against Struggling Homeowners

January 30, 2012
by Chris Arnold

Freddie Mac, a taxpayer-owned mortgage company, is supposed to make homeownership easier. One thing that makes owning a home more affordable is getting a cheaper mortgage.

But Freddie Mac has invested billions of dollars betting that U.S. homeowners won't be able to refinance their mortgages at today's lower rates, according to an investigation by NPR and ProPublica, an independent, nonprofit newsroom.

These investments, while legal, raise concerns about a conflict of interest within Freddie Mac.

"We were actually shocked they did this," says Scott Simon, who heads the mortgage-backed securities team at the giant bond trading and investment firm called PIMCO. "It seemed so out of line with their mission, out of line with what Congress wanted them to do."

Freddie Mac, formally called the Federal Home Loan Mortgage Corp., was chartered by Congress in 1970. On its website, it says it has "a public mission to stabilize the nation's residential mortgage markets and expand opportunities for homeownership." The company is owned by U.S. taxpayers and overseen by a regulator, the Federal Housing Finance Agency (FHFA).

In December, Freddie Mac CEO Charles Haldeman (left), FHFA Acting Director Edward DeMarco (center) and Fannie Mae CEO Michael Williams testified about the FHFA's performance to the House Financial Services subcommittee.

 

In December, Freddie Mac CEO Charles Haldeman (left), FHFA Acting Director Edward DeMarco (center) and Fannie Mae CEO Michael Williams testified about the FHFA's performance to the House Financial Services subcommittee.

In December, Freddie's chief executive, Charles Haldeman, assured Congress his company is "helping financially strapped families reduce their mortgage costs through refinancing their mortgages."

But public documents show that in 2010 and 2011, Freddie Mac set out to make gains for its own investment portfolio by using complex mortgage securities that brought in more money for Freddie Mac when homeowners in higher interest-rate loans were unable to qualify for a refinancing.

Those trades "put them squarely against the homeowner," PIMCO's Simon says.

Freddie Mac's trades came at a time when mortgage rates were falling to record lows. Millions of homeowners wish they could refinance, but their lenders tell them they can't qualify for today's low rates because of tight rules. Freddie Mac is one of the gatekeepers with the power to set those rules, and lately, it has been saying no more often to homeowners.

That raises concerns among some industry insiders who see a conflict: Freddie Mac's own financial health improves when homeowners can't refinance.

Simply put, "Freddie Mac prevented households from being able to take advantage of today's mortgage rates — and then bet on it," says Alan Boyce, a former bond trader who has been involved in efforts to push for more refinancing of home loans.

In the summer of 2010, long lines of hopeful homeowners waited for help from the Neighborhood Assistance Corporation of America's "Save the Dream" tour. The tour made stops around the U.S., offering assistance from hundreds of mortgage counselors from various mortgage companies.

 

In the summer of 2010, long lines of hopeful homeowners waited for help from the Neighborhood Assistance Corporation of America's "Save the Dream" tour. The tour made stops around the U.S., offering assistance from hundreds of mortgage counselors from various mortgage companies.

Freddie and FHFA repeatedly declined to comment on the specific transactions, but Freddie did say that its employees who make investment decisions are "walled off" from those who decide the rules for homeowners.

When Homeowners Lose,
Freddie Mac Wins

Freddie Mac, based in Northern Virginia, says its job is to purchase "loans from lenders to replenish their supply of funds so that they [the lenders] can make more mortgage loans to other borrowers." That's one reason why Freddie has a gigantic portfolio containing loans that generate income from mortgage payments. Critics say this investment portfolio has been allowed to grow far larger than necessary to further Freddie's policy mission.

Plus, in 2010 and 2011, Freddie didn't just hold a simple pile of loans. Instead, for hundreds of thousands of home loans, it used Wall Street alchemy to chop these loans up into complicated securities — slices of which were sold in financial markets.

This hypothetical example may help explain what happens:

          1) Freddie Mac takes, say, $1 billion worth of home loan
          and packages them. With the help of a Wall Street banker, it
          can then slice off parts of the bundle to create different
          investment securities, some riskier than others.  The slices
          could be set up so that, say, $900 million worth are relatively
          safe investments, based upon homeowners paying
          the principal on their mortgages.

2) But the one remaining slice, worth $100 million, is the riskiest part. Freddie retains that slice, known as an "inverse floater," which receives all of the interest payments from the entire $1 billion worth of mortgages.

3) That riskiest investment pays out a lucrative stream of interest payments. But Freddie's slice also has all the so-called "pre-payment risk" associated with that $1 billion worth of loans. So if lots of people "pre-pay" their old loans and refinance into new, cheaper ones, then Freddie Mac starts to lose money. If people can't refinance, then Freddie wins because it continues to receive that flow of older, higher interest payments.

If the homeowner is unable to refinance, the Freddie Mac portfolio managers win, Simon says. "And if the homeowner can refinance, they lose."

Refinancing A Path To Recovery

"I'm sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates," Obama said during his State of the Union speech last week. "No more red tape. No more runaround from the banks."

 

"I'm sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates," Obama said during his State of the Union speech last week. "No more red tape. No more runaround from the banks."

In his State of the Union address, President Obama pushed for legislation to allow "every responsible homeowner the chance to save about $3,000 a year on their mortgage" by refinancing without what he called "red tape" or a "runaround from the banks."

Columbia University economist Chris Mayer supports such an approach. "A widespread refinancing program would have many benefits — not only helping the economy and putting tens of billions of dollars back in consumers' pockets, the equivalent of a very long-term tax cut," he says.

"It also is likely to reduce foreclosures and benefit the U.S. government by having fewer losses that they have to pay," Mayer adds.

In the long term, he says, allowing more Americans to refinance would help taxpayers as well as mortgage giants Freddie Mac and Fannie Mae, because they would suffer fewer losses related to foreclosures. These inverse floater trades, however, give Freddie Mac a short-term incentive to resist such so-called "mass re-fi" programs.

"If there was a mass re-fi program, the bets they made would get absolutely wiped out," PIMCO's Simon says. "The way these bets do the best is if the homeowner is barred from refinancing."

In a written statement, Freddie said it "is actively supporting efforts for borrowers to realize the benefits of refinancing their mortgages to lower rates." It also says it refinanced loans for hundreds of thousands of borrowers just last year.

Fannie and Freddie have taken part in an existing federal program known as "HARP" to help Americans refinance, but many economists say far more homeowners would benefit if Fannie and Freddie were to implement the program more aggressively.

The Silversteins had trouble selling this house after they moved out, forcing them to carry two mortgages for more than two years. "It just drained us," says Jay Silverstein.

 

The Silversteins had trouble selling this house after they moved out, forcing them to carry two mortgages for more than two years. "It just drained us," says Jay Silverstein.

Stuck In 'Financial Jail'

Some homeowners believe the current re-fi game is stacked against them.

If Jay and Bonnie Silverstein were able to refinance their mortgage, they could save nearly $500 a month.

 

If Jay and Bonnie Silverstein were able to refinance their mortgage, they could save nearly $500 a month.

Jay and Bonnie Silverstein describe themselves as truly stuck in a bad mortgage. They live in an unfinished development of yellow stucco houses north of Philadelphia. The developer went bankrupt.
The Silversteins bought this home before the housing market crashed, and then couldn't sell their old house. They now say that buying a new home before selling the old one was a mistake — a painful one. Stuck with two mortgages, they started to get behind on their payments on the old house.

"It wound up taking us years to sell that house, so we had two homes and two mortgages for two-and-a-half years," Jay Silverstein says. "It burned up my 401(k) and drained us."

Jay Silverstein has a modest pension, and they haven't missed a mortgage payment on their current home. Still, they are struggling. They could make the monthly payment on their new home if they could just refinance — down from their current interest rate of near 7 percent to today's rates below 4 percent. That could save them roughly $500 a month.

"You know, we're living paycheck to paycheck," he says. A lower rate "might go a long way toward helping us."

But that's the problem — getting approved for a refinancing. Here's why: After the housing market crashed, the Silversteins' old house had to be sold for less than the mortgage was worth. That's known as a short sale.

Freddie Mac has been tightening lending restrictions, and one of its restrictions blocks people with a short sale in their past from refinancing for up to four years following that short sale. So the Silversteins are stranded by the rule.

"We're in financial jail," Jay says. "We've never been there before."

One of Freddie Mac's restrictions blocks people who have a short sale in their past from refinancing for two to four years following the short sale.

 

One of Freddie Mac's restrictions blocks people who have a short sale in their past from refinancing for two to four years following the short sale.

Tight For Homeowners, But Elsewhere, Money Still Flows

Economists say that during the housing bubble, lending standards got too loose. Now many believe the pendulum has swung too far, making rules too tight.

The short-sale restriction may be a good example. For a home purchase, such a rule may be prudent, but allowing people with existing loans to refinance actually lowers the risk that they may default by giving them more affordable mortgage payments.

In a recent analysis of remedies for the stalled housing market, the Federal Reserve criticized Fannie and Freddie for the fees they have charged for refinancing. Such fees are "another possible reason for low rates of refinancing," the Fed wrote, adding that the charges are "difficult to justify."

Meanwhile, even though Freddie is a ward of the federal government, its top executives are highly compensated. The Freddie Mac official then in charge of its investment portfolio, Peter Federico, made $2.5 million in 2010, and had target compensation of $2.6 million for last year — the time period during which most of these inverse floater investments were made. ProPublica and NPR made numerous attempts to reach Federico. A woman who answered his home phone said he declined to comment.

December Existing-Home Sales Show Uptrend

Washington, DC, January 20, 2012

Existing-home sales continued on an uptrend in December, rising for three consecutive months and remaining above a year ago, according to the National Association of Realtors®.

The latest monthly data shows total existing-home sales1 rose 5.0 percent to a seasonally adjusted annual rate of 4.61 million in December from a downwardly revised 4.39 million in November, and are 3.6 percent higher than the 4.45 million-unit level in December 2010. The estimates are based on completed transactions from multiple listing services that include single-family homes, townhomes, condominiums and co-ops.

Lawrence Yun, NAR chief economist, said these are early signs of what may be a sustained recovery. “The pattern of home sales in recent months demonstrates a market in recovery,” he said. “Record low mortgage interest rates, job growth and bargain home prices are giving more consumers the confidence they need to enter the market.”

For all of 2011, existing-home sales rose 1.7 percent to 4.26 million from 4.19 million in 2010.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to another record low of 3.96 percent in December from 3.99 percent in November; the rate was 4.71 percent in December 2010; recordkeeping began in 1971.

NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami, said more buyers are expected to take advantage of market conditions this year. “The American dream of homeownership is alive and well. We have a large pent-up demand, and household formation is likely to return to normal as the job market steadily improves,” he said. “More buyers coming into the market mean additional benefits for the overall economy. When people buy homes, they stimulate a lot of related goods and services.”

Total housing inventory at the end of December dropped 9.2 percent to 2.38 million existing homes available for sale, which represents a 6.2-month supply2 at the current sales pace, down from a 7.2-month supply in November.

Available inventory has trended down since setting a record of 4.04 million in July 2007, and is at the lowest level since March 2005 when there were 2.30 million homes on the market.

“The inventory supply suggests many markets will see prices stabilize or grow moderately in the near future,” Yun said.

Foreclosures3 sold for an average discount of 22 percent in December, up from 20 percent a year ago, while short sales closed 13 percent below market value compared with a 16 percent discount in December 2010.

The national median existing-home price4 for all housing types was $164,500 in December, which is 2.5 percent below December 2010. Distressed homes – foreclosures and short sales – accounted for 32 percent of sales in December (19 percent were foreclosures and 13 percent were short sales), up from 29 percent in November; they were 36 percent in December 2010.

All-cash sales accounted for 31 percent of purchases in December, up from 28 percent in November and 29 percent in December 2010. Investors account for the bulk of cash transactions.

Investors purchased 21 percent of homes in December, up from 19 percent in November and 20 percent in December 2010. First-time buyers fell to 31 percent of transactions in December from 35 percent in November; they were 33 percent in December 2010.

Contract failures were reported by 33 percent of NAR members in December, unchanged from November; they were 9 percent in December 2010. Although closed sales are holding up better than this finding would suggest, contract cancellations are caused largely by declined mortgage applications and failures in loan underwriting from appraised values coming in below the negotiated price.

Single-family home sales increased 4.6 percent to a seasonally adjusted annual rate of 4.11 million in December from 3.93 million in November, and are 4.3 percent higher than the 3.94 million-unit pace a year ago. The median existing single-family home price was $165,100 in December, which is 2.5 percent below December 2010.

Existing condominium and co-op sales rose 8.7 percent to a seasonally adjusted annual rate of 500,000 in December from 460,000 in November but are 2.0 percent below the 510,000-unit level in December 2010. The median existing condo price was $160,000 in December, down 3.0 percent from a year ago.

Regionally, existing-home sales in the Northeast jumped 10.7 percent to an annual pace of 620,000 in December and are 3.3 percent above a year ago. The median price in the Northeast was $231,300, which is 2.7 percent below December 2010.

Existing-home sales in the Midwest rose 8.3 percent in December to a level of 1.04 million and are 9.5 percent above December 2010. The median price in the Midwest was $129,100, down 7.9 percent from a year ago.

In the South, existing-home sales increased 2.9 percent to an annual level of 1.76 million in December and are 3.5 percent above a year ago. The median price in the South was $146,900, down 1.1 percent from December 2010.

Existing-home sales in the West rose 2.6 percent to an annual pace of 1.19 million in December but are 0.8 percent below December 2010. The median price in the West was $205,200, up 0.3 percent from a year ago.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.

# # #

NOTE: For local information, please contact the local association of Realtors® for data from local multiple listing services. Local MLS data is the most accurate source of sales and price information in specific areas, although there may be differences in reporting methodology.

Twin Cities home sales are up, but prices are down

Twin Cities home sales are up, but prices are down

JIM BUCHTA, Star Tribune

Higher sales, but much lower prices. That pretty much sums up the Twin Cities housing market in 2011.

And those diverging realities suggest that the area is still a long way from recovery as foreclosures and short sales accounted for a significant chunk of transactions last year.

Home sales in the Twin Cities metro area during the year rose 8.2 percent compared with 2010, but the median sale price fell 11.7 percent to $150,000, according to data released Tuesday by the St. Paul Area Association of Realtors and the Minneapolis Area Association of Realtors.

There were 41,429 home sales in 2011. With the exception of 2009, a year when the federal home buyer's tax credit helped goose sales, that was the most sales since 2006. But half of the closed sales last year were either foreclosures or short sales, down slightly from previous years.

Richard Tucker, president of the St. Paul Area Association of Realtors, said while 2011 showed promise, "price increases will be the final piece of the recovery."

The market was dogged by historically high levels of foreclosures and short sales that were popular with bargain shoppers and investors hungry for deals. While demand for those distressed homes have buoyed sales, they've put considerable downward pressure on prices. The 2011 median sale price of $150,000 is the lowest in more than a decade. Since the downturn began in 2006, when the median sale price topped out at $230,000, prices have been on a downward spiral.

Cari Linn, a sales agent with Coldwell Banker Burnet and president of the Minneapolis Area Association of Realtors, said that the market has become fragmented, with the biggest price declines coming from distressed sales, which dropped 14.2 percent to $115,000. Prices on traditional listings were off only 7.8 percent to $200,000, a sign of strengthening demand, tight inventory and less flexibility from sellers. Generally, bank-owned properties sell for far less than a traditional listing because lenders want to unload those properties quickly.

Despite ongoing troubles with foreclosures, Linn and other agents point to a historic decline in listings as a sign that the market is on the cusp of recovery. Overall inventory in 2011 was down nearly 30 percent from the previous year, but was down 41.4 percent compared with 2007.

Stronger sales helped whittle away at the number of houses on the market, but there were also fewer homeowners willing to put their houses up for sale. Many prospective sellers are waiting out the market either because they don't want to sell at a discount or because they owe more on the homes than what they're worth.

The number of new listings during December fell to the lowest level since 2004.

Strong sales and declines in inventory caused the absorption rate -- the number of months that it would take to sell the existing inventory -- to dip to 4.5 months. The market is considered balanced when there's a five-month supply of listings.

The latest report does little to explain how many sellers are waiting in the wings for better prices, or how many distressed properties are in the hands of lenders and have yet to hit the market. Banks are now stepping up foreclosure proceedings in the wake of the robo-signing scandal, which caused lenders to reevaluate the way foreclosures are processed.

Because of those unknowns, Jeanne Boeh, chairwoman of the Economics Department at Augsburg College in Minneapolis, said that while double-digit price declines are very unlikely in 2012 , prices will take longer to recover than the unusually low 2011 inventory levels might suggest.

"Inventory is down because people who don't have to sell aren't," she said. "Right now, people are saying 'I'm in no hurry.'"

Jim Buchta • 612-673-7376

Make Sure You Are Taking Advantage of All 2011's Tax Deductions

It's that time of year, time to pull together all your tax information for 2011.  Here are some things that I found useful for you to use to help save some money on your taxes.  If you have any questions on these items talk with a trusted tax advisor and if you don't have one, I can get you pointed in the right direction.

Information brought to you by houselogic.com:

HOME RELATED TAX DEDUCTIONS
There are deductions for mortgage interest, home offices, vacation homes, private mortgage insurance, and even medical home improvements. HouseLogic’s insights help you determine which fit your circumstances.

Read more: http://www.houselogic.com/home-taxes-financing/taxes-incentives/tax-deductions/#ixzz1iz8Dm0k4

ENERGY TAX CREDITS
2011’s federal energy tax credits of up to $500 for various home improvements are a far cry from what they were last year. But if the limits and other fine print—which we’ll get to—doesn’t dissuade you and you really need to upgrade one or more of the following systems, take advantage of the energy tax credits.

• Biomass stoves
• Heating, ventilation, air conditioning
• Insulation
• Roofs (metal and asphalt)
• Water heaters (non-solar)
• Windows, doors, and skylights
• Storm windows and doors

The energy tax credits are small, but at least a credit is better than a deduction:

• Deductions just reduce your taxable income.
• With a credit, you get a dollar-for-dollar reduction in your tax liability: If you get the $500 credit, you pay $500 less in taxes.
• Other limits on IRS energy tax credits besides $500 max
• Credit only extends to 10% of the cost (not the 30% of yesteryear), so you have to spend $5,000 to get $500.
• $500 is a lifetime limit. If you pocketed $500 or more in 2009 and 2010 combined, you’re not entitled to any more money for energy-efficient improvements in the above seven categories. But if you took $300 in the last two years, for example, you can get up to $200 in 2011.
• With some systems, your cap is even lower than $500.
• $500 is the max for all qualified improvements combined.
• Certain systems capped below $500

No matter how much you spend on some approved items, you’ll never get the $500 credit—though you could combine some of these:

• System Cap
• New windows $200 max (and no, not per window—overall)
• Advanced main air-circulating fan $50 max
• Qualified natural gas, propane, or oil furnace or hot water boiler $150 max
• Approved electric and geothermal heat pumps; central air-conditioning systems; and natural gas, propane, or oil water heaters $300 max

And not all products are created equal in the feds’ eyes. Improvements have to meet IRS energy-efficiency standards to qualify for the tax credit. In the case of boilers and furnaces, they have to meet the 95 AFUE standard. EnergyStar.gov has the details.

Tax credits cover installation—sometimes

Rule of thumb: If installation is either particularly difficult or critical to safe functioning, the credit will cover labor. Otherwise, not. (Yes, you’d have to be pretty handy to install your own windows and roof, but the feds put these squarely in the “not covered” category.)

Installation covered for:

• Biomass stoves
• HVAC
• Non-solar water heaters

Installation not covered for:

• Insulation
• Roofs
• Windows, doors, and skylights
• How to claim the 2011 energy tax credit

Determine if the system you’re considering is eligible for the credits. Go to Energy Star’s website for detailed descriptions of what’s covered; then talk to your vendor.

Save system receipts and manufacturer certifications. You’ll need them if the IRS asks for proof.

File IRS Form 5695 with the rest of your tax forms in 2012.

This article provides general information about tax laws and consequences, but isn’t intended to be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice, and remember that tax laws may vary by jurisdiction.



Read more: http://www.houselogic.com/home-advice/tax-credits/how-to-collect-2011-tax-energy-credits/#ixzz1iz9dLJ3s

Spring Market Starts Soon!!!

The Spring Market will be heating up in the next couple weeks. 

You heard me right. The Spring Market actually starts in January. Many believe that the Spring Market starts when the snow melts and the temperature rises. That simply is not the case. Buyers actually start their search in January and February. Typically buyers close on a home a couple of months after making their offer. Therefore, people assume that the Spring Market happens in the beginning of Spring.

So if you have been thinking of selling your home and plan to look for a new one now is an ideal time to do so. Or for those of you that have been on the market and decided to take a break for the holidays, now is the time to get back on the market. You will get more visibility and exposure because there are fewer homes on the market during this time. The fewer homes buyers have to choose from the better chance that you have to sell your home.

I want to help you explore your options. So if you are planning to talk to an agent, I would be more than happy to meet with you. I do offer a Free Current Market Analysis with every first appointment. Call me today for a no obligation consult, 651-235-0868.