Things are going from bad to worse at the mortgage giant Fannie Mae. They posted an $18.9 Billion loss in Q3, forcing them to borrow another $15 Billion fro the taxpayer. That raises the bailout total to $60.9 Billion, and counting.
These massive losses are originating from an unprecedented surge in mortgage delinquencies.
Fannie Mae said the delinquency rate on loans in its single-family guarantee business rose 0.28 percentage points to 4.45 percent in August, the latest month Fannie has data for, well above 1.57 percent in August 2008.
With disastrous results like this it is easy to see why someone might panic and try some crazy gamble against long odds. That appears to be exactly what the executives at Fannie Mae did today.
The new "Deed for Lease" program will allow homeowners to transfer title to Fannie Mae and sign a one-year lease, with potential month-to-month extensions after that. It also helps save money because the lender does not need to complete the often lengthy and time-consuming foreclosure process.
So a company who's mandate involves buying and selling mortgages on the secondary market is suddenly going to become the largest landlord in America. Does that sound like a normal and logical business decision to you?
To qualify, homeowners have to live in the home as their primary residence and prove that they can afford the market rent, which would be determined by the management company. The rent can't be more than 31 percent of their pretax income.
Here's an obvious problem: if the "renter" can afford to pay 31% of their income on housing, why couldn't they do so on a mortgage?
Even more important, and this is the key point, if the mortgage was significantly greater than what Fannie will be charging for rent, then the rent won't cover the PITI (Principal, Interest, Taxes and Insurance) on the original note. Otherwise the "homeowner" would never have to become a renter in the first place. This is a default on the mortgage by other means.
Also, we should note that the rental market is completely saturated and at record levels. Fannie's desperation play will likely result in a further depression of rent prices, and make it harder for existing owners of investment homes to pay their mortgages.
So why is Fannie doing this? You could say they are doing this out of the goodness of their hearts, but let's be serious.
While Fannie Mae executives say the company's motives are community-minded, critics say the company is simply gambling that the properties will eventually sell for a higher price. That's folly, says Peter Schiff, president of Euro Pacific Capital in Darien, Conn., and a longtime bearish investor.
"Taxpayers are now going to own all these houses that (Fannie Mae) should have unloaded," he said. "It's going to cost a fortune."
The question here is what the housing market will look like in a year. If the housing market turns around and prices are higher next year then Fannie's gamble will pay off. If housing prices are lower than Schiff is right and this gamble will simply mean that the taxpayer bailouts will not only continue, but increase in size.
So which is more likely?
The housing market is experiencing a massive overhang in approaching foreclosures.
There are 7 million homes of shadow inventory in the pipeline. That's nearly a year and a half of homes just waiting to be dumped onto the market. Foreclosures are artificially low given the present conditions because of government efforts to stem the foreclosure issues.
As it stands now, people are living in their homes for as long as year without paying their mortgages, and without getting a foreclosure notice.
As of July, mortgage companies hadn’t begun the foreclosure process on 1.2 million loans that were at least 90 days past due, according to estimates prepared for The Wall Street Journal by LPS Applied Analytics, which collects and analyzes mortgage data. An additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the lender hadn’t yet acquired the property. The figures don’t include home-equity loans and other second mortgages.
Moreover, there were 217,000 loans in July where the borrower hadn’t made a payment in at least a year but the lender hadn’t begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue aren’t in foreclosure, up from 8% a year earlier."
The cure rate for mortgages like these are next to zero. These people will be foreclosed on. It's only a matter of time.
So with all these homes just waiting to be dumped onto the market the moment housing prices stop falling, what are the realistic chances that Fannie's gamble will pay off? Especially when the credit markets continue to get tighter.
Of course there are two other issues that really underscore this Hail Mary pass:
a) one way or another, this will increase the amount of "shadow inventory" in the housing market. Sooner or later all these homes are going to need to be sold. This overhang will suppress home prices for a very long time.
b) Fannie Mae executives will be able to hide massive losses off their books for several quarters. This will probably translate into executive bonuses.