Mortgage Payment Program

Depending on your point of view, the Fed has been on either a spending spree or an investment spree that is unheralded.  They are spending trillions of dollars –sprinking a few billion here, say in bailing out insurance firms like AIG, a few more billion on the auto industry, a few more billion on TARP funds to bail out failing banks, and a few billion more on seemingly anything that they hope will either spark a short rally on Wall Street and/or the spirits of the American people who are collectively worried about the long term implications of our economy.  All this spending raises a two very big questions:

1. How much money are we spending? We all know a billion is a big number, and a trillion is even bigger. I am not sure most Americans grasp how big these numbers really are.  How big is a trillion?

1 million seconds = 12 days
1 billion seconds = 31 years
1 trillion seconds is 31,688 years

Of course, when we look at the Fed spending we are talking about dollars instead of time.  Imagine you were paid $1 for every second of the year. And look at those figures again. It would take you 31 years to earn a $1 billion at a rate of $1 per second.  Even at the rate Bill Gates earns money, it would take him thousands of years to earn $1 trillion – an amount the Fed committed to invest one day last week.  The final tally on the cost for stimulus and bail out could very well come in between $3 trillion and $5 trillion.

2. Where is my bailout money?  The governments original plan invest TARP funds in banks in order to help them get the toxic assets off their books and provide liquidity so they could resume lending does not seem to have worked. In mid March, they announced another couple round of funds to buy up Fannie Mae and Freddie Mac mortgage backed securities in order to provide funds for new mortgage lending and to buy $300 billion in Treasuries over the next 6 months to influence lower interest rates for mortgage loans. Neither of these are really “bail out” plans for homeowners, but the combination may result in record low interest rates for homeowners who qualify to refinance.

For homeowners who are delinquent and/or on the verge of foreclosure, there is the FHA Hope for Homeowners (or H4H) program.  This plan was rolled out in late 2008, and is designed to provide refinance options to qualified homeowners who need help. The program can reduce the amount owed down if the new appraisal comes in below the amount owed – a huge help for people in markets where property values have plummeted.  Of course, there are restrictions and qualification the borrower must meet.  To find out more about the H4H visit www.fha.gov.

In February, President Obama announced plans to expand the loan program to help homeowners struggling to keep up with payments.  Those programs are in development now by Fannie Mae and Freddie Mac and should be available to homeowners in a few weeks, once the two GSE’s work through the systems issues of approving loans that normally would fail several of the standard automated underwriting checks in the existing software.

This past weekend the inevitable happened: the government stepped in to take over Fannie Mae and Freddie Mac. The two companies were placed into a conservatorship in an effort to bring some stability to the housing and mortgage market. Who are the winners and losers from this landmark move?

Winners: The investors. By investors I mean the companies that buy the debt or securities Fannie and Freddie created from the mortgages they funded. The federal government is now responsible for losses on these investments – a move which the government hopes will attract investors back to mortgage securities and create the much needed funds to fuel mortgage originations.

Losers: The shareholders. The shares prices have been in a steady decline and the move to take over the companies is not a move to buy out the shareholders. People who invested in Fannie Mae or Freddie Mac stocks are likely going to continue to be upside down (lose money on their investment) until the future of these entities is decided and, should they remain public, regain value in their share – meaning a long, long time.

As for homeowners… we will have to wait and see. With the government stepping in that should clear the way for mortgage rates to drop down. However, lending standards are still up in the air. We may not get a decision on how conservative or liberal the lending standards will be until after the next president is elected. My guess is we are likely to see stricter underwriting guidelines that are more inline with what these two companies used originally; requirements for larger down payments and more conservative debt to income ratios which may make mortgages more difficult to obtain for many.