The political current in Washington seems predisposed to wind down Fannie Mae and Freddie Mac. The drive is so strong that even a center-left group like the Center for American Progress has abandoned its support for some public-purpose entity. The climate is so hostile that supporting the GSEs, even in a very different and scaled-down orientation, is somewhat of a radical point of view.

The logic provided by the supporters of such a measure is that private investors will step in to buy mortgages on the secondary market. That (more…)

I can agree that we need to address how Fannie and Freddie operate. It isn’t as if there is only one problem, either. The GSEs took on too much leverage. They started buying sub-prime mortgages. They had a finance structure that made no sense at all. It isn’t just a problem for people that want a mortgage, for shareholders, or for people that have been outgunned by GSE lobbyists. It is an issue that should concern anyone that pays taxes. Taxpayers have been forced to recapitalize the GSEs.

But even when all of that is acknowledged, the ongoing value of the GSEs is irrefutable. (more…)

• The Motley Food rated H&R Block as the “Worst Stock in the S & P 500,” mainly on the news that they will offer free federal e-file returns. “How desperate has H&R Block become, if it needs to resort to coaxing taxpayers into its stores with free federal filing?” they ask. A contrary viewpoint would say that the market is already discounting their business. Block’s fundamentals reflect a very low valuation. It is also worth mentioning that Jackson Hewitt is offering free preparation for basic federal returns (online).
• The Colorado Attorney General’s Office announced a settlement with Payday Everyday of Colorado. The Texas company operates the Payday Everyday of Colorado and FastBucks stores. The company deserves (more…)

The Federal Housing Administration has decided to rethink how it protects itself with a new guidance last month. The new rules have implications not just for borrowers, but also for private mortgage insurance companies.

The new rules, known as the Loan Level Pricing Adjustments (LLPA – pdf here), say that most FHA borrowers will now have to pay an upfront premium of 150 basis points on the amount of their FHA loan. Subsequently, they will be expected to pay another 50 basis points each year. That second charge is paid with the monthly payment.

One analyst at a private mortgage insurance company called me to tell me how much of a difference this will make for his company. He paints a tough picture for the market in the last year: the private firms were being squeezed by the low rates at FHA and the high origination fees built in to (more…)

Where is the outrage over LLPA and AMDC, the GSE guidelines that have placed additional costs on mortgages that are purchased on the secondary market by the agencies?

The Loan Level Pricing Adjustment (LLPA) imposes charges, ranging from 25 basis points to 200 basis points, for mortgages that have higher risk characteristics.  Those categories include loans with stated income features, investor loans, loans on multifamily units, and loans where borrowers have lower credit scores.

The Adverse Markets Delivery Charge (AMDC) fixes an additional cost on mortgages that are made in areas where real estate values have declined sharply. The application of the charge is analysed at the MSA level. That’s good, because it would be particularly onerous if it was applied on a more micro target. Imagine what would happen if the GSEs were willing to buy loans on one side of the tracks at one price, but at a higher price on “the other side of the tracks.” We would be back to redlining.

For a period, it appeared that FHA would not accept this pricing on its loans. That hinted at a major problem for private mortgage insurers. After all, this would have pushed more and more loans to FHA.

If the demand on the secondary market returned to a state where private buyers were interested, then this could become interesting again. Again, though, this seems to create a force that would prevent that. Imagine if the private buyers were back. Then, they’d be likely to get a greater share of mortgages made to borrowers with less than perfect credit. They would also be more attractive to investors, to multifamily buyers, and to people with ARMs or with stated-income loans. That’s not an attractive prospect.

Demand for mortgages, particular for mortgages on loans that are used to buy homes, is weak. The expiration of the first-time homebuyer tax credit prompted a lot of activity for lower-priced homes. That incentive is gone, now, and for homes that remain the prospects of sales are much weaker. Interest rates are very low, but down payment requirements make a big difference.