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NAR-Backed Rate Buydown Gains Traction
An effort by the NATIONAL ASSOCIATION OF REALTORS® to spur home sales through a mortgage-interest rate buydown appears to be gaining traction. Reports in major news media like the Washington Post and Wall Street Journal today quote sources familiar with a meeting between U.S. Treasury officials and NAR in November in which the buydown proposal was discussed.
"Treasury officials told the REALTORS® that the [buydown] plan could be a more effective way to help homeowners than focusing solely on borrowers who are struggling to meet their monthly payments," the Washington Post story says.
Under the Treasury plan, lenders would sell newly issued mortgage-backed securities to the government provided the interest-rate on the loans collateralizing the securities was no higher than 4.5 percent. Although NAR supports a buydown, it does not take a position on how low interest rates should go.
To pay for the plan, Treasury would issue bonds at 3 percent, creating a 1.5-percent spread that it could use for buying the securities. Those securities would then be purchased by secondary mortgage market companies Fannie Mae and Freddie Mac, which are under federal conservatorship.
NAR has been calling for a buydown and other measures to help stimulate housing sales as part of a four-point plan it showcased at its annual meeting in Orlando last month. To date, tens of thousands of REALTORS® have sent letters to their members of Congress asking for quick action to help housing, which is widely considered a crucial first step to a broader economic recovery. Other parts of the four-point plan include making 2008 high-cost conforming loan limits, which are now $729,750, permanent, and improving the home buyer tax credit by expanding it to all buyers, not just first-timers, and eliminating the repayment requirement.
Some analysts have calculated that an interest-rate buydown could help as many as 2.5 million households.
Source: REALTOR® Magazine Online
Fed: CRA Didn't Encourage Subprime Loans
The Community Reinvestment Act isn’t the culprit behind the current housing meltdown, said Federal Reserve Governor Randall Kroszner in a speech to a Washington DC public policy forum.
Kroszner said that contrary to charges that that encouraging banks to lend to lower-income borrowers pushed banking firms into high-risk lending, most of the subprime loans took place in middle and higher-income neighborhoods.
The loans that are the focus of the CRA represent "a very small portion of the subprime lending market," Kroszner said.
Source: Dow Jones Newswires (21/03/2008)
Housing Prices Fall Below Replacement Costs
Housing consultancy Global Insight reports that nationwide, housing prices are now 3.8 percent undervalued, based on total market value. It says values fell at a faster pace in the third quarter after stabilizing earlier in the year.
According to Global Insight’s calculations, prices are now 6.5 percent below their 2007 peak. They fell at a 6.9 percent annual pace affecting 241 of the 330 metropolitan areas analyzed by Global Insight. That’s up from 150 metro areas affected in the second quarter.
Contraction is most severe in the Southeast and Southwest with only the Pacific Northwest remaining overvalued, Global Insight says.
Home prices fell more than 10 percent in the third quarter in nine central California communities. The Central Valley communities of Merced, Stockton, and Modesto have seen property values fall to less than half their 2005 value. Twenty-nine metro areas in California, Florida, and Nevada – at one time among the most overvalued – have seen price declines in excess of 30 percent. Similar steep price drops are occurring in Michigan, northeast Ohio, the southern metro areas from Charlotte to Atlanta, as well as in New England.
"Weak economic conditions and wary consumers continue to hold the housing market back. Although many areas are seeing home sales increase, it is largely due to foreclosure homes being snapped up at significantly discounted prices. As the inventory of these homes is removed from the market, prices will remain on a downward path," predicts Jeannine Cataldi, senior economist and manager of Global Insight’s Regional Real Estate Service.
Source: Global Insight (12/03/2008)
Speech
Chairman Ben S. Bernanke
At the Federal Reserve System Conference on Housing and Mortgage Markets, Washington, D.C.
December 4, 2008
Housing, Mortgage Markets, and Foreclosures
The U.S. financial system has been in turmoil during the past 16 months. Credit conditions have tightened and asset values have declined, contributing substantially, in turn, to the weakening of economic activity. As the participants in this conference are keenly aware, I am sure, housing and housing finance played a central role in precipitating the current crisis. As the crisis has persisted, however, the relationships between housing and other parts of the economy have become more complex. Declining house prices, delinquencies and foreclosures, and strains in mortgage markets are now symptoms as well as causes of our general financial and economic difficulties. These interlinkages imply that policies aimed at improving broad financial and economic conditions and policies focused specifically on housing may be mutually reinforcing. Indeed, the most effective approach very likely will involve a full range of coordinated measures aimed at different aspects of the problem.
I will begin this morning with some comments on developments in the housing sector and on the interactions among house prices, mortgage markets, foreclosures, and the broader economy. I will then discuss both some steps taken to date and some additional measures that might be taken to support housing and the economy by reducing the number of avoidable foreclosures. As we as a nation continue to fashion our policy responses in coming weeks and months, we must draw on the best thinking available. I expect that the papers presented at this conference will add significantly to our understanding of these important issues.
Developments in Housing and Housing Finance
As you know, the current housing crisis is the culmination of a large boom and bust in house prices and residential construction that began earlier in this decade. Home sales and single-family housing starts held unusually steady through the 2001 recession and then rose dramatically over the subsequent four years. National indexes of home prices accelerated significantly over that period, with prices in some metropolitan areas more than doubling over the first half of the decade.1 One unfortunate consequence of the rapid increases in house prices was that providers of mortgage credit came to view their loans as well-secured by the rising values of their collateral and thus paid less attention to borrowers' ability to repay.2
However, no real or financial asset can provide an above-normal market return indefinitely, and houses are no exception. When home-price appreciation began to slow in many areas, the consequences of weak underwriting, such as little or no documentation and low required down payments, became apparent. Delinquency rates for subprime mortgages--especially those with adjustable interest rates--began to climb steeply around the middle of 2006. When house prices were rising, higher-risk borrowers who were struggling to make their payments could refinance into more-affordable mortgages. But refinancing became increasingly difficult as many of these households found that they had accumulated little, if any, housing equity. Moreover, lenders tightened standards on higher-risk mortgages as secondary markets for those loans ceased to function.
Higher-risk mortgages are not the only part of the mortgage market to have experienced stress. For example, while some lenders continue to originate so-called jumbo prime mortgages and hold them on their own balance sheets, these loans have generally been available only on more restrictive terms and at much higher spreads relative to prime conforming mortgage rates than before the crisis. Mortgage rates in the prime conforming market--although down somewhat from their peaks--remain high relative to yields on longer-term Treasury securities, and lending terms have tightened for this segment as well.
As house prices have declined, many borrowers now find themselves "under water" on their mortgages--perhaps as many as 15 to 20 percent by some estimates. In addition, as the economy has slowed and unemployment has risen, more households are finding it difficult to make their mortgage payments. About 4-1/2 percent of all first-lien mortgages are now more than 90 days past due or in foreclosure, and one in ten near-prime mortgages in alt-A pools and more than one in five subprime mortgages are seriously delinquent.3 Lenders appear to be on track to initiate 2-1/4 million foreclosures in 2008, up from an average annual pace of less than 1 million during the pre-crisis period.4
Predictably, home sales and construction have plummeted. Sales of new homes and starts of single-family houses are now running at about one-third of their peak levels in the middle part of this decade. Sales of existing homes, including foreclosure sales, are now about two-thirds of their earlier peak. Notwithstanding the sharp adjustment in construction, inventories of unsold new homes, though down in absolute terms, are close to their record high when measured relative to monthly sales, suggesting that residential construction is likely to remain soft in the near term.
As I mentioned earlier, the problems in housing and mortgage markets have become inextricably intertwined with broader financial and economic developments. For example, mortgage-related losses have eroded the capital of many financial institutions, leading them to become more reluctant to make not only mortgage loans, but other types of loans to consumers and businesses as well. Likewise, some homeowners have responded to declining home values by cutting back their spending, and residential construction remains subdued. Thus, weakness in the housing market has proved a serious drag on overall economic activity. A slowing economy has in turn reduced the demand for houses, implying a further weakening of conditions in the mortgage and housing markets.
Reducing Preventable Foreclosures
Because developments in the housing sector have become so interlinked with the evolution of the financial markets and the economy as a whole, both macro and micro policies have a role in addressing the strains in housing. At the macro level, the Federal Reserve has taken a number of steps, beginning with the easing of monetary policy. To the extent that more accommodative monetary policies make credit conditions easier and incomes higher than they otherwise would have been, they support the housing market.
The Federal Reserve has also implemented a series of actions aimed at restoring the normal functioning of financial markets and restarting the flow of credit, including providing liquidity to a range of financial institutions, working with the Treasury and the Federal Deposit Insurance Corporation (FDIC) to help stabilize the banking system, and providing backstop liquidity to the commercial paper market. The Federal Reserve supported the actions by the Federal Housing Finance Agency (FHFA) and the Treasury to put the housing-related government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, into conservatorship, thereby stabilizing a critical source of mortgage credit. The Federal Reserve has also recently announced that it will purchase up to $100 billion of the debt issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and up to $500 billion in mortgage-backed securities issued by the GSEs.
Although broad-based macroeconomic policies help to create an economic and financial environment in which a housing recovery can occur, policies aimed more narrowly at the housing market are important, too. In the remainder of my remarks, I will focus on policy options for reducing preventable foreclosures.
Foreclosures impose large costs on families who face the loss of their homes and reduced future access to credit. But the public policy case for reducing preventable foreclosures does not rely solely on the desire to help people who are in trouble. Foreclosures create substantial social costs. Communities suffer when foreclosures are clustered, adding further to the downward pressure on property values. Lower property values in turn translate to lower tax revenues for local governments, and increases in the number of vacant homes can foster vandalism and crime.5 At the national level, the declines in house prices that result from the addition of foreclosed properties to the supply of homes for sale create broader economic and financial stress, as I have already noted.6
On the surface, private economic incentives to avoid foreclosure would appear to be strong for the lender as well as the borrower. Foreclosure dissipates much of the value of the property: Indeed, recent losses on defaulted subprime mortgages have averaged around 50 to 60 percent of the loan balance.7 Besides the general decline in property values and foregone payments, fees related to foreclosure, such as court costs, maintenance expenses, and others, can amount to 10 to 15 percent of the loan balance; furthermore, the discount in value due to foreclosure status can be an additional 5 to 15 percent.8
However, despite the substantial costs imposed by foreclosure, anecdotal evidence suggests that some foreclosures are continuing to occur even in cases in which the narrow economic interests of the lender would appear to be better served through modification of the mortgage. This apparent market failure owes in part to the widespread practice of securitizing mortgages, which typically results in their being put into the hands of third-party servicers rather than those of a single owner or lender. The rules under which servicers operate do not always provide them with clear guidance or the appropriate incentives to undertake economically sensible modifications.9 The problem is exacerbated because some modifications may benefit some tranches of the securities more than others, raising the risk of investor lawsuits. More generally, the sheer volume of delinquent loans has overwhelmed the capacity of many servicers, including portfolio lenders, to undertake effective modifications.
During more normal times, mortgage delinquencies typically were triggered by life events, such as unemployment, illness, or divorce, and servicers became accustomed to addressing these problems on a case-by-case basis. Although taking account of the specific circumstances of each case remains important, the scale of the current problem calls for greater standardization and efficiency. Loan modification programs with clearly defined protocols can both help reduce modification costs and protect servicers from the charge that they have acted arbitrarily. The federal banking regulators have urged lenders and servicers to work with borrowers to avoid preventable foreclosures. The regulators recently reiterated that position in a joint statement that encouraged banks to make the necessary investments in staff and capacity to meet the escalating workload and to adopt systematic, proactive, and streamlined modification protocols to put borrowers in sustainable mortgages.10
A number of initiatives have attempted to address the problem of unnecessary foreclosures. Working in collaboration with the Treasury Department, the Hope Now Alliance, a coalition of mortgage servicers, lenders, housing counselors, and investors--led by Faith Schwartz, a member of the Fed's Consumer Advisory Council--has produced a set of guidelines that participating servicers have agreed to use as they work to prevent foreclosures. In addition, servicers in the Alliance agreed to delay foreclosure proceedings if an alternative approach might allow the homeowners to stay in their home. Recently, in conjunction with the FHFA, the coalition announced that its members will adopt a streamlined modification program for certain loans that they service for the GSEs. This program will closely follow the one that the FDIC has introduced for modifying the loans in the portfolio that it took over from IndyMac.11
The Federal Reserve has also been actively supporting efforts to prevent unnecessary foreclosures. Through the System's Homeownership and Mortgage Initiative, we have conducted studies on housing and foreclosures, provided community leaders with detailed analyses to help them better target their borrower outreach and counseling efforts, and convened forums like this one to facilitate the exchange of ideas and the development of policy options. Taking advantage of the Federal Reserve's nationwide presence, the twelve Reserve Banks have sponsored or co-sponsored more than 100 events related to foreclosures around the country since last summer, bringing together more than 10,000 lenders, counselors, community development specialists, and policymakers. A particular focus of the Fed's efforts has been the mitigation of the costs to communities of high rates of foreclosure. For example, we have partnered with NeighborWorks America on a neighborhood stabilization project and helped them develop responses to community needs as well as train local leaders.
Beyond these efforts, two government programs to facilitate loan modifications have been authorized, both through the Federal Housing Administration (FHA). The FHASecure program has provided long-term fixed-rate mortgages to borrowers facing a rise in payments due to an interest rate reset. Another, more recent program, dubbed Hope for Homeowners (H4H), allows lenders to refinance a delinquent borrower into a new, FHA-insured fixed-rate mortgage if the lender writes down the mortgage balance to create some home equity for the borrower and pays an up-front insurance premium. In exchange for being put "above water" on the mortgage, the borrower is required to share any subsequent appreciation of the home with the government.
Although the basic structure of the H4H program is appealing, some lenders have expressed concerns about its complexity and cost, including the requirement in many cases to undertake substantial principal write-downs. As a result, participation has thus far been low. In response to these concerns, the board of the H4H program--on which Governor Duke represents the Federal Reserve--recently approved a number of changes, using the authority granted to it under the Emergency Economic Stabilization Act (EESA). These changes would reduce the necessary write-down on some loans, address the complications caused by subordinate liens by permitting up-front payments to those lien holders, allow lenders to extend mortgage terms from 30 to 40 years to increase affordability, and eliminate the trial modification period to expedite loan closings. It is still too early to know what the ultimate demand for H4H loans under this set of rules will be, but as I will discuss further momentarily, a case can be made for further adjusting the terms of the program to make it more attractive to both lenders and borrowers.
Despite good-faith efforts by both the private and public sectors, the foreclosure rate remains too high, with adverse consequences for both those directly involved and for the broader economy. More needs to be done. In the remainder of my remarks I will discuss, without ranking, a few promising options for reducing avoidable foreclosures. These proposals are not mutually exclusive and could be used in combination. Each would require some commitment of public funds.
To be effective, loan modifications should aim to put borrowers into mortgages that they can afford over the longer term. During more normal times, many homeowners could be helped with a temporary repayment plan--for example, a deferral of interest payments for a period. But under the current circumstances, with house prices declining and credit tight, permanent loan modifications will often be needed to create sustainable mortgages and keep people in their homes. Most current proposals to reduce foreclosures incorporate this view and thus emphasize permanent modifications.
A more difficult design question turns on the extent to which the probability of default or redefault depends on the borrower's equity position in the home, as well as on the affordability of the monthly payment. Although not conclusive, the available evidence suggests that the homeowner's equity position is, along with affordability, an important determinant of default rates, for owner-occupiers as well as investors. If that evidence is correct, then principal write-downs may need to be part of the toolkit that servicers use to achieve sustainable mortgage modifications.12
If one accepts the view that principal write-downs may be needed in cases of badly underwater mortgages, then strengthening the H4H program is a promising strategy, as I have noted. Beyond the steps already taken by the H4H board, the Congress might consider making the terms of H4H loans more attractive by reducing the up-front insurance premium paid by the lender, currently set in law at 3 percent of the principal value, as well as the annual premium paid by the borrower, currently set at 1-1/2 percent. The Congress might also grant the FHA the flexibility to tailor these premiums to individual risk characteristics rather than forcing the FHA to charge the same premium to all borrowers.
In addition, consideration might be given to reducing the interest rate that borrowers would pay under the H4H program. At present, this rate is expected to be quite high, roughly 8 percent, in part because it is tied to the demand for the relatively illiquid securities issued by Ginnie Mae to fund the program. To bring down this rate, the Treasury could exercise its authority to purchase these securities, with the Congress providing the appropriate increase in the debt ceiling to accommodate those purchases. Alternatively, the Congress could decide to subsidize the rate.
A second proposal, put forward by the FDIC, focuses on improving the affordability of monthly payments. Under the FDIC plan, servicers would restructure delinquent mortgages using a streamlined process, modeled on the IndyMac protocol, and would aim to reduce monthly payments to 31 percent of the borrower's income. As an inducement to lenders and servicers to undertake these modifications, the government would offer to share in any losses sustained in the event of redefaults on the modified mortgages and would also pay $1,000 to the servicer for each modification completed.13 The strengths of this plan include the standardization of the restructuring process and the fact that the restructured loans remain with the servicer, with the government being involved only when a redefault occurs.
As noted, the FDIC plan would induce lenders and servicers to modify loans by offering a form of insurance against downside house price risk. A third approach would have the government share the cost when the servicer reduces the borrower's monthly payment. For example, a servicer could initiate a modification and bear the costs of reducing the mortgage payment to 38 percent of income, after which the government could bear a portion of the incremental cost of reducing the mortgage payments beyond 38 percent, say to 31 percent, of income. This approach would increase the incentive of servicers to be aggressive in reducing monthly payments, which would improve the prospects for sustainability. Relative to the FDIC proposal, this plan would pose a greater operational burden on the government, which would be required to make payments to servicers for all modified loans, not just for loans that redefault. However, this approach could leverage existing modification frameworks, such as the FDIC/IndyMac and Hope Now streamlined protocols, and in this respect would build on, rather than crowd out, private-sector initiatives.
Yet another promising proposal for foreclosure prevention would have the government purchase delinquent or at-risk mortgages in bulk and then refinance them into the H4H or another FHA program. This approach could take advantage of the depressed market values of such mortgages, and buying in bulk might help avoid adverse selection problems. In addition, scale efficiencies could be achieved by contracting with specialty firms (perhaps including the GSEs) capable of re-underwriting large volumes of loans to make them eligible for H4H or another program. The Treasury has already considered how to undertake bulk purchases as part of its work under EESA, and the Federal Reserve has submitted to the Congress an analysis of bulk purchases per a legislative requirement in the H4H bill. Even so, this program could take some time to get up and running, and the re-underwriting required for H4H loans would likely take more time and incur greater operational costs than other plans. But such an approach could result in many homeowners being refinanced into sustainable mortgages.
Conclusion
The housing market remains central to the economic and financial challenges that we face. Because housing and mortgage markets are tightly interlinked with the rest of the economy, actions to strengthen financial markets and the broader economy are important ways to address housing issues. By the same token, steps that stabilize the housing market will help stabilize the economy as well.
In this regard, reducing the number of preventable foreclosures would not only help families stay in their homes, it would confer much wider benefits. Significant efforts have been taken in this direction, but more can be done. Today I have briefly discussed a few promising options, which are not necessarily mutually exclusive. As we as a country consider ways to address our financial and economic challenges, policy initiatives to reduce the number of preventable foreclosures should be high on the agenda.
Footnotes
1. Estimates for specific metropolitan areas are based on Case-Shiller Home Price Indexes. Return to text
2. See Kristopher Gerardi, Andreas Lehnert, Shane Sherlund, and Paul Willen (forthcoming), "Making Sense of the Subprime Crisis," Brookings Papers on Economic Activity (Washington: Brookings Institution Press). Also see Chris Mayer, Karen Pence, and Shane Sherlund (2008), "The Rise in Mortgage Defaults," Finance and Economics Discussion Series 2008-59 (Washington: Board of Governors of the Federal Reserve System, November). Return to text
3. Estimates of delinquencies are based on data from the Mortgage Bankers Association and from First American LoanPerformance. Return to text
4. Foreclosure starts are based on data from the Mortgage Bankers Association, adjusted to reflect the limited coverage of their sample. Historically, about half of foreclosure starts resulted in the borrower losing the home, but recent rates appear higher. Return to text
5. For evidence that concentrations of foreclosures lead to lower house prices throughout the neighborhood, see, for example, William C. Apgar, Mark Duda, and Rochelle Nawrocki Gorey (2005), "The Municipal Cost of Foreclosures: A Chicago Case Study," Housing Finance Policy Research Paper 2005-1 (Minneapolis, Minn.: Homeownership Preservation Foundation, February), www.995hope.org/content/pdf/Apgar_Duda_Study_Full_Version.pdf; and John P. Harding, Eric Rosenblatt, and Yao Vincent (2008), "The Contagion Effect of Foreclosed Properties,"  Social Science Research Network working paper 1160354 (July). Return to text
6. To be sure, policy should not attempt to keep house prices from falling sufficiently to stabilize the demand for housing. But preventing avoidable foreclosures does not block necessary adjustments. Indeed, failing to prevent such foreclosures may heighten the risk that house prices will move lower than they would otherwise need to go. Return to text
7. See J.P. Morgan (2008), "SOS--Summary of Subprime, Alt-A, Prime Jumbo," Global Structured Finance Research (November 2); and Credit Suisse (2008), "Deep Dive into Subprime Mortgage Severity," Fixed Income Research Report (June 19). Return to text
8. See "Deep Dive," note 8. Return to text
9. Servicers of mortgages in securitized pools must abide by the pooling and servicing agreements, which state what modifications may be prohibited but provide limited guidance about what types of modifications investors would consider to be appropriate. See Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, and Eileen Mauskopf (2008), "The Incentives of Mortgage Servicers: Myths and Realities," Finance and Economics Discussion Series 2008-46 (Washington: Board of Governors of the Federal Reserve System, November). Return to text
10. See Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision (2008), "Interagency Statement on Meeting the Needs of Creditworthy Borrowers," joint press release, November 12. Return to text
11. In addition, Hope Now has been an important source of data on loss-mitigation activity. The loan-level data that they plan to provide in the future will be useful for analyzing the relative effectiveness of alternative strategies for loan modifications. Return to text
12. Studies tend to find that equity positions matter most for default rates when they interact with other contributing factors; for example, numerous studies have found that borrowers are more likely to default when house prices have fallen and incomes decline. At the household level, such "double triggers" may induce defaults because of cash flow constraints or because continuing to make payments on a mortgage whose balance significantly exceeds the value of the house is more difficult to justify when the family budget is strained. See Shane Sherlund (forthcoming), "The Past, Present, and Future of Subprime Mortgages," Finance and Economics Discussion Series (Washington: Board of Governors of the Federal Reserve System); Kristopher Gerardi, Christopher L. Foote, and Paul S. Willen (2008), "Negative Equity and Foreclosure: Theory and Evidence (354 KB PDF)," Public Policy Discussion Papers 08-3 (Boston: Federal Reserve Bank of Boston, June); and Haughwout, Andrew, Richard Peach, and Joseph Tracy (forthcoming), "Juvenile Delinquent Mortgages: Bad Credit or Bad Economy?" Journal of Urban Economics. Return to text
13. The original plan would have had the government share half of any loss incurred by the lender, regardless of how far underwater the loan might have already been by the time of modification. The latest version of the plan modifies this provision by offering lower loss-sharing rates for loans that have loan-to-value (LTV) ratios above 100 percent at the time of the modification. Under the modified plan, the loss-sharing rate declines from 50 percent on a loan with an LTV of 100 percent at the time of modification to 20 percent on a loan with a LTV of 150 percent. Loans with LTVs of more than 150 percent at the time of modification do not qualify for loss-sharing. An alternative way to address this concern would be to base the amount of the government insurance payment on the loss in value relative to the appraised value of the property at the time of the loan modification. Return to text
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| 2008
Summary of Commentary on
Current Economic Conditions
by Federal Reserve District
Commonly known as the Beige Book, this report is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis.
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| 1970 - present (on the web site of the Federal Reserve Bank of Minneapolis) |
| Fannie Mae Announces 2009 Benchmark Securities® Issuance Calendar |
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WASHINGTON, DC -- Fannie Mae (FNM/NYSE) today announced its 2009 Benchmark Securities® issuance calendar. The calendar is designed to assist investors and other market participants in incorporating Fannie Mae Benchmark Securities into their ongoing investing, trading, hedging and financing strategies.
Fannie Mae will continue to auction three- and six-month Benchmark Bills on a weekly basis and, from time to time, may auction one-year Benchmark Bills. The size of the offerings will be announced on Monday mornings eastern time. If Monday is a holiday, announcement will typically be made on the previous business day. Auctions will be open for bidding on Wednesdays between 9:00 a.m. and 9:45 a.m. eastern time.
The 2009 Benchmark Securities Calendar identifies the pre-defined monthly calendar dates for each Benchmark Notes announcement. On each announcement date, Fannie Mae will provide market participants with the maturity date of the issue, the dealer syndicate and an indication of deal size. Benchmark Notes transactions are generally expected to price within a few business days of the announcement date.
Fannie Mae may forego any scheduled Benchmark Bills or Benchmark Notes issuance. If Fannie Mae elects not to issue a scheduled Benchmark offering, it will provide notice of its election either prior to or on the scheduled announcement date.
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Fannie Mae exists to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America's secondary mortgage market to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers. In 2008, we mark our 70th year of service to America's housing market. Our job is to help those who house America.
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Fannie Mae Resource Center |
Telephone 1-800-7FANNIE
(1-800-732-6643)
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Economists Ponder Future of Home Prices
When will home prices go back up again?
Economists surveyed by The Wall Street Journal say that home prices won’t hit bottom until the second half of 2009 at the earliest and some say the downward trend will continue until 2011 or 2012. After that they may rise again, but not nearly as fast as they have in the last decade. Instead they will rise just a little faster than inflation and stay in line with increases in household income.
William Wheaton, a professor of economics and real estate at the Massachusetts Institute of Technology, says he expects house prices to increase at a rate roughly 1-percentage point higher than inflation over the long term.
Celia Chen, director of housing economics at Moody’s Economy.com is more optimistic, expecting home values to rise an average of 4 percent per year over the next couple of decades.
Demographer William Frey predicts that growth will continue in coastal and Southern cities while populations in rustbelt areas like Michigan, Ohio, Western Pennsylvania and Upstate New York will continue to decline.
The great unknown is the impact aging baby boomers will have. While retirees in the past have often headed for warmer and suburban areas, boomers have tended to confound expectations. They could well show a propensity for staying put or moving to urban areas for the cultural life or to be near friends and family, shunning sun-dappled retirements communities.
Source: The Wall Street Journal, James R. Hagerty (12/02/2008)
Mortgage Applications Surge After Fed Action
Mortgage applications skyrocketed last week in response to the Federal Reserve’s announcement that it would buy debt from Fannie Mae and Freddie Mac.
Even with the shortened Thanksgiving week, the mortgage applications index increased 112.1 percent to 857.7 compared to 404.4 the previous week on a seasonally adjusted basis. On an unadjusted basis, the index increased 51.4 percent compared with the previous week, but was still down 21.9 percent compared with the same week a year ago.
Rates fell quickly, but they didn’t stay so low. “Many borrowers missed an opportunity to take advantage when rates dropped sharply for a brief period when [Fannie Mae and Freddie Mac] were placed under conservatorship,” said Orawin Velz, associate vice president of economic forecasting for MBA. Last week's announcement persuaded many of those on the sidelines to quickly jump in and take advantage of lower rates before they began to rebound, added Velz.
Nearly 70 percent of the applications were for refinances with the refinance index rising 203.3 percent compared to the previous week.
Mortgage rates declined dramatically, then rose toward the end of the week:
- 30-year fixed-rate mortgages decreased to 5.47 percent from 5.99 percent;
- 15-year fixed-rate mortgages decreased to 5.13 percent from 5.78 percent;
- 1-year ARMs decreased to 6.61 percent from 6.87 percent.
Source: Mortgage Bankers Association (12/03/2008)
Governor Randall S. Kroszner
At the Confronting Concentrated Poverty Policy Forum, Board of Governors of the Federal Reserve System, Washington, D.C.
December 3, 2008
The Community Reinvestment Act and the Recent Mortgage Crisis
Good morning. I am pleased to welcome you to the Board and even more pleased to introduce today's discussion of the study conducted by the Federal Reserve System's Community Affairs program in partnership with The Brookings Institution, The Enduring Challenge of Concentrated Poverty in America: Case Studies from Communities across the U.S.1
As you have heard, this report represents an extraordinary and comprehensive effort by staff in all 12 Reserve Banks and at the Board of Governors to explore the problem of concentrated poverty. The 16 case studies in the report represent urban and rural areas, immigrant and Native American communities, as well as older "weak" market cities and newer "strong" market areas. By covering a wide variety of communities, the report adds depth and texture to the existing literature on poverty and offers important insights regarding the relationship between public services and private investment.
For those who may not be familiar with the Federal Reserve System's Community Affairs function, this report illustrates one of the many ways in which it supports the System's objectives for economic growth by promoting community development and fair and impartial access to credit. The System's strength in research, together with its unique structure, makes it particularly well suited to pursue this kind of work.
The Community Affairs program takes advantage of the 12 Federal Reserve Banks located in different regions of the country to gather information on local conditions and to conduct outreach and education efforts through regular contact with financial institutions and market intermediaries. The System's network of Community Affairs staff works with lenders, community organizations, and local governments to identify trends and issues affecting low- and moderate-income neighborhoods. This communication with both financial markets and communities allows the Federal Reserve to act as a bridge between the private and public sectors.
The System's reputation for high-quality research, outreach, and analysis and its regional presence made these 16 case studies and the comparative analysis possible. This report makes an important contribution to the literature on the dynamics of poor people living in poor communities by recognizing the existence and persistence of concentrations of poverty beyond the urban areas where it has been well documented. Indeed, the study confirms that poverty persists in places, such as rural and suburban communities, where it is not so easily seen.
The report also identifies the existing avenues for bringing poor people and communities into the economic mainstream. This topic is at the center of today's discussions. The Federal Reserve, together with the other federal financial regulatory agencies, has had some experience in addressing the credit needs of underserved communities, using the Community Reinvestment Act (CRA) as our guide. CRA encourages financial institutions not only to extend mortgage, small business, and other types of credit to lower-income neighborhoods and households, but also to provide investments and services to lower-income areas and people as part of an overall effort to build the capacity necessary for these places to thrive.
Some critics of the CRA contend that by encouraging banking institutions to help meet the credit needs of lower-income borrowers and areas, the law pushed banking institutions to undertake high-risk mortgage lending. We have not yet seen empirical evidence to support these claims, nor has it been our experience in implementing the law over the past 30 years that the CRA has contributed to the erosion of safe and sound lending practices. In the remainder of my remarks, I will discuss some of our experiences with the CRA. I will also discuss the findings of a recent analysis of mortgage-related data by Federal Reserve staff that runs counter to the charge that the CRA was at the root of, or otherwise contributed in any substantive way, to the current subprime crisis.
Regulatory Efforts to Meet Credit Needs in Underserved Markets
In the 1970s, when banking was still a local enterprise, the Congress enacted the CRA. The act required the banking regulators to encourage insured depository institutions--that is, commercial banks and thrifts--to help meet the credit needs of their entire community, including low- and moderate-income areas. The CRA does not stipulate minimum targets or goals for lending, investments, or services. Rather, the law provides incentives for financial institutions to help meet the credit needs of lower-income people and areas, consistent with safe and sound banking practices, and commensurately provides them favorable CRA consideration for those activities. By requiring regulators to make CRA performance ratings and evaluations public and to consider those ratings when reviewing applications for mergers, acquisitions, and branches, the Congress created an unusual set of incentives to promote interaction between lenders and community organizations.
Given the incentives of the CRA, bankers have pursued lines of business that had not been previously tapped by forming partnerships with community organizations and other stakeholders to identify and help meet the credit needs of underserved communities. This experimentation in lending, often combined with financial education and counseling and consideration of nontraditional measures of creditworthiness, expanded the markets for safe lending in underserved communities and demonstrated its viability; as a result, these actions attracted competition from other financial services providers, many of whom were not covered by the CRA. There are many fine examples of community development lending and investment activities designed to address needs in the poorest of areas, including many of those highlighted by the case studies in this report.
During trips to the regional Federal Reserve Banks and Branches, I have spent a lot of time visiting areas with high concentrations of poverty. For many years, the Fed has promoted community banking services for the unbanked and underbanked population. It was gratifying for me to find that financial services were accessible in, for example, central Cleveland, thanks to the efforts of one local bank that offers check-cashing services at much lower rates than competing nonbank check cashers. Similarly, in the Little Haiti neighborhood in Miami, another case-study community that I had the opportunity to visit last year, one banking institution has committed to serving the neighborhood's unbanked residents by hiring Creole-speaking staff to promote a prosperity campaign built around the Earned Income Tax Credit.
I am sure that today's luncheon speaker, Tom Barrett, mayor of Milwaukee, could share similar observations about a local financial institution serving that case-study neighborhood by providing low-income residents complimentary electronic income tax filing combined with financial education seminars, innovative credit repair programs, and low-cost banking services. These services benefit lower-income customers by providing a simple means of accessing Earned Income and Homestead Tax Credits and the services necessary to maximize the benefits of these programs.
In addition to providing financial services to lower-income people, banks also provide critical community development loans and investments to address affordable housing and economic development needs. These activities are particularly effective because they leverage the resources available to communities from public subsidies and tax credit programs that are targeted to lower-income people. In just the past two years, banks have reported making over $120 billion in community development loans nationwide.2 This figure does not capture the full extent of such lending, because smaller institutions are not required to report community development loans to their regulators.
Evidence on CRA and the Subprime Crisis
Over the years, the Federal Reserve has prepared two reports for the Congress that provide information on the performance of lending to lower-income borrowers or neighborhoods--populations that are the focus of the CRA.3 These studies found that lending to lower-income individuals and communities has been nearly as profitable and performed similarly to other types of lending done by CRA-covered institutions. Thus, the long-term evidence shows that the CRA has not pushed banks into extending loans that perform out of line with their traditional businesses. Rather, the law has encouraged banks to be aware of lending opportunities in all segments of their local communities as well as to learn how to undertake such lending in a safe and sound manner.
Recently, Federal Reserve staff has undertaken more specific analysis focusing on the potential relationship between the CRA and the current subprime crisis. This analysis was performed for the purpose of assessing claims that the CRA was a principal cause of the current mortgage market difficulties. For this analysis, the staff examined lending activity covering the period that corresponds to the height of the subprime boom.4
The research focused on two basic questions. First, we asked what share of originations for subprime loans is related to the CRA. The potential role of the CRA in the subprime crisis could either be large or small, depending on the answer to this question. We found that the loans that are the focus of the CRA represent a very small portion of the subprime lending market, casting considerable doubt on the potential contribution that the law could have made to the subprime mortgage crisis.
Second, we asked how CRA-related subprime loans performed relative to other loans. Once again, the potential role of the CRA could be large or small, depending on the answer to this question. We found that delinquency rates were high in all neighborhood income groups, and that CRA-related subprime loans performed in a comparable manner to other subprime loans; as such, differences in performance between CRA-related subprime lending and other subprime lending cannot lie at the root of recent market turmoil.
In analyzing the available data, we focused on two distinct metrics: loan origination activity and loan performance. With respect to the first question concerning loan originations, we wanted to know which types of lending institutions made higher-priced loans, to whom those loans were made, and in what types of neighborhoods the loans were extended.5 This analysis allowed us to determine what fraction of subprime lending could be related to the CRA.
Our analysis of the loan data found that about 60 percent of higher-priced loan originations went to middle- or higher-income borrowers or neighborhoods. Such borrowers are not the populations targeted by the CRA. In addition, more than 20 percent of the higher-priced loans were extended to lower-income borrowers or borrowers in lower-income areas by independent nonbank institutions--that is, institutions not covered by the CRA.6
Putting together these facts provides a striking result: Only 6 percent of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes. This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.
Of course, loan originations are only one path that banking institutions can follow to meet their CRA obligations. They can also purchase loans from lenders not covered by the CRA, and in this way encourage more of this type of lending. The data also suggest that these types of transactions have not been a significant factor in the current crisis. Specifically, less than 2 percent of the higher-priced and CRA-credit-eligible mortgage originations sold by independent mortgage companies were purchased by CRA-covered institutions.
I now want to turn to the second question concerning how CRA-related subprime lending performed relative to other types of lending. To address this issue, we looked at data on subprime and alt-A mortgage delinquencies in lower-income neighborhoods and compared them with those in middle- and higher-income neighborhoods to see how CRA-related loans performed.7 An overall comparison revealed that the rates for all subprime and alt-A loans delinquent 90 days or more is high regardless of neighborhood income.8 This result casts further doubt on the view that the CRA could have contributed in any meaningful way to the current subprime crisis.
Unfortunately, the available data on loan performance do not let us distinguish which specific loans in lower-income areas were related to the CRA. As noted earlier, institutions not covered by the CRA extended many loans to borrowers in lower-income areas. Also, some lower-income lending by institutions subject to the law was outside their local communities and unlikely to have been motivated by the CRA.
To learn more about the relative performance of CRA-related lending, we conducted more-detailed analyses to try to focus on performance differences that might truly arise as a consequence of the rule as opposed to other factors. Attempting to adjust for other relevant factors is challenging but worthwhile to try to assess the performance of CRA-related lending. In one such analysis, we compared loan delinquency rates in neighborhoods that are right above and right below the CRA neighborhood income eligibility threshold. In other words, we compared loan performance by borrowers in two groups of neighborhoods that should not be very different except for the fact that the lending in one group received special attention under the CRA.
When we conducted this analysis, we found essentially no difference in the performance of subprime loans in Zip codes that were just below or just above the income threshold for the CRA.9 The results of this analysis are not consistent with the contention that the CRA is at the root of the subprime crisis, because delinquency rates for subprime and alt-A loans in neighborhoods just below the CRA-eligibility threshold are very similar to delinquency rates on loans just above the threshold, hence not the subject of CRA lending.
To gain further insight into the potential relationship between the CRA and the subprime crisis, we also compared the recent performance of subprime loans with mortgages originated and held in portfolio under the affordable lending programs operated by NeighborWorks America (NWA). As a member of the board of directors of the NWA, I am quite familiar with its lending activities. The NWA has partnered with many CRA-covered banking institutions to originate and hold mortgages made predominantly to lower-income borrowers and neighborhoods. So, to the extent that such loans are representative of CRA-lending programs in general, the performance of these loans is helpful in understanding the relationship between the CRA and the subprime crisis. We found that loans originated under the NWA program had a lower delinquency rate than subprime loans.10 Furthermore, the loans in the NWA affordable lending portfolio had a lower rate of foreclosure than prime loans. The result that the loans in the NWA portfolio performed better than subprime loans again casts doubt on the contention that the CRA has been a significant contributor to the subprime crisis.
The final analysis we undertook to investigate the likely effects of the CRA on the subprime crisis was to examine foreclosure activity across neighborhoods grouped by income. We found that most foreclosure filings have taken place in middle- or higher-income neighborhoods; in fact, foreclosure filings have increased at a faster pace in middle- or higher-income areas than in lower-income areas that are the focus of the CRA.11
Two key points emerge from all of our analysis of the available data. First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA- related loans appear to perform comparably to other types of subprime loans. Taken together, as I stated earlier, we believe that the available evidence runs counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis.
Conclusions
Our findings are important because neighborhoods and communities affected by the economic downturn will require the active participation of financial institutions. Considering the situation today, many neighborhoods that are not currently the focus of the CRA are also experiencing great difficulties. Our recent review of foreclosure data suggested that many middle-income areas currently have elevated rates of foreclosure filings and could face the prospect of falling into low-to-moderate income status. In fact, 13 percent of the middle-income Zip codes have had foreclosure-rate filings that are above the overall rate for lower-income areas.
Helping to stabilize such areas not only benefits families in these areas but also provides spillover benefits to adjacent lower-income areas that are the traditional target of the CRA. Recognizing this, the Congress recently underscored the need for states and localities to undertake a comprehensive approach to stabilizing neighborhoods hard-hit by foreclosures through the enactment of the new Neighborhood Stabilization Program (NSP). The NSP permits targeting of federal funds to benefit families up to 120 percent of area median income in those areas experiencing rising foreclosures and falling home values.
In conclusion, I believe the CRA is an important model for designing incentives that motivate private-sector involvement to help meet community needs. The CRA has, in fact, been helpful in alleviating the financial isolation of many areas of concentrated poverty, but as our report illustrates, there is much more that could be done in these communities. Contrary to the assertions of critics, the evidence does not support the view that the CRA contributed in any substantial way to the crisis in the subprime mortgage market. Today's discussion is an important first step in the process of identifying other initiatives and areas of cooperation between government and the private sector that will effectively address the continuing challenge of poverty in the United States.
Footnotes
1. Federal Reserve System, Community Affairs Offices; and Brookings Institution, Metropolitan Policy Program (2008), The Enduring Challenge of Concentrated Poverty in America: Case Studies from Communities across the U.S. (Richmond, Va.: Federal Reserve Bank of Richmond). Return to text
2. Data are from filings made by larger banking institutions to the Federal Financial Institutions Examination Council on CRA-related small business, small farm, and community development lending; for more information, see FFIEC website. Return to text
3. See Board of Governors of the Federal Reserve System (1993), Report to the Congress on Community Development Lending by Depository Institutions (Washington: Board of Governors), pp. 1-69; and Board of Governors of the Federal Reserve System (2000), The Performance and Profitability of CRA-Related Lending (147 KB PDF) (Washington: Board of Governors, July), pp. 1-99. Return to text
4. The staff analysis focused on loans originated in 2005 and 2006. Return to text
5. Loan origination data are from information reported pursuant to the Home Mortgage Disclosure Act (HMDA). The HMDA data do not identify subprime loans directly, in part because there is not a single definition of which loans fall into this category. Rather, the HMDA data indicate which loans are categorized as higher priced, including subprime loans and some alt-A loans. The analysis of data includes first-lien conventional loans for home purchase or refinance related to site-built homes. It excludes business-related loans to the extent they could be identified. For more information on HMDA data and higher-priced lending, see Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner (2007), "The 2006 HMDA Data," Federal Reserve Bulletin, vol. 93. Return to text
6. About 17 percent of the higher-priced loan originations were made by CRA-covered lenders or their affiliates to lower-income populations in areas outside the banking institutions' local communities. Such lending is not the focus of the CRA and is frequently not considered in CRA performance evaluations. Return to text
7. Data are from First American Loan Performance (LP). For the analysis, Zip code delinquency data were classified by relative income in two different ways. First, the data were classified using information published by the U. S. Census Bureau on income at the Zip Code Tabulation Area (ZCTA) level of geography. Because the ZCTA data provide an income estimate for each Zip code, delinquency rates can be calculated directly from the LP data based on the Zip code location of the properties securing the loans. Second, delinquency rates for each relative income group (lower, middle, and higher) were calculated as the weighted sum of delinquencies divided by the weighted sum of mortgages, where the weights equal each Zip code's share of the population in census tracts of the particular relative income group. Relative income is based on the 2000 decennial census and is calculated as the median family income of the census tract divided by the median family income of its metropolitan statistical area or nonmetropolitan portion of the state. Both approaches yield virtually identical results. Return to text
8. The analysis focused on loans originated from January 2006 through April 2008 with performance measured as of August 2008. However, a virtually identical relationship in loan performance across neighborhood income groups is found if the pool of loans evaluated is expanded to cover those originated in 2004 or 2005. The only material difference is that the levels of delinquency are lower for the loans covering longer periods. Loans that are 90 days or more delinquent include those that end in foreclosure or as real estate owned.Delinquency rates were somewhat higher in the lower-income areas. However, the somewhat higher delinquency rates in lower-income areas is not a surprising result because lower-income borrowers tend to be more sensitive to economic shocks given that, among other things, they have fewer financial resources on which to draw in emergencies. Return to text
9. The CRA neighborhood income threshold is where the neighborhood median family income is 80 percent of the median family income of the broader area, such as a metropolitan statistical area or nonmetropolitan portion of a state, depending on the specific location of the neighborhood. Return to text
10. No information was available on the geographic distribution of the NeighborWorks America loans. The geographic pattern of lending can matter, as certain areas of the country are experiencing much more difficult conditions in their housing market than other areas. Return to text
11. Data are from RealtyTrac, covering foreclosures from January 2006 through August 2008. These data are reported at the Zip code level. Foreclosure filings have been consolidated at the property level, so separate filings on first- and subordinate-lien loans on the same property are counted as a single filing. Return to text
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Last update: December 3, 2008
Dress For Success
Looking good is important when you want to make a great impression, whether for a job interview or a social function. The same is true of a home that is on the market. When the "For Sale" sign goes up in front of your home, it should be "dressed" for the occasion.
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