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Fannie, Freddie, FHA Under Fire

It has been a quiet week in the markets, shortened by Good Friday. Oh, Standard & Poor’s created a tempest with its threat to the AAA rating of Treasurys, but as the week wore on, more and more people asked, “How would they know?”

Stocks regained all losses, but Treasury bond yields stayed low, the 10-year at 3.39 percent and mortgages under 5 percent.

Bill Gross, famously dumping all of PIMCO’s Treasurys last month, has lost money on the trade. A federal budget deal is now likely; Europe is in trouble (again, Greek 2-year bonds paying 22 percent), and domestic data is weakening.

Sales of new and existing homes are flat, but distressed inventory is rising. The Federal Housing Finance Agency found that home prices fell 1 percent in January and another 1.6 percent in February.

The fascinating thing about housing, now: it’s no longer news. It’s so yesterday, boring. For seven months, media attention has focused on “Foreclosure Gate,” the so-called robo-signing scandal in which some loan servicers allegedly foreclosed on some innocent homeowners.

The reality is clear now, as then: Some servicers have mistreated borrowers by inattention, finding a work-around for the antiquated local-level foreclosure procedures. Servicers will be fined and newly regulated.

Media have found a handful of wrongly foreclosed families, but that preoccupation has missed this wisdom, attributed to Joseph Stalin: “A single death is a tragedy; a million deaths is a statistic” (if Stalin didn’t say it, he should have — the origins of this saying are cloudy).

The search for human interest has abandoned the real victims: Another 2 million households end up in foreclosure this year, 11 million underwater — and government help is going … gone.

Imagine if in 1937 Franklin Delano Roosevelt had said, “I see one-third of a nation ill-clothed, ill-housed, and ill-fed … but if we wait long enough, they’ll get over it.”

Everybody understands the basics: more houses for sale than buyers. However, even those in pain often don’t believe me when I say that credit is too tight and too scarce.

Today, two examples:

Fannie Mae, Freddie Mac and the Federal Housing Administration are the only remaining significant sources of mortgages, and they are frantically trying never to make another bad loan. One cause of default is fraudulent borrower documents.

Early in the 1990s, minutes after the invention of desktop publishing, the first borrower fabricated tax returns showing more income than the ones filed at the Internal Revenue Service. Minutes after that, Fannie, Freddie and the FHA required Form 4506-T in order to pull transcripts from the IRS.

For a while we actually checked, but so few fraudulent returns were found that the signed 4506-T became a threat but not an immediate act.

Since 2009 — as never before — every borrower must bring tax returns (not just the self-employed), and we must run a 4506-T every time. May a merciful Almighty save us this time of year, when the IRS could not find its back end with the help of a medical professional. Transcript delays have run six, even eight weeks.

How many fraudulent returns and defaulted loans are we really preventing? In a billion dollars of loans through here, I know of one case of fraud (a certified public accountant applicant), hundreds of innocent but odd 1040s questioned with red-hot tongs, and thousands of delays. Think Fannie, Freddie and the FHA are tracking cost/benefit? Uh-uh. Just tighten, baby, tighten.

A second example: the Dodd-Frank bill’s Qualified Residential Mortgage, qualifying for capital exemption in securitization. QRMs will require 20 percent down to buy, 25 percent equity to refi, forbid second mortgages … a belt tightened right through the backbone.

An FHFA study (released April 14, at found annual rates of 90-day delinquency pre-bubble (1997-2003) clustered between 2.5 percent and 3 percent for all loans — which is why Fannie, Freddie and the FHA charge to securitize loans, or require mortgage insurance. QRM-equivalent defaults ranged 0.31 percent to 0.55 percent, but were barely 20 percent of all loans.

By 2009, standards had so greatly tightened that all new purchase loans had a 0.3 percent default rate, and the QRM fraction 0.07 percent. No one need fear the wind-down of government-supported lending: it’s already done — although the 80 percent of supply, non-QRM loans are going to be expensive and scarce.

This self-defeating political backlash against Fannie, Freddie and the FHA has turned them into insurance companies offering hurricane coverage, but only for homes 200 miles from any ocean.