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Fannie and Freddie Finally Wake Up

Fannie and Freddie Finally Wake Up
Profile photo of Doug French

lasvegasReprinted from LewRockwell.com

Spring is in the air signaling the start of homebuying season.  But here in Las Vegas, buyers “are aplenty,” 1st Realty Group owner Thomas Blanchard tells the Las Vegas Review Journal, but “we just don’t have the properties to sell them.”

It hardly seems possible, not enough homes for sale. After all, squatting in bank-owned homes has become a cottage industry in Sin City, where 2% of all homes, close to 14,000, sit vacant (or occupied by trespassers), remnants of the housing crash.

“Las Vegas metropolitan police, which patrol an area of nearly two million residents, have seen a 25% leap in the last three years in calls for service regarding suspected squatters, up to nearly 5,000 annually,” writes John Glionna for The Guardian.

In North Las Vegas, which was hardest hit by the crash, “officers have worked to remove trespassers from 180 homes in the last year alone.”

This has the attention of the Nevada legislature which is considering a bill allowing “police a way to cut to the quick,” to remove squatters, writes Rick Anderson for the Las Vegas Sun. Last year law enforcement received 5,394 complaints about squatters — an average of 16 a day. In 2014, Metro received approximately 3,000 calls.

“This is affecting the entire valley,” Metro Police Lt. Nick Farese told The Sun. “There’s $600 million in property that is essentially being held hostage.”

In addition to the squatters holding properties hostage, according to Zillow.com, 16.6% of Vegas mortgagees were upside-down in the fourth quarter of last year, highest among large metro areas, but a far cry from the 71% who were underwater in 2012.

With Las Vegas being the nation’s underwater capital, many homeowners are trapped, only able to sell if banks consent to taking a haircut on loan principal.

This is not how markets are supposed to work. The supply is there as is demand, why can’t the market clear? I provided the answer in a piece appearing on mises.org in 2011. “The real help for underwater homeowners will only arrive when Fannie, Freddie, and the rest are allowed to fail. The equivalent of a chapter 7 bankruptcy filing (liquidation) would put these underwater loans out for bid in the market place.”

Lewis Ranieri’s (of “Liar’s Poker” fame) Selene Residential Mortgage Opportunity Fund which purchased mortgages for deep discounts provided the example. The Wall Street Journal reported Selene’s story on it’s front-page.

Ranieri’s company, reported the WSJ,

buys loans to make a profit on them, not as a public service, but company officials say it is often more profitable to keep the borrower in the home than to foreclose. If a delinquent loan can be turned into a “performing” loan, with the borrower making regular payments, the value of that loan rises, and Selene can turn around and either refinance it or sell it at a profit.

“Around 90% of Selene’s loan modifications involve reducing the principal,” James R. Hagerty wrote in the WSJ, “compared to less than 2% of the modifications done by federally regulated banks in the first quarter.”

Because Fannie and Freddie weren’t allowed to fail, it has taken years for these mortgage wards of the state to smell the delinquent mortgage coffee. The GSAs have finally decided to make a rational business decision and sell their billions in bad paper.

The Wall Street Journal’s Liz Hoffman and Serena Ng write,

In 2015, Fannie and Freddie began auctioning off delinquent, or “nonperforming,” mortgages in batches. Most had been written in the years leading up to the crisis, when home values soared and lending standards slipped. Some had gone unpaid for as long as six years, according to public documents on the loans.

The company waiting with open arms to bid on these mortgages is Goldman Sachs. The Wall Street giant bought up Fannie Mae’s bad paper to the tune of $4.5 billion for $5.7 billion worth of mortgages since 2015, reported the Wall Street Journal last month.

Goldman has purchased 59% of the Fannie Mae auctions and “nearly swept the last two auctions, held in October and earlier this month, acquiring 15,000 individual loans representing $2.8 billion in unpaid balances.”

Goldman has been especially assertive, Hoffman and Ng point out,

Its aggressive bidding has raised eyebrows among competitors and was much talked about on the sidelines of a recent securitization-industry conference in Las Vegas, according to attendees.

The bank has paid between 50 and 90 cents on the dollar for the loans, according to Fannie Mae records. A steady rise in home prices has increased the cost of buying delinquent loans in recent years—but also the potential profit if Goldman can resell them or foreclose on the property.

The Wall Street mega-bank looks to settle its $5.1 billion penalty from regulators for the housing debacle and restructuring these loans counts toward $1.8 billion of the settlement.

Any relief they provide homeowners is money they don’t have to hand over to Uncle Sam.

In the short term Goldman may be looking to satisfy its debt to society, but, in the long run, they think they can make money at this. Laurie Goodman agrees. She is the co-director of the Housing Finance Policy Center at Urban Institute, a Washington, D.C.-based think tank. “Buying non-performing loans and modifying them is a profitable business,” Goodman says.

Ludwig von Mises explained that one government intervention leads to an endless succession of interventions to deal with the effects of the first and subsequent interventions. Ultimately, it comes down to two choices. “Either capitalism or socialism: there exists no middle way,” Mises wrote.

These mortgage sales are years overdue, proving Mises’s point, there was no middle way to solve the housing crisis. Capitalism could have worked its magic years ago and set underwater homeowners free. If lenders were allowed to fail and mortgages traded at market clearing prices, more homeowners would be have kept their homes and there would be no squatting epidemic today.   

Articles
Profile photo of Doug French

Douglas E. French is a Director of the Ludwig von Mises Institute of Canada. Additionally, he writes for Casey Research and is the author of three books; Early Speculative Bubbles and Increases in the Supply of Money, The Failure of Common Knowledge, and Walk Away: The Rise and Fall of the Home-Owenrship Myth. French is the former president of the Ludwig von Mises Institute in Auburn, Alabama.

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