Regina Corcoran's - "Pursuing the American Dream"
Sunday, February 27, 2011
Friends, Romans and countrymen

By Regina Corcoran Special to The Citizen

"Lend me your ears! I come to bury Caesar, not to praise him. The evil that men do in their lives may live long after, while the good is often interred with their bones," wrote William Shakespeare.

So let it be with Fannie Mae and Freddie Mac. Yes, the end of Fannie and Freddie is possibly very near.

Offspring of Franklin Roosevelt's presidency, they rose to their zenith during the Clinton presidency.

On Feb. 11, 2011, the U.S. Treasury Department released a white paper proposing the dismantlement of the finance giants over a five- to seven-year period.

The plan is that Fannie and Freddie will increase their charges and down payment requirements while lowering the loan size that they will guarantee.

The hope is that, like Wyoming's Old Faithful geyser, private capital will come shooting into the mortgage market to take up the gap.

The question is, how would the federal government extricate itself from the mortgage lending market? It would be like deconstructing the Willis Tower (formerly known as the Sears Tower) stone by stone and board by board.

Here's Plan A: Fannie and Freddie, the mortgage twins, offer ever less-desirable products, eventually succumbing to euthanasia. Only lower-income buyers and Veterans Administration (VA) buyers would be eligible for loans with federal guarantees, such as Federal Housing Administration (FHA) programs.

That would encourage FHA to return to its niche market. Both FHA and the VA have been approving loans in high-value market areas up to $729,750. A recent George Washington University report shows that 95 percent of both African-American and Hispanic borrowers have home loans less than $300,000.

To slow down FHA-insured loans, FHA's down payment may increase to 5 percent from 3.5 percent and its mortgage insurance cost may rise, too.

The result would be that government involvement would be no more than 10 percent to 15 percent of the mortgage market.

Treasury Secretary Tim Geithner believes a private capital market will be more cautious about lending when it is "flying without a net."

Plan B is one where Fannie Mae and Freddie Mac would stay small in normal times (whatever that is) but step up to the plate in a future housing crisis. Since these are institutions and not superheroes, a small footprint that can swell and rise to the task as needed (just add water?) is a big challenge.

Further, what politician could resist the urge to "grow" Fannie and Freddie to monumental size again? To deny homeownership to any American seeking it would be as popular as denying a decent education to all children.

Plan C has the match that starts the forest fire already lit. In this case, the administration imagines a group of tightly regulated (government involvement already anticipated), well-capitalized (Hello? How many well-capitalized private mortgage insurance companies are there these days?) private mortgage insurers which would be backstopped (the "safety net") by government insurance.

Fannie Mae and Freddie Mac were not the problem. The VA, for example, has arranged for veterans to buy homes with no down payment, high ratios and no mortgage insurance for decades. Their record of losses is low compared with nearly all other forms of real estate finance.

We lost sight of the goal: homeownership.

Trace most short sales and mortgage foreclosures back to their roots. You won't find Jack and Jill Homeowner with their single mortgage.

It is more likely to find Joe, the speculator, who bought and then refinanced so he could buy more, over and over. You also may find the Strippers, who refinanced over and over as property values appreciated, pocketing tens of thousands of dollars along the way.

Homeownership is good and should be encouraged.

What do you think?

Regina E. Corcoran, SRA, is a Florida real estate broker, state-certified residential appraiser and residential contractor. She is president of AmeriRealty Corp. and vice president of AmeriMortgage Corp. She can be reached at ReginaECorcoran@cs.com. Corcoran writes her column exclusively for The Citizen. It appears every other Sunday.