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Well, it looks like our voice (along with those of nine Attorneys General and a chorus of congresspersons) has been heeded. President Obama has nominated a new director for the Federal Housing Finance Agency (FHFA).

Related article:

Out with DeMarco, in with cramdowns

If confirmed by Congress, which is likely, Representative Melvin L. Watt of the banking triangle of North Carolina will replace Ed DeMarco as the FHFA Director. The director of the FHFA primarily oversees Fannie Mae and Freddie Mac. Thus, Representative Watt will become one of the most influential persons deciding the fate of the national real estate market through mortgage financing oversight.

DeMarco’s ouster has been a long time coming. Consternation surrounding DeMarco’s performance as FHFA Director stems primarily from his pigheaded refusal to allow cramdowns on Frannie-backed loans.

Along with many other unyielding politicians, DeMarco contends cramdowns will pose a moral hazard to the real estate market, potentially inspiring a wave of otherwise legally permissible strategic defaults.

We will have to wait and see what Representative Watts’ stance will be on principal reductions. But one thing’s clear: it’s way past time for a change, in director and in attitude.

first tuesday insight

We have been an outspoken advocate of cramdowns since the housing bubble burst. Banks had to be bailed out to keep them afloat, why should it be any different for homeowners?  Finance is finance, right?

Aside from encouraging cramdowns, we have a few more suggestions for the new director once he’s confirmed:

  • keep Frannie in place until private mortgage insurance (PMI) is fully capable of replacing the government-backed agencies; and
  • cut incentives and loopholes for speculators to stabilize the single-family residential (SFR) market.

The first suggestion is a bit of a no-brainer, since Frannie is indispensable to maintaining liquidity in the mortgage market. Government guarantees are the only thing keeping lenders in the game since risk aversion still runs high.

However, Frannie’s dependence on speculators has become abundantly clear with recent news of Frannie’s profitability. We have reported that Frannie has only posted profits due to vigorous speculator acquisition activity. This activity has led to massive asset price inflation in low-tier housing, and thus a mini bubble.

As a further aggravation, Frannie REO inventory is starting to pile up. Frannie is bumping prices up to 20% over speculator-produced comparable sales just when sales volume has dropped, portending a price deceleration and fall off by end of year.

Related articles:

Fannie’s phantom profits

Speculations on speculator suppression

Financing for Frannie-backed loans ought to be limited to primary residencies only. This will keep absentee owners (read: speculators) out of the game. Taxpayers will be prevented from backing the big risks that speculators take and homebuyers from bearing the price increases they inflict. The Federal Housing Administration (FHA) is an even worse offender, but we won’t go there now.

The new director has a lot of ground to make up. Here’s hoping he listens to more voices than the real estate trade unions and the big banks.

His roots are in banking. He comes from North Carolina — the Wall Street of the South.

Re: “Obama nominates congressman to lead mortgage agency” from the New York Times