Supreme Court Crushes FNMA and FHLMC
A ruling on June 23 by the United States Supreme Court crushes FNMA and FHLMC. (see Collins vs Yellen). FNMA and FHLMC both effectively went broke at the beginning of the housing crisis with no liquidity and no capital. As government sponsored enterprises (GSEs) with the ability to call on the US Treasury, they were placed in conservatorship. Conservatorship provides oversight and authority to force decisions and actions. This path avoided bankruptcy and liquidation. The Federal Housing Finance Agency took the role of overseeing the two. The government provided lifelines, but took control of the entities. Both paid annual salaries in the millions to former Clinton staffers who had refocused the GSEs missions to high risk mortgages. Investors holding FNMA and FHLMC stock hoped to move the GSEs back to private ownership and build up capital. This effort sought to return them to their original mission.
In the ruling, the Supreme Court held that the director of the FHFA could be removed. In setting up the FHFA, Congress unconstitutionally limited the ability for the director to be removed. Congress made the same mistake with the CFPB (Consumer Finance Protection Board) and the court struck that down in a prior year.
What Does This Mean In Getting A Mortgage
In summary, FNMA and FHLMC will continue to be wards of the federal government for a long time. Prior to the 2008 housing crisis, the control of FNMA and FHLMC was indirect by the federal government. Political players from Clinton’s white house years received top jobs and became part of the board of directors. They drove the forays into lending to unqualified borrowers by emphasizing subprime loans. Subprime means loans to borrowers with terrible credit and limited likelihood of repayment. Think of it as payday lending for a mortgage. High interest rates, high risk. In the Bush years, the policy continued to put people into houses even if they couldn’t afford them.
They also pushed FNMA and FHLMC deeper into no documentation mortgages without any verifications. For example: you state that you work at McDonalds and make $300,000 per year flipping burgers. Sounds good–here’s your loan for your $800,000 home. Don’t worry about showing pay stubs, bank statements, tax returns or anything. We don’t need any documentation. By the way, you will pay an interest rate of 12%.
Don’t Over-Borrow
Going forward, the administration will make FNMA and FHLMC more directly entities following a political agenda. The prior housing crisis took about 7-8 years before it collapsed on itself and devastated millions. FHFA and CFPB need to now be watched more closely to see if the market will be building to an even bigger collapse. Fiscal management and common sense may prevail. But so far, actions by FHFA and CFPB over the last 6 months reinforce the likelihood of an even bigger implosion i the housing market. Not much income? The governments going to provide super low interest rate loans to borrowers unable to repay normally according to a recent proposal. No down payment? No problem. The government’s going to give you money for that? Can’t pay your mortgage? No problem! The government wants to limit or stop justifiable foreclosures. Forty year mortgage needed to repay? Absolutely!
As a borrower, you should be very leery of over-borrowing. Avoid default. Make sure you have solid income, build your savings, and prepare for a downturn. Don’t borrow too much money or stretch your finances for a home. Don’t get in a bidding war for a home, waive an inspection, or waive an appraisal. The 2008 mortgage crisis took down a lot of borrowers who were not poor risks, but didn’t have much cushion to weather the government caused 2008 collapse. The next bubble burst will take down even more borrowers due to FOMO and over-bidding and over-payment for purchases. Don’t be one caught in the drain when the plug gets pulled. Buy or borrow with care in the current market!