To compliment Pershing Square’s presentation on the state of the mortgage market, Freddie Mac (the Federal Home Loan Mortgage Corporation), the public government sponsored enterprise includes in its quarterly results a review of the housing market that is always very interesting. Regarding Freddie Mac, the situation seems to be stabilizing with almost no draws in the last quarter (only $100 million in q3), which is particularly good considering the 10% interest of the preferred government senior. Not only that, but Freddie Mac’s single family delinquencies peaked in February 2010 to 4.2% and improved six quarters in a row. The corporation buys mortgages on the secondary market and sells the same as mortgage based security in the open market.
With the rising rate of mortgage in the last few months, people were unwilling to invest as there seemed to be a lower gain for the investors. The Wall Street Journal suggested that Fannie Mae and Freddie Mac be asked to consider forgiving some amount of the principal on underwater mortgages. People turned to banks for investment, looking for places with lower interest rates for borrowing. With the sharp increase in mortgage rates, refinancing of home loans by borrowers have dropped. Investors who have already bought recently issued mortgage bonds have high chances of losing out on returns and will also face a slower rate of interest.
The Obama administration has pressurized the GSES through FHFA to participate in a program that allows banks and other creditors to write down mortgages and hand off the reduced loans to the FHA. It’s done with the intention of dealing with the loans that are severely underwater. The GSES will relinquish their options of collecting from mortgage insurers or return loans to banks when a loan defaults.
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