Mel Watt weighs in on housing reform that could affect REITs



The Federal Housing Finance Agency is the conservator for Fannie Mae and Freddie Mac

By far, the biggest and costliest blow-ups in the financial crisis were the government-sponsored enterprises Fannie Mae (FNMA) and Freddie Mac (FMCC). Born out of the Great Depression, they were intended to help banks spur housing investment and lending. By the mid aughts, they essentially became the biggest mortgage arbitrage hedge fund on the Street, with a government backstop, massive leverage, and a social mandate that gave them cover for their huge levered bets in mortgage-backed securities. They also had severe accounting problems. Once the GSEs blew up, they were taken into conservatorship, which meant their profits and losses flow straight to Treasury. Although they’re still private and their stock trades, they’re effectively nationalized. Current shareholders will likely see their investment wiped out.

FHFA House Price Index

Mel Watt took over from Ed DeMarco after a contentious term

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Ed DeMarco was the Acting Commissioner of FHFA and he held the job since the Bush Administration. In his role of Acting FHFA Chairman, his over-arching goal was to protect the taxpayer. This put him directly at odds with the left, who wanted to see principal forgiveness for loans held by Fannie Mae and Freddie Mac. Given the fact that many borrowers who were given loan modifications soon re-defaulted, DeMarco resisted principal modifications. The vision for FHFA fell predictably along partisan lines, with the left wanting more rate and term modifications, principal reductions, more affordable housing targets, and looser credit. The right wanted Fannie Mae’s footprint in the mortgage market reduced and never liked the social engineering aspect of housing policy to begin with. Finally, they worried about the moral hazard of a massive principal forgiveness program.

Due to the amount of underwater homeowners, consumer spending was depressed, and the left believed that principal forgiveness would unleash a wave of spending. However, if you look at the chart of the FHFA Home Price Index, which is based on homes with conforming loans, prices are approaching their peak levels, which means there are much fewer underwater borrowers than there were in 2010. Fewer underwater borrowers mean good news for mall REITs like Simon Property (SPG), General Growth Properties (GGP), and Realty Income Fund (O).


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