Basically the only way such a program would be effective (notice I said effective, not good or helpful or useful) is if the GSEs participate. They control 59% of all mortgages and $100 billion of negative equity. So the government is really pushing hard (read: bribing) Fannie Mae and Freddie Mac to get on board. They’ve not doubled, but actually tripled the incentives to principal reduction. For every dollar they reduce the principal they get between 18 and 63 cents back.

So a reduction of $100 billion would end up totaling $60 billion. In other words, a net cost to the taxpayer of $40 billion. Ouch!

But don’t worry, they’re considering a program called shared appreciation. Basically what this means is that the lenders will get a slice of any future appreciation in value of the home. So it’ll cost them in the short term but when housing prices rebound they’ll make some money.

Note: it doesn’t sound like the taxpayer is being offered a slice of the pie, but that’s old news already.

Either way just about everyone is desperate to avoid another slew of foreclosures this year. I’m not that concerned yet, considering that 93.1% of the GSE’s underwater homes are still current on their payments. But hey, if you smell smoke . . . move?

Okay, so that intro was a little melodramatic, but sometimes it feels that way. And especially after all of the horrific revelations about Freddie Mac that came out recently, it’s unbelievable refreshing to hear some common sense break the surface. So here’s the latest I’ve heard:

The FHFA (please don’t tune out just because you hate them) laid out a plan to phase out Fannie and Freddie and let the private sector take over their roles.

Woohoo!!

Now don’t get caught up in the excitement and think those clowns up there actually know how to do what they want to do, but at least they want to do what they want to do. To do. Um, maybe that was too much.

Either way, they WANT to get mortgage securitization out of the GSE’s hands and move towards a more privately backed industry. I give them full props for that, let’s just hope they develop a plan to do it. (For starters they admit right up front that the two GSEs put up $100 billion in new mortgages per month and no one can currently match that.) So the challenges are very real, but not hopeless.

Of course, prices will “rise.” But if you count how many hidden costs already exist, plus the ridiculously high cost of the “bailout” you’ll see it won’t be more expensive in the long run.

Only smarter and better run.

Any thoughts? I know you’re all itching to chop up Fannie and Freddie so feel free to let loose.

It’s a sad truth to learn, but everyone has got to learn it eventually. Just some of us choose to live in denial just a bit longer. So let’s take the latest, um, difference of opinions as an example and see what’s going on. So on the one hand, we have the Federal Reserve who are worried about what fiscal policy is best for the country vs. Congress who are worried about how the country can best help their fiscal policy. (Okay, I’ll admit to being pretty annoyed with both of them right from the start.) So what they’re trying to decide is if the country should fund the housing recovery or if the housing recovery should fund the country.

If you lost me so far let me give you two concrete examples, actual quotes from the two bodies:

- Fed: In order to fund initiatives to help the housing market, “losses must ultimately be allocated among homeowners, lenders, guarantors, investors and taxpayers.”

- Congress: Payroll tax cuts must be funded by increasing fees from the GSEs.

It’s unbelievable to me that neither of these groups can see that it’s all connected. You can’t tell where the housing market ends and economy begins. It’s a giant circle and you can’t make different parts run at the expense of the other.

Bottom line is – solutions to the housing crisis are going to come from within, despite Congress’ and the Fed’s good intentions.

Think I’m wrong? Think I’m right? Leave a comment.

Here’s a ridiculous example for you:

Obama, in the middle of a long speech, slipped in a line about refinancing just about every mortgage in America.

Not much publicity for something that’s going to mean covering 2.9 million mortgages. But maybe he was shy.

Either way, here’s how the numbers break down:

- GSE savings = $3.9 billion

- Fed. Reserve losses = $4.5 billion

- Private investor losses = $15 billion

So basically the Federal government stands to lose about $600 million on the deal and private investors will lose $15 billion. You can imagine this is going to turn into a pretty messy battle.

So are you and me supposed to sit back and watch the action? Are we supposed to take sides? And if so, whose? I’m sure a lot of hurting families out there need those refinances at lower rates, but someone’s going to lose in this deal. Maybe it’ll be the banks, but don’t they have feelings too? Maybe not. Have a great weekend.

That was a long, complicated story in a nutshell. But the companies which control a ridiculously large amount of the wealth in our country aren’t the types to just take tough words lying down. They’ve begun to respond in kind. It of course begins with the typical whining. Some things you might hear:

- It wasn’t us. The bubble had to do with “market forces.”

- FHFA’s claims are “meritless.”

- It’s the job market’s fault.

- My dog ate my homework.

And so on until it gets heated and ridiculous. Now I don’t think anyone’s denying that there were a lot of factors involved. And I also don’t think anyone is denying the fact that Fannie and Freddie should have done their homework on these mortgage-backed securities. But the lawsuit is really about the idea that banks and others knowingly sold junk before it burst.

If that’s what the FHFA has set out to prove then I think a court case on that is totally justified. I don’t think we should make this bigger than it really is. It’s not a case to decide “who threw our country down the toilet.” It’s just got one specific goal – did major financial institutions purposely hurt GSEs?

What do you think? How strong is the case against Bank of America, Ally Financial, Citigroup, etc.? Is this really going to solve anything or are there just a lot of big egos in the game? Leave a comment with your take on it.

Very basically, people all along have been saying that Fannie and Freddie bear a good portion of the responsibility because of all the lousy mortgages they backed. If they hadn’t been in such a rush to push through so many low-quality loans things would never have spiraled out of control the way they did.

But as it turns out (I’m only half sarcastic here, by the way) they were just following orders. You see, the big boys higher up are always politically motivated. No surprise there. But basically the Federal regulators who were supposed to oversee the GSEs’ activities were more interested in what was considered politically acceptable. So when it became in Washington’s best interest to make housing affordable, they coerced Fannie and Freddie into going along with the program.

Since our current system allows Washington oversight it also allows for political values to seep in at the expense of things like common sense and prudent investing. So it turns out that regulators and politicians reaped the benefits of looking out for the common man when times were easy, but pushed the blame on to Fannie and Freddie when things got hairy.

I must say, that’s a pretty brilliant plan, even if it is awful and downright nasty. And as for the GSEs, how much can we hold them responsible for not standing up to their political superiors? Sure they should have realized what was coming and taken a stance, but would any of us have done that? Careers have been ruined for less.

I think that in such a complicated situation shifting blame isn’t just a waste of time, it actually dilutes the blame. Trying to simplify things to the point of “his fault” or “their fault” makes it seem like some kind of game, instead of people’s lives. Maybe if Washington was less concerned with appearances and “what will I look like” and more concerned with “how can I serve faithfully” we’d all be better off.

These are the questions lawmakers, bankers, and everyone else will be discussing during the coming months as GSEs come under every more intense criticism for their role in causing the country’s financial problems. Many people point out that none of the financial reforms that were enacted in the past few years dealt with the underlying issues that plague Fannie Mae and Freddie Mac. These two institutions, which are essentially government constructed entities fouling the waters of the private market, exploit huge risks at the taxpayer’s expense.

So there is a growing movement to end our reliance on them completely, have them shut their doors, and allow private banks to assume the credit risk that they’ve been carrying. These banks would come under heavier supervision than the GSEs faced and ultimately grow their portfolios much more than the GSEs were capable of, all with less risk.

Some of the changes would include:

- having private funds support the secondary mortgage market

- keep up the pace of conventional mortgages to borrowers, but from private banks

- keep taxpayers away from assuming risks connected to the secondary mortgage market

- support affordable residential and rental housing

Will any of these changes happen? Will Congress be motivated enough to do what needs to be done? Like most issues in Washington, some compromises will need to be made, but at least they’ve put the issue on the table.

Fannie Mae is trying to make a change. From now on, lenders that sell loans to the GSE won’t be allowed to make changes to the appraisers’ valuations. This practice is known as “appraisal cutting” and is now banned.

The problem was, essentially, that banks were afraid of risk for several reasons and so tried to devalue the properties. Now, if a lender wants to change an appraisal, they have to go back and get the original appraiser to do it.

The lender can no longer revalue the property on a whim. The process will be much more rigid than it has been until now. Lenders can’t simply decide that they won’t take the risk on such a large loan. If the house is worth the money in the appraiser’s opinion, then that’s the end of the story.

So suddenly Fannie Mae is the public protector. They’ve taken on the Superman role, looking out for borrowers and keeping the “evil” banks out of our hair.

Seems like a sharp turn-around for Fannie Mae don’t you think? I’m not sure they don’t have a hidden agenda somewhere, but for now we’ll watch how this law plays out with banks.

Let me know what experiences you come across when doing appraisals. Together we should be able to find any holes in the plan, if they’re there.