Back in late September, I wrote about the rumors of an Obama administration program seeking to provide financing and subsidies to promote mortgages to low- to moderate-income families. Today, it finally got around to announcing the project with Housing Finance Agencies (HFA). Reading the press release, my pessimistic analysis from back in September might have been too kind. It sounds like a disaster form all sides.

First, here are the goals of the HFA initiative from a fact sheet provided (opens .pdf):

- provide hundreds of thousands of affordable mortgages for working families;
- enable the development and rehabilitation of tens of thousands of affordable rental properties;
- provide refinancing opportunities for at-risk borrowers to convert to sustainable mortgages;
- be paid for by HFAs - not taxpayers;
- incentivize HFAs to transition back to market sources of capital as quickly as possible;
- maintain viability of HFAs to preserve important role in providing housing resources.

As a useless but amusing aside about the first point, I love the rhetoric with always talking about "working" families. Indeed, nobody likes those families that don't work! But I digress. . .

Let's consider all of these points, except for the last one, because it's more an outcome than a characteristic.

Lower Interest Rates

The first and third points essentially means lower interest rates. This leads me to ask: do we really need to get mortgage rates lower? In case you don't follow mortgage rates, they're already pretty darn low. Here's a chart I made based on data from mortgage-x.com:

mortgage rates 10-2009.PNG

Even at their high point for the year, they were around the low for the past six years.

More Rental Properties?

The next point is perhaps the most interesting, and not in the earlier report I commented on last month. Do we really need more rental properties? To my knowledge, there is already an overabundance of empty housing out there. Why spend money rehabilitating additional properties -- just let the market set the price for what's existing. It's already been driving down the price of renting recently, making what's already available more affordable. I'm not sure why government intervention is needed to aid a phenomenon the market is already providing.

HFAs Taking The Losses

The new plan boasts that the HFAs will foot the bill, which is a round about way of saying that they will maintain exposure for most losses. I'm not convinced. Here's what the press release says:

HFAs will pay fees set to minimize costs to the Treasury Department and to taxpayers.

And:

Fannie Mae and Freddie Mac will administer a Temporary Credit and Liquidity Program (TCLP) for HFAs to help relieve current financial strains and enable them to continue to serve their important role in providing housing resources to working families.

Okay, so the idea is that the HFAs will pay fees which will act as cushion for potential losses to the financing that Fannie and Freddie are providing. How high are those fees? The rates they're going to offer to borrowers are already lower than the market rate -- the price which is supposed to cover the risk involved and cost of funding. Given how incredibly low those rates already are, how can the HFAs make money off these mortgages if they're paying a fee to cover the remainder of the risk? After all, on the population we're talking about, that risk is significant. Even beyond pure loss, there's also servicing cost to worry about, which could be substantial on loans like these.

The reality, I suspect, is that these fees won't possibly be high enough to cover most losses taxpayers will face if the loans go bad. They can't be, or else the HFAs wouldn't be able to make any money from the loans.

HFAs To Seek Market Sources For Capital

Speaking of those fees, here's how the Treasury intends to incentivize the HFAs to move to private sources of capital:

The fee for HFAs to use the TCLP will increase over time. This increasing cost to the HFAs will encourage the HFAs to transition from the TCLF to private market financing alternatives as quickly as possible.

This sounds like good intentions gone awry. First of all, what private sources in their right minds would want to finance these loans? Their return is below market and their risk is high. I like the idea that there should be an incentive to move these to private capital, I'm just entirely unconvinced that there's much private capital out there that wouldn't charge a lot for financing. If there was, then why would they need Fannie and Freddie in the first place? Meanwhile, if HFAs can't get other financing, they'll lose money not only on associated mortgage losses (which could be high) but also face increasing fees.

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