Fannie Mae and Freddie Mac could need a taxpayer bailout of as much as $99.6 billion if a severe economic downturn gripped the U.S., according to the GSEs’ regulator.
The Federal Housing Finance Agency released the results of a stress test mandated by the post-financial-crisis Dodd-Frank Act.
The test found that Fannie and Freddie together would require between $34.8 billion and $99.6 billion to cope with what’s called a “severely adverse scenario.”
“We’ve been warning all along that this will happen because the government is gutting the two companies financially in the hopes that another ‘bailout’ will prompt congressional action to reform the organizations,” says the Collingwood Group Managing Director Tim Rood. “If the status quo continues, it’s just a matter of time before Fannie Mae and/or Freddie Mac will be forced to take a draw from the Treasury to cover a quarterly loss. Pundits like to mock these companies as failed business models that were written off for dead by most five years ago. Yet, despite drastic efforts by the government to minimize their earning potential, these companies have generated $270 billion in earnings that have gone straight to the Treasury department.”
The two government-sponsored enterprises have operated under federal conservatorship since the 2008 crisis. In 2010, the Obama administration amended that 2008 agreement to require that Fannie and Freddie send all their profits to the Treasury and draw down remaining capital buffers until they reach zero in 2018.
Depending on the accounting treatment of certain deferred tax assets both companies hold, they would be able to tap between $158.4 billion and $223.2 billion in the “severely adverse scenario” imagined.
Under the hypothetical scenario, a severe global recession with “elevated stress” in corporate financial and commercial real estate markets plays out over nine quarters from 2017 to early 2019. GDP would decline as much as 6.50 percent, unemployment would peak at 10 percent, and consumer price inflation would decline to about 1.25 percent.
Additionally, equity prices would decline about 50 percent even as volatility picks up. Home prices would fall by 25 percent, and commercial real estate prices by 35 percent.
Collingwood Group’s Rood concludes, “Fannie and Freddie made a deal that they literally couldn’t refuse – conservatorship – and a deal that literally can’t repay because there are no mechanisms for them to pay down the principal amount of what they owe. I fear taxpayers will feel the pain in the end.”
The Big “IF” for Fannie and Freddie
What a difference two little letters can make.
Shares of Fannie Mae and Freddie Mac were both up 4.8 percent last week after both government-sponsored enterprises included the word “if” in their quarterly financial statements when referencing their upcoming dividend payment to the Treasury.
“Fannie Mae will pay Treasury a dividend of $3.1 billion for the third quarter of 2017 by September 30, 2017 if FHFA declares a dividend in this amount before September 30, 2017,” Fannie Mae wrote in its second-quarter earnings report, following Freddie Mac’s lead.
According to Height Securities analyst Edwin Groshans, the carefully placed “if” was no coincidence.
Groshans says the changes to the GSE’s dividend language highlight several key issues surrounding housing finance reform at the moment. While Federal Housing Finance Agency director Mel Watt hasn’t officially directed Fannie or Freddie to withhold dividend payments, it’s well within his power to do so at any time. If Watt chooses to withhold some or all of the dividend payments, it could be a sign that the government has begun the long, arduous task of recapitalizing Fannie and Freddie.
“Any adjustment to the dividend is unlikely to occur prior to Congress raising the debt ceiling and making progress on the FY2018 budget,” Groshans said.
Even if the government opts to begin recapitalizing the two GSEs, investors should keep their expectations in check. Earlier this year, Groshans estimates it would take roughly a decade for Fannie and Freddie to be adequately capitalized if they were allowed to retain 100 percent of their earnings.
The good news, however, is that Fannie Mae reported it expects to maintain its profitability in the foreseeable future.
read more: Benzinga
Tax Cut Not Good for All Banks
The Trump administration’s proposal to slash the corporate tax rate from 35 to 15 percent is a bittersweet blessing for one group of commercial banks. On the one hand, lower taxes are always appealing but, on the other, for commercial banks that invest in the affordable housing market, the proposal is a downright scary prospect.
Situs Executive Managing Director Steven Bean (pictured) and Situs Vice President Russell Foster write in the current issue of American Banker: “These banks have traditionally relied on tax deductions, including depreciation and interest payments, to make their investments in affordable housing financially viable but the simple math is deductions taken from a 35 percent tax rate are far more valuable than those taken from a 15 percent rate.
“The affordable housing market was created by the Tax Reform Act signed into law by President Ronald Reagan in 1986. Section 42 of the Act established Low Income Housing Tax Credits, or LIHTC, which provide investors with a one-for-one tax credit for every dollar they invest in affordable housing. Additionally, and key to the investment, the program also gave investors an avenue to take deductions against their corporate tax bills.
“With significant commercial bank participation, the LIHTC program has been a resounding success. It has led to the construction of more than 2.4 million low income housing units, created hundreds of thousands of jobs and improved neighborhoods in literally every state in the nation.
“LIHTC investments have proven to be an extremely valuable way for commercial banks to help meet the credit needs of their communities but, at the same time and just like any other investor, they need to receive a reasonable return on investment in order to continue participating in the market. Typically, investments in the program have generated 5 to 6 percent annual returns. Given all of the benefits of the LIHTC program, including millions of affordable homes and hundreds of thousands of jobs, this is a program well worth saving. We strongly urge Congress to make the LIHTC tax credits worth more, if they cut corporate taxes. We would also strongly encourage local governments to consider granting property tax abatements that would ease the biggest expense in any affordable housing project. Government programs are not always successful but this one is worth keeping.”
read more: American Banker
White House Reportedly Weighs Lower Mortgage Deduction Cap
The Trump administration is reportedly considering reducing the annual $1 million mortgage deduction cap for U.S. homeowners as a part of its broader tax reform, despite earlier promises to protect the tax advantage.
Politico reports the popular deduction came up at a White House round table with real estate industry representatives led by National Economic Council Director Gary Cohn. The publication quoted an attendee as saying Cohn was willing to “ruffle some feathers” by putting everything on the table.
The Internal Revenue Service says homeowners can deduct all interest on mortgages of up to $1 million. Lowering the mortgage deduction cap could help pay for major tax cuts for businesses and individuals that Republicans view as crucial for driving U.S. economic growth.
But the White House pushed back on the notion that its position has changed.
“As we’ve said since we introduced our principles in April, we intend to protect the homeownership deductions,” White House spokeswoman Natalie Strom said.
read more: Politico
Struggling Americans Once Sought Greener Pastures; Now They’re Stuck
When she graduated from high school, Taylor Tibbetts was a bright star in a small Northern Michigan town. She won an $18,000-a-year swimming scholarship to Converse College in Spartanburg, S.C., and departed for her freshman year with high hopes.
Once on campus, however, she felt overwhelmed by her courses and scared and isolated among students from all over the country with different values. After just a week, her mother reluctantly agreed to bring her home.
Three years later, sitting on a vinyl booth at her family’s pizzeria in West Branch where she now works, Ms. Tibbetts, 21, says she longs to live in a thriving city like Denver or Nashville, and regrets her inability to leave here.
“I can’t be the kid that just stays here forever,” she says.
Like a lot of small towns in sparsely populated American counties, West Branch, population 2,067, is in an economic funk brought on by the decline of manufacturing and farm consolidation. In recent years, a handful of retailers, a flour mill and a carpet shop have all closed their doors.
What is troubling about this rural town and many places like it is that while lots of struggling residents see leaving as the best way to improve their lives, a surprising share remain stuck in place. For a number of reasons — both economic and cultural — they no longer believe they can leave.
Economists say there are several practical reasons for the declining rural mobility — the first being the cost of housing. While small-town home prices have only modestly recovered from the housing market meltdown, years of restrictive land-use regulations have driven up prices in metropolitan areas to the point where it is difficult for all but the most highly educated professionals to move.
read more: Wall St Journal
Most Expensive Places to Buy a Home in the U.S.
Home prices are on the rise across the U.S., especially in cities with a shortage of new developments and entry-level properties. Some places are so short on properties that bidding wars break out, driving home prices up even further.
The National Association of Realtors tracks the median sale prices of homes across the U.S., revealing where you’ll have to spend the most to become a homeowner.
As of the first quarter of 2017, here are the most expensive places to buy a home:
5. San Diego, CA
Metro area: San Diego-Carlsbad, CA
Median price of a single-family home: $564,000
4. Honolulu, HI
Metro area: Urban Honolulu, HI
Median price of a single-family home: $746,000
3. Anaheim, CA
Metro area: Anaheim-Santa Ana-Irvine, CA
Median price of a single-family home: $750,000
2. San Francisco, CA
Metro area: San Francisco-Oakland-Hayward, CA
Median price of a single-family home: $815,000
1. San Jose, CA
Metro area: San Jose-Sunnyvale-Santa Clara, CA
Median price of a single-family home: $1,070,000
McMansion for Millennials
There’s been much wailing and gnashing of teeth in the real estate industry over what insiders see as a distressing trend among millennials: They aren’t buying houses at nearly the same rate as generations before them.
“Over the next seven years, there are 10 million millennials who will turn 31, the most common age at which Americans buy their first home,” says Kevin Gillen, senior research fellow at Drexel University’s Lindy Institute for Urban Innovation. “However, as a group, the millennials have a negative savings rate — they collectively owe more in debt than they have in wealth and income.”
In fact, a recent survey by ApartmentList.com found that 78 percent of Philly millennials plan to buy a home, but 72 percent of those are holding off because they can’t afford to. And it’s not just debt that keeps them on the sidelines — there’s also a shortage of homes at prices they can afford.
Stepping into this breach are luxury home builders, of all people, including Horsham-based Toll Brothers, one of the largest such developers in the country. The company, eager to build brand loyalty among future buyers, has been branching out into rental and student housing — and now is aiming to bring young buyers into the fold with a new slate of lower-priced homes. The T-Select line is currently under construction in the Houston and Philly markets.
The homes — set to go to market here by year’s end — are aimed not just at millennials but at first-time and move-up buyers of all kinds, says Chuck Breder, president of Toll’s Eastern Pennsylvania division. “It’s still the Toll luxury experience,” he says, but with fewer custom features, less square footage, and prices that start in the low to mid-$300s, 20 to 30 percent below a typical Toll home. “The choices are more limited than in our typical product,” Breder adds, “but we still offer several packages of standard and upgraded features.”
read more: Philadelphia Magazine
Have a prosperous day!
Please TIP ME to any news your company is making for inclusion in future updates and let me know if you want to receive this three-day a week newsletter.
Senior Media Consultant