Feds investigate home builder's lending practices

Newspaper uncovers high default rate among Beazer projects

Wednesday, March 28, 2007

Inman News

A series of stories in the Charlotte Observer has prompted a federal investigation into the mortgage lending practices of Atlanta-based Beazer Homes in North Carolina.

In a series of stories beginning March 18, the Observer reported that at least 388 of the 2,900 homes Beazer built in Mecklenburg County, N.C., between 1997 and 2006 have foreclosed.

Beazer is both a builder and mortgage broker, arranging loans for buyers of its homes. The Observer said that in some instances, Beazer brokered loans that buyers could not afford, and included the cost of financial incentives in the price of homes.

Some of the company's actions violated federal lending rules, the Observer alleged, including four instances where loans were based on misstated information about applicants' income and debts.

Many loans Beazer brokered in the Charlotte area were insured by the Federal Housing Administration, and the Observer found FHA-backed loans were associated with more foreclosures than any other kind of loan.

The Observer today reported that several federal agencies are conducting a joint investigation of potential fraud, including the builder's role in arranging loans for home buyers. The agencies conducting the investigation are the Federal Bureau of Investigation, the Internal Revenue Service, and the Department of Housing and Urban Development.

Beazer officials said in a statement that they have been in contact with the U.S. Attorney's office and "at this time, there have been no allegations of any wrongdoing." Beazer said it has received a request for documents relating to its mortgage business and is "fully cooperating" with the request.

"We believe this request was fueled by the articles recently published by the Charlotte Observer," the company said in a statement today. "Based on our internal investigations to date, we have found no evidence to support the allegations in these articles."

In the article published today, Observer editor Rick Thames stood by the paper's stories, saying reporters began tracking "an abnormally high rate of foreclosure" in the Charlotte area more than a year ago. The research led to an examination of subdivisions built by Beazer, Thames said.

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Freddie Mac says Q4 losses not related to subprime woes

GSE says it's poised to capitalize on turmoil in mortgage lending

Friday, March 23, 2007

By Matt Carter
Inman News

Mortgage repurchaser Freddie Mac reported a net loss of $480 million in the fourth quarter as it upped provisions for losses and saw the value of its investments decline because of a drop in long-term interest rates.

In their annual report to investors, Freddie execs emphasized that they are not heavily invested in subprime loans. The abrupt turnaround from a $684 million profit earned during fourth-quarter 2005 was an anticipated consequence of falling interest rates, not the quality of its loans.

For the year, Freddie reported profits of $2.2 billion, or $2.84 per share, up from $2.1 billion and $2.75 per share in 2005. Total revenue declined from $5.6 billion in 2005 to $5.2 billion, however, and the increase in profits was largely due to a favorable tax ruling.

The government-sponsored entity managed to grow its credit guarantee portfolio by 10.6 percent, to $1.5 trillion, in 2006, a challenging year for lenders. As of Dec. 31, Freddie's $704 billion portfolio of retained loans included $238 billion of nonagency, mortgage-backed securities (MBS), of which $124 billion was backed by subprime loans.

Freddie executives downplayed the risk of those investments, saying 96 percent of its nonagency MBSs were rated AA or higher. The loan-to-value ratio of Freddie's credit guarantee portfolio stood at 57 percent at the end of the year, compared with 56 percent at the end of 2005.

A "slight credit deterioration" in Freddie's loan portfolio prompted the company to boost provisions for credit losses to $297 million, and record a $60 million loss on real estate-owned properties.

But Freddie Mac executives announced a plan to repurchase $1 billion in stock, and said the company's sound finances could allow it to capitalize on the problems now facing subprime lenders. Freddie is developing new products suited to borrowers of limited means, and could be stepping up its financing of loans to that share of the market.

"We are working fairly intensely right now on how we can develop products in the subprime space that are both shareholder and consumer-friendly," Freddie Mac Chief Executive Officer Richard Syron told investors in a conference call Friday. "Early work on this -- we're doing it on an a pretty accelerated basis -- I would say, is promising. There is a space there."

Patricia Cook, executive vice president of investments and capital markets, said there's an opportunity for Freddie to step in and finance loans that Wall Street investors are wary of. 

"With the dramatic changes that are occurring in the ... subprime and even Alt-A market, where liquidity is drying up, I think there's an opportunity for Freddie Mac to both provide liquidity and take a leadership role on the credit side," Cook said. "I think the combination of some new products and our ability, given where we stand in credit, to provide some liquidity to the market is a great opportunity for Freddie Mac."

Freddie estimated that its share of GSE mortgage securitizations was approximately 43 percent in 2006, compared with 45 percent in 2005 and 41 percent in 2004.

The results released Friday were preliminary, as Freddie hasn't yet caught up with its financial reporting since a 2003 management and accounting scandal forced the company to restate results from years past.

Congress is considering legislation that would strengthen oversight of Freddie and its sister company, Fannie Mae, that may also address concerns that the GSEs have been expanding their lending portfolios in a drive for profit, while neglecting their chartered mission of supporting affordable housing.

That legislation means that Freddie "faces a highly uncertain regulatory environment," the company said in a press release announcing the release of the annual report. "Freddie Mac believes appropriate GSE oversight legislation would strengthen market confidence and promote the company's mission, but cannot predict the prospects for the enactment, timing or content of any final legislation."

Freddie reported its "strongest ever" affordable-housing performance, claiming that nearly 56 percent of the homes financed by the company were affordable to low- or moderate-income families, and that the company financed almost half a million affordable apartments.

Although Freddie met the low- and moderate-income housing subgoals set by the U.S. Department of Housing and Urban Development, it fell short in the "special-affordable" housing subgoal. The goal was 17 percent, and Freddie's reported results of 16.93 percent are under review by HUD, the company said.

The company estimates that its share of government-sponsored enterprise (GSE) mortgage securitizations for 2006 was approximately 43 percent, compared with about 45 percent in 2005 and about 41 percent in 2004. All-in, Freddie Mac's 2006 activities provided mortgage funds for approximately 3.3 million families.

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Subprime problems hurt builder confidence

Survey: Tightening credit could be bad for business

Tuesday, March 20, 2007

Inman News

Builder confidence in the market for new single-family homes receded in March, largely on concerns about deepening problems in the subprime mortgage arena, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

Based on a monthly survey that measures builder perceptions and expectations for home sales, the index dropped to 36 in March from a downwardly revised reading of 39 in February. An index rating above 50 indicates that more builders view sales conditions as good, while a rating below 50 indicates that more builders view conditions as poor.

"Builders are uncertain about the consequences of tightening mortgage lending standards for their home sales down the line, and some are already seeing effects of the subprime shakeout on current sales activity," said NAHB Chief Economist David Seiders in a statement. " … NAHB continues to forecast modest improvements in home sales during the balance of 2007, although the problems in the mortgage market increase the degree of uncertainty surrounding our baseline (i.e., most probable) forecast."

All three component indexes registered declines in March after having risen in the previous month, according to the index. The index gauging current single-family home sales and the index gauging sales expectations for the next six months each declined three points, to 37 and 50, respectively. Meanwhile, the index gauging traffic of prospective buyers declined a single point, to 28.

Regionally, the HMI results were somewhat mixed. In the Midwest and West, the index gained one point to 28 and 36, respectively. In the Northeast, the HMI declined two points to 41, and in the South it fell four points to 40.

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Freddie, Fannie say Congress trying to have it both ways

Bill seeks to limit GSEs' profits, increase support for affordable housing

Friday, March 16, 2007

By Matt Carter
Inman News

Fannie Mae and Freddie Mac will be in a better position to help housing markets weather the current turmoil in subprime lending if Congress doesn't give regulators free rein to decide how much debt they can safely take on, executives with the companies told lawmakers Thursday.

The government-sponsored entities, which purchase mortgage loans from lenders and guarantee loans that sold to Wall Street investors on the secondary market, have been fighting tighter limits on their lending portfolios, which currently total $1.4 trillion.

In the wake of accounting and managements scandals at the GSEs, Bush administration officials and other Republican lawmakers have warned that Fannie and Freddie's considerable debt obligations pose a "systemic risk" to the banking system and financial markets.

The GSEs also have critics on the other side of the aisle, with some Democrats and affordable-housing advocates saying they've been more focused on profits than the mission Congress created them for -- to lower the cost of borrowing for average Americans by guaranteeing conforming loans.

Legislation that would have capped the GSEs' mortgage portfolios failed to pass the Senate last year. But a new compromise bill introduced in the House last week, HR 1427, would give regulators who oversee the companies' new powers, including more flexibility in determining Fannie and Freddie's minimum and risk-based capital requirements.

That flexibility worries Freddie Mac Chief Executive Officer Richard F. Syron.

The GSEs' minimum capital requirements are currently determined by applying hypothetical stress tests enacted in law. HR 1427 would give regulators more flexibility in setting the requirements.

The GSEs maintain that their capital provisions -- assets that can be used to cover potential losses -- don't need to be as conservative as the requirements in place for banks. That's because banks finance many types of debt, including credit card and automobile loans, which ostensibly carry more varied risks than home loans.

Because the bill doesn't spell out a requirement for the GSEs to reduce their mortgage portfolios, it's been "widely interpreted as meaning that the regulator would not impose the drastic reductions in our portfolio called for by our critics," Syron said in prepared testimony before the House Financial Services Committee

But the bill's language would give regulators "very broad authority to limit or substantially reduce the size of GSE portfolios, if they choose to do so -- making it possible to achieve the policy objectives" of the failed Senate bill, Syron said. "The high degree of discretion has cheered some GSE critics -- and that worries us."

Syron noted that one reason Freddie and Fannie were created "was to mitigate the impacts on the housing finance system of a transition like the one we are experiencing right now," referring to the rise in delinquencies and foreclosures among risky loans. Because the GSEs provide funds for mortgage lending counter-cyclically, now is not a good time to restrict that capability, he said.

"By acting counter to the business cycle, Freddie Mac and Fannie Mae help reduce the depth of a housing recession and support credit flows during an expansion in an "as needed" basis," Syron said. "We can only serve this function if we have the capital and operational flexibility to respond quickly to market transitions."

If regulators require the GSEs to hold capital in excess of their actual risks, Syron said, "We may not have the financial base that allows us to inject liquidity into the marketplace by buying and holding mortgages. We should be careful not to damage the successful GSE business model, especially at a time when GSEs may be needed to sustain the world's most liquid and successful housing finance system."

But some critics say Fannie and Freddie contributed to the current crisis by buying up subprime lenders' risky loans on the secondary market, allowing them to make even more loans. At the same time, the GSEs were turning their back on lenders making loans in less affluent communities under the Community Reinvestment Act, said Judith A. Kennedy, president of the National Association of Affordable Housing Lenders, in her prepared testimony.

"It has recently become clear that the GSEs were the major financiers of private label, mortgage-backed securities backed by subprime loans, while billions of prime, consumer-friendly CRA-eligible mortgages piled up on lenders' books," Kennedy said.

About $500 billion in GSE debt is invested in mortgage-backed securities (MBS), half of which are private-label securities backed by subprime loans, she said, citing a report by the Office of Federal Housing Enterprise Oversight (OFHEO).

Meanwhile, the market for CRA loans "is increasingly constipated for lack of capital," Kennedy said. "Billions of dollars in CRA-eligible loans remain on the books of the originating lenders, unless and until the lenders peddle their loans like Fuller Brush men to pension funds, insurance companies and other investors through expensive, time-consuming, private placements."

Syron argued that the GSEs' investments in MBS actually support its mission of helping families purchase affordable housing. He used those investments and others to dispute OFHEO reports claiming that only about 30 percent of Fannie and Freddie's portfolios support loans for affordable housing.

Freddie's CEO said closer to two-thirds of Freddie's portfolio supports affordable housing, if bonds financing low-cost housing are taking into account, along with whole loans, non-agency securities, and loans to first-time home buyers and minority families that are too large to count toward the GSEs' affordability goals.

HR 1427 would establish an affordable-housing fund, to which Fannie and Freddie would contribute amounts equal to 1.2 basis points of outstanding mortgages -- about $500 million a year, bill sponsor Barney Frank, D-Mass., has said.

Syron said that no "CEO of any shareholder owned company would enthusiastically support an additional cost imposed on his or her business, and I'm no exception. At the same time, I understand the interest in Congress in creating such a fund."

If the affordable-housing fund is part of the legislation ultimately passed by Congress, he said, it should be managed by the GSEs, and not regulators.

But the Treasury Department recommends that if Congress insists on establishing an affordable-housing fund, it be controlled by government regulators, temporary and capped, Treasury under Secretary Robert K. Steel said in his prepared testimony to the committee

Originally chartered by Congress, Fannie and Freddie were converted to for-profit, publicly traded companies in the late 1960s. But there is still a perception that the government will come to their rescue if they run into financial problems.

The GSEs "greatly benefit from the market's perception that the U.S. government guarantees or stands behind GSE obligations, which results in preferential funding rates," Steel said. "On behalf of Treasury, I want to reiterate that the GSEs' debt and other financial obligations are not backed by the federal government."

To make it explicit that the government will not necessarily bail Fannie and Freddie out if they run into trouble, HR 1427 would create a new regulator, the Federal Housing Finance Agency, which would have the power to place the GSEs in receivership.

The FHFA would be authorized to not only take over Fannie and Freddie's day-to-day operations as a conservator -- which regulators are allowed to do under existing law -- but close the GSEs down and liquidate their assets, leaving shareholders and creditors responsible for losses.

That could eliminate some or all of the rate discounts the GSEs enjoy, which Syron said save homeowners between $16 billion and $21 billion per year.

It's hard to argue that the GSEs are dominating the mortgage lending business, Freddie Mac's CEO said, as Fannie and Freddie have seen their market share of the $11 trillion in outstanding residential mortgage debt fall to less than 7 percent each in 2006 -- a 40 percent decline from three years ago.

But Steel stood behind the Treasury Department's previous statements that the GSEs have taken on too much risk -- a conclusion based not only on the size of their portfolios and the false perception that they are backed by the government, but because of their influence on banks and derivatives.

"The combination of these three factors causes the GSEs to present the potential for systemic risk to our financial system and the global economy," Steel said. "This view has not changed."

The Treasury Department "would be strongly opposed to changes that weaken (FHFA's) ability to effectively implement the capital provisions," Steel said.

Syron said that if Congress tries to push Fannie and Freddie into providing more support for affordable housing while simultaneously limiting its ability to generate profits, lawmakers might hamstring the GSEs. Fannie and Freddie -- which receive no direct government funding -- must generate a return to investors in order to accomplish the mission Congress intended, Syron said.

Profits, he said "are indispensable to the GSE model," allowing Fannie and Freddie to use private-sector methods and private capital to respond to changing markets.

"The genius of the GSE model as it has evolved since the Great Depression is the ability to harness private capital as much as possible to promote the public purpose of a liquid secondary market for housing finance," Syron said. "To that end, Congress has given the GSEs the freedom they needed, within the context and confines of their charters, to successfully compete for private capital and achieve attractive returns on that capital. Imposing too many conflicting demands on the GSEs risks crippling this highly successful model."

Requiring the GSEs to maintain capital levels greater than required by actual risks would slow growth and the flow of money into the new affordable-housing fund, Syron said.

Constraints on the GSEs' retained portfolio -- loans it buys and holds -- would mean conventional mortgage rates would rise. "Extremely aggressive housing goals" targeted at very low-income areas can lead to an "over-extension" of credit to some borrowers, as currently seen in the subprime market, he said.

As housing prices have spiraled upward since the turn of the century, Freddie and Fannie have been able to guarantee fewer loans in high-cost areas, because many mortgages exceed the conforming loan limit, which currently stands at $417,000. Many say that's been a factor in the growth in market share by subprime lenders in high-cost areas like California and Florida.

HR 1427 would attempt to address the issue by allowing the GSEs to guarantee loans up to 150 percent above the conforming loan limit in high-cost areas, or loans equal to the median home price -- whichever is less. Loans above the conforming loan limit would have to be securitized, and FHFA would study whether the securitization requirement raises their cost. FHFA would also be tasked with establishing and enforcing housing goals and an annual home-purchase goal for Fannie and Freddie.

*** Inman news