Apartment Rental News Weekly Roundup: July 8, 2008

This week offers some very important news that could have a major effect on both the housing crisis and the apartment rental market.

Shareholders fled from Fannie Mae and Freddie Mac on Monday, possibly restricting those entities’ ability to further purchase and guarantee home loans.

Also on Monday, the Senate invoked the second of the necessary three cloture votes for passage of the federal housing rescue plan, while HUD Secretary Preston indicated that the White House had softened their position on the bill by offering input on how to conciliate discrepancies between House and Senate versions.

Freddie Mac and Fannie Mae Shares Plummet

The front page of this morning’s Wall Street Journal featured an article, Mortgage Giants Take Beating On Fears Over Loan Defaults, which gives a detailed appraisal of the current financial states of Freddie Mac and Fannie Mae. Both shares dropped to their lowest levels in more than 14 years.

Investors are worried that Freddie and Fannie will have to issue more stock in order to raise enough money to continue purchasing and guaranteeing mortgages. If the companies do not have enough capital, due to the drop in stock price, to continue purchasing and guaranteeing mortgages, than interest rates on new home loans could spike.

This would be troublesome for the already crippled mortgage market considering that the government sponsored entities own or guarantee about half of all outstanding home loans in the U.S.

Adding to the financial worries, the insurance that Freddie and Fannie take out to protect themselves from losses due to defaults has been rising significantly. On July 1st, it cost the companies $173,000 annually to cover $10 million; just yesterday afternoon, investors agreed on an annual premium of $210,000.

Federal Housing Rescue Plan Updates

On top of these worrying financial statistics, the federal housing rescue plan, which moved one step closer to the President’s desk this week, will further burden the GSEs, placing the cost of the program, estimated between .5 and 1.7 billion, on their shoulders. Furthermore, the bill calls for a new federal regulator for Freddie and Fannie, which some believe will act to restore confidence, but may hamper the ability of the GSEs to pump money into the faltering mortgage market.

H.R. 3221, which has been held up since we started our weekly Apartment Rental News Roundups, passed the second of three necessary cloture votes yesterday. The last cloture vote is proving to be quite a battle.

Senate Majority Harry Reid will not allow a vote on Senator Ensign’s amendment to provide $8 billion in tax credits for renewable energy because he fears that the Republicans and Blue Dog Democrats in the House will not agree to the measure without offsets. Senator Ensign is able to stall the bill and reject a unanimous consent request to move the bill because his amendment was part of the original bill before it was passed over to the House.

The Senate, however, is expected to invoke cloture and pass the bill, it is just a matter of when. Before it moves to the President’s desk, however, it will have to move to conference to synchronize the House and Senate versions. HUD Secretary Steve Preston has offered two suggestions, indicating the Administration’s recent acquiescence to the bill, as the White House had originally threatened a veto.

The Secretary’s recommendations were:

  • Adopt the Senate amendment to ban seller assisted down payments in virtue of the fact that they foreclose 3 times more often
  • Adopt the House amendment to allow the Federal Housing Authority to price products based on a borrower’s credit risk, which, if not included, could endanger the long term solvency of the program.

In addition to these recommendations, Secretary Preston announced that the FHA would expand its voluntary program to allow at risk borrowers to refinance into more stable loans. Thus, families that have missed three mortgage payments and those who have experienced temporary economic hardship will be allowed into the program, which is expected to help more than 100,000 families.

This ongoing saga certainly displays how slowly legislation develops. Whether the remedy arrives in a timely fashion is anyone’s guess. Senator Dodd’s hope was that it would have been reviewed by the President this week, but now the hope is that it will leave conference before Congress takes it’s month long recess in August.

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