Last Wednesday GMAC Financial Services, citing losses in its mortgage division, received another infusion of cash — $3.8 Billion this time — from the Federal government. This means that GMAC has received a total of $16.3 Billion from American taxpayers. In exchange for this aid, the Feds now own 56.3% of GMAC. No matter what your political leanings, this is a huge amount of money and an unprecedented amount of government control.

Here is the interesting question: DiTech Mortgages, one of GMAC’s subsidiaries, is one of the nation’s largest mortgage lenders. Given that Fannie Mae and Freddie Mac are both now owned by the Feds, and now have unlimited capital to buy mortgages, will mortgages from DiTech receive preferential treatment? After all, this level of vertical integration is the goal of many private corporations. If the Feds could somehow pick up a national real estate firm, they could pretty much control the transaction from start to finish.

What do you think? Is this level of government control what is needed to revive the mortgage market?

[photo credit: Creative Commons and Shiny Things]

On Christmas Eve the Treasury Department announced that it was lifting the caps that limited the amount of available capital for Fannie Mae and Freddie Mac. Prior to Christmas Eve, each company was limited to $200 Billion of capital from the Federal government [read taxpayers]. the decision was, in the opinion of the Treasury, “necessary for preserving the continued strength and stability of the mortgage market.” Now, and through the end of 2012, the Federal government [again, that's you and me] are guaranteed to cover all losses of the two companies. You can see more of the details in this Wall Street Journal article.

What does that mean for you and me? In the short run, this will probably help hold mortgage rates down. With unlimited reserves, Fannie and Freddie will almost certainly be more aggressive in buying mortgages. This increased demand will encourage lenders to increase the supply of mortgages, which they do by either lowering rates [to encourage more good borrowers back into the market], or loosening standards [to attract more borrowers from the edges]. This is good news for borrowers, especially people looking to take advantage of the extended and expanded first-time home buyers credit.

The long run, however, is more concerning. To get access to all this new capital, Fannie and Freddie had to give the government preferred stock paying 10% dividends [preferred means the dividends are guarenteed no matter what]. They each also gave the government warrants that allow the government to purchase roughly 80% of each company. So, in effect, the Federal government owns Fannie Mae and Freddie Mac. And the Feds track record for running anything isn’t too great.

Hopefully we will have the best of both worlds — a well capitalized secondary mortgage market and a Federal government dedicated to allowing Fannie and Freddie to operate as somewhat  independent entities. We will certainly see what happens over the next few months.

In all the sound and fury about the extension of the First Time Homebuyer’s Credit, you might have missed the news from Fannie Mae. Last Thursday, Fannie Mae announced a new program to allow troubled homeowners a chance to stay in properties threatened by foreclosure. Under the program, homeowners would transfer ownership of the property to Fannie Mae [a "deed-in-lieu of foreclosure"]. Fannie Mae would then allow the [now former] homeowners to sign a lease for up to one year to remain in the property. As you might expect, there are a number of conditions;

1. You must have a mortgage owned by Fannie Mae. If you aren’t sure, you can check here to see if your loan is owned or backed by Fannie Mae.
2. You must be behind on your current mortgage.
3. You can not qualify for a loan modification under current Federal guidelines.
4. You must qualify for a deed in lieu of foreclosure under Fannie Mae guidelines
5. You must demonstrate that you can afford a market rent. Generally this means that the market rent is less than 31% of your monthly gross income.
6. Any subordinate lien [a second mortgage, HELOC, etc] must be released by payment in full or some other arrangement.

This program is similar to one offered by Freddie Mac. The main difference is that Freddie Mac is signing month-to-moth leases to allow homeowners to stay in the home while Freddie Mac finds a new buyer.

Both of these programs will certainly advance the Government’s immediate goal of helping people stay in their homes — at least for a little while. It will, however, make the Federal Government a landlord for an increasing number of properties. Both Fannie and Freddie expect to hire management companies, but it is still one more bureaucracy in companies stretched to the limit already.

The second thing these programs will do is delay the needed and eventual adjustment of the housing market. With Fannie delaying the sale of these homes for a year [or possibly more] becomes even more of the long drawn out pain instead of the short sharp adjustment the economy needed.

What do you think? do these programs help or hurt the overall economy?