Our $14t Deficit Doesn’t Matter, Until It Does. Solving Fannie & Freddie’s 242k Foreclosure Backlog.

Yesterday the markets were concerned about S&P cutting Japan’s credit rating for the first time in 9 years to AA- to account for their mounting debt. What about here in the US, are we broke yet? Our deficit is over $14 trillion. This doesn’t matter … until it does. But when does that happen? When the Federal Government runs a deficit, it has to borrow money, mostly be selling Treasury securities. And it pays interest on that borrowing (just like you and me), and continues rolling over the debt and paying interest indefinitely. Most analysts look at the deficit as a percentage of GDP. In the early 1980’s, many thought that deficits above 3% of GDP would cause economic pain. During the 1990’s, thanks in part to the tech boom, the deficit came down, but in the 2000’s it rose again. But investors, here and abroad (especially China) stepped in and bought Treasury securities, helping to keep demand high, prices high, and rates low. ‘Round and ’round we go, and where it stops, nobody knows. But few argue that a high deficit helps our credit rating or our borrowing costs, which in turn influence mortgage rates.

Below are some comments industry insiders have sent me regarding what to do about Fannie & Freddie’s 242,000 backlog of foreclosed homes.

“The critical issue here is that the MBS Servicers interests are, at times, not fully aligned with either the homeowner or government policy. This is because the servicers, who are mainly banks, do not have the credit risk associated with the loan since it has already been securitized and sold. The GSE’s have the risk. Maybe the GSEs should take over the servicing function for loans that they wrap in their day-to-day G-Fee business. Since they own the credit risk, they will be fully interested in the lowest cost solution to delinquency.”

“Another pro-active (foreclosure aversion) idea for the agencies would be that prior to the home becoming REO the owner-occupied borrower, once seriously delinquent, could be offered the opportunity to rent the property at the current market rent. The government would legislate a program that would permit investors to take these loans off their balance sheet once the home is rented to the borrower thereby strengthening these financial institutions and freeing up their balance sheets so they can lend. As the renter successfully makes 24-36 payments on time, they qualify to purchase back the property at the then market value.”

Another, on the Realtor side, wrote, “One of the biggest points of Fannie & Freddie’s REO congestion is the lack of brokers they’re using. Their current system of using on a few listing agents is ridiculously inefficient. Of course every Realtor in the business wants to get in on this action, and there are some very qualified folks out there being left out of the game. Someone at Fannie & Freddie needs to recognize that they need more hands on deck to move these homes. Basically, they need to at least double the number of Realtors listing these properties if they want to make a dent.”

“If regulators do away with the Fannie and Freddie system and don’t replace it with some form of implicit or an outright explicit government guarantee, the ‘Law of Unintended Consequences’ will strike. Ginnie Mae’s will undoubtedly price way better than any private MBS and the government will be over-run with FHA mortgages. Leave it to politicians to screw it up again. I say again, because it was all this nonsense about lending to the “underserved”, which is code for those that don’t qualify using traditional credit risk principals, that was a primary reason for the problems in the agency portfolios today. It is an example of the ‘medicine’ being worse than the disease.”