Market Recap

The more things change, the more they remain the same, or so the cliché goes. For Fannie Mae, not much is changing, but things are remaining the same. Fannie Mae continues to rack up losses and continues to slash its dividend. On the former, it posted a $2.3 billion loss in the second quarter after reporting a $2.5 billion lost in the first quarter. On the latter, the dividend was cut 86% this quarter after being cut 30% last quarter.

Fannie is in capital-raising mode, and many of us are providing the capital. One way Fannie is raising capital is by raising fees. For instance, Fannie announced last week that it is raising the “adverse market delivery” fee, which was introduced eight months ago. The original fee was $250 per $100,000 borrowed. Now the fee will double to $500 per $100,000 borrowed, meaning borrowing costs will be roughly an eighth of a point higher.

Not that we need higher borrowing costs; we don’t. Last week, the prime 30-year fixed-rate mortgage averaged 6.74%, the prime 15-year fixed-rate mortgage averaged 6.27%, while the 5/1 adjustable-rate mortgage averaged 6.32%, according to Bankrate.com’s weekly survey.

Fortunately, the news was more upbeat in other sectors of the economy. Pending home sales rose 5.3% in June, according to the National Association of Realtors. What’s more, the rise was broad-based, occurring in all four major regions of the country. Could this be an indicator of a sustained rally off a bottom? It’s tough to say. If distressed transactions – short sales and foreclosed properties – are a lower percentage of the total, it could be.

Another positive sign for housing is falling oil prices, which dropped below $117/barrel last week. Oil prices have tumbled 30% in the past month, and gasoline prices are now well below $4/gallon in many parts of the country. Lower commuting and energy costs make houses, suburban houses in particular, more affordable, so let’s root for still lower oil prices in coming months.

More Competition, Please

Fannie Mae’s and Freddie Mac’s influence over the mortgage market is one of many reasons we should be happy when private competition returns. At this point, Fannie and Freddie are nickel-and-diming us to death to cover their mismanagement. Worse, they are strangling segments of the market that shouldn’t be strangled, such as the market for Alt-A loans.

Yes, Alt-A and subprime loans have caused a lot of heartache over the past two years, but it wasn’t the loans, per say, that caused the heartache: It was the pricing of the loans. Lenders and investors were insufficiently compensated for risk, but that doesn’t mean that borrowers with lower credit ratings or borrowers with irregular incomes should be eliminated from the mortgage market. On the contrary, they should be part of the market. The key is to have these borrowers pay rates and fees according to the risk they impose. In other words, it’s not the product but the way the product is applied.

Fortunately, private competition for Fannie and Freddie will return, bringing more liquidity and options. It can’t return soon enough.