Is Fannie Mae Getting Too Stingy?

Battery Park CityMany borrowers with existing mortgages are set to get a big break, thanks to the Obama administration's new support for forgiving loan principal, but it's getting tougher out there for new customers to get a mortgage. The latest to strike out are buyers trying to purchase apartments in New York's ritzy Battery Park City.

Crain's New York Business reports that Fannie Mae is currently not buying home mortgages for Battery Park City condos and co-ops. That effectively means that buyers there can't get mortgages. As a result, sellers can't unload their apartments unless someone comes in with an-all cash offer. With one-bedroom apartments selling in the $500,000s, Fannie's freeze-out of Battery Park City has brought the sales market there to a near halt.
The reason? Battery Park City buyers don't actually own the land that their luxury towers sit on. The property is leased from the Battery Park City Authority, a government agency that itself depends on revenues from its real estate to pay its bills. The Authority also has heavy debts to pay to bond-holders, backed by those payments from property owners – condo owners, landlords, and corporate tenants like Goldman Sachs. (Ironically, it also holds $185 million in Fannie Mae securities in its investment portfolio.) Those bondholders are in line to be paid before Fannie Mae if a borrower gets into trouble, which means that in a climate of declining property values Fannie could be exposed to losses. It would rather stay out of the game.

Remember that the next time you complain about Fannie Mae spending taxpayer's billions recklessly. It isn't. If anything, lately Fannie has been operating at the other extreme: it's so intolerant of potential losses on any transaction that it's refusing to back mortgages that should be perfectly reasonable risks. While it did take heavy losses on bad loans that came out of its own portfolio, mostly Fannie's in the red because it has the world's dirtiest job: keeping the mortgage market alive when its other players collapsed.

Now, Fannie underwriters are under strict orders to avoid losses and risks. That could pose a threat to the newly expanded Home Affordable Modification Program, because investors – including Fannie Mae, when it backs a mortgage - have to voluntarily agree to principal forgiveness. Will it? We'll see.

Already, Battery Park City isn't the only place where Fannie's skittishness is screwing things up for borrowers. As the Wall Street Journal reported last week, a number of cities are launching new programs to lend money to homeowners to make their houses and condos energy efficient. Homeowners then pay the money back on their tax bills. Great and necessary, right?

But Fannie Mae and Freddie Mac won't get on board with green energy programs, for the same reason that Fannie is bailing on Battery Park City: these green programs, known as Property Assessed Clean Energy (PACE), raise money by selling bonds to investors, and mortgage lenders then have to get in line behind those investors to get paid. Fannie and Freddie see PACE borrowers as an unknown risk, since they don't have to get approved by a bank to qualify – all taxpaying homeowners are eligible, and it's up to local tax collectors to make sure the loans get paid back. Fannie and Freddie aren't counting on it.

Next time you worry about Congress giving Fannie Mae and Freddie Mac a blank check, remember that the problem might actually be the opposite of the one people fear: not that they're reckless with our money, but that they're getting so stingy that it's choking off borrowers' ability to get home loans. You still do want mortgages, right?
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