The U.S. government just gave first-time homebuyers and other budget-minded house shoppers a big boost with a sweeping rule change that provides federal backing to mortgages with down payments as low as 3 percent. The change manifests in two parallel programs: Fannie Mae’s My Community Mortgage and Freddie Mac’s Home Possible Advantage.
The programs both offer fixed-rate loans for candidates’ primary residences. My Community Mortgage, which opened to buyers and owners in early December, offers loans to applicants with credit scores as low as 620. Its refinancing component will initially be limited to candidates who currently hold Fannie mortgages. Home Possible Advantage, which begins in March, may be open to buyers with even lower credit scores and includes a no-cash-out refinancing program open to all mortgage holders, not just current Freddie customers. It also doesn’t establish a hard credit score floor for purchase loans, broadening the pool of potential borrowers.
First time buying a home? You just got a huge boost from the U.S. government
These programs represent the government’s latest effort to assist first time homebuyers and other qualified borrowers to enter the market and become homeowners, but they’re not exactly groundbreaking. Private companies like Prospect Mortgage, a leading national independent mortgage banker led by Fannie Mae veteran (and former CEO) Michael Williams, have offered HUD eligible purchase and refinancing products with low down payments for years.
During Williams’ tenure, Fannie Mae faced down an existential crisis—the quarter prior to his tenure saw a shocking loss of more than $23 billion—and emerged with its strongest balance sheet and loan pipeline in years. After serving as Board Chairman for over a year, Mr. Williams took on the additional role of CEO at Prospect Mortgage in mid-2014) shortly after returning Fannie to a $5 billion quarterly profit, cementing his reputation as a fearless reformer.
The new Fannie and Freddie programs build on the foundation Mr. Williams laid during his tenure as Fannie CEO. Both promise to reduce barriers to entry for first time homebuyers currently priced out of the housing market.
Despite surging profits at Fannie and Freddie, the housing market recovery remains patchy, disproportionately favoring higher-income buyers and those who already own a home. According to the New York Times, the U.S. homeownership rate currently sits near 64 percent, a multi-year low. And first time homebuyers make up just 29 percent of the pool of prospective buyers, far below the 40 percent historic average.
Structural factors, such as stagnating wage growth at the lower end of the income scale, account for some of the discrepancy. But other factors, including traditional mortgage issuers’ overly strict lending criteria and onerous down payment requirements for first-time buyers and refinancing candidates, are a direct legacy of the recent housing bust.
My Community Mortgage and Home Possible Advantage could significantly improve buyer access at the lower end of the income scale, though experts are divided on just how much help they’ll provide. And Andres Carbacho-Burgos, a respected Moody’s economist, warned that any broadening of access would have to be accompanied by a renewed focus on mortgage monitoring and buyer counseling programs to safeguard against a rise in default rates.
Visit Fannie Mae and Freddie Mac online to learn more about their respective programs for first time homebuyers and refinancing candidates.
Credit Suisse has agreed to pay $885 million to settle claims it mis-sold mortgage-backed securities in the US before the financial crisis.
The Swiss bank was accused of misleading US government-backed mortgage giants, Fannie Mae and Freddie Mac, over the quality of the products.
Fannie Mae and Freddie Mac, which received government bailouts in 2008, will be paid $234 million and $651 million respectively.
More than $10.1 billion has been recovered from banks in similar actions.
Credit Suisse has agreed to pay $885 million to settle claims it mis-sold mortgage-backed securities in the US before the financial crisis (photo Reuters)
The Credit Suisse settlement is the ninth that the Federal Housing Finance Agency (FHFA) has reached over some $200 billion in mortgage-backed securities – an investment product at the centre of the global financial crisis.
Since 2011 the FHFA, which oversees Fannie Mae and Freddie Mac, has filed 18 lawsuits against banks over the products.
Credit Suisse said the settlement resolved its biggest remaining mortgage-related lawsuit.
The settlement covered $16.6 billion of securities sold to the two mortgage companies between 2005 and 2007.
Credit Suisse said it would reduce previously reported 2013 annual earnings by 275 million Swiss francs ($311 million) as a result of the settlement.
JP Morgan has agreed to pay $4.5 billion to investors who lost money on mortgage-related securities during the financial crisis.
The settlement is with 21 major institutional investors.
Mortgage-related investments were a major factor in the crisis, which began in 2007 with the collapse of the US housing market.
Last month JP Morgan agreed a separate, preliminary $13 billion deal with the US government over mortgage securities.
As part of that deal $5.1 billion would go to settle charges that the bank misled mortgage giants Fannie Mae and Freddie Mac during the housing boom. That settlement was the biggest ever by a US bank.
JP Morgan has agreed to pay $4.5 billion to investors who lost money on mortgage-related securities during the financial crisis
Now, 21 institutional investors that put money into more than 300 residential mortgage-backed securities are to be reimbursed by the bank.
The securities in question were issued between 2005 and 2008 by JP Morgan and Bear Stearns – a bank which it took over during the financial crisis.
“This settlement is another important step in JP Morgan’s efforts to resolve legacy related… matters” stemming from mortgage-related securities, JP Morgan spokeswoman Jennifer Zuccarelli said in a statement on Friday.
Friday’s deal still has to be accepted by trustees for the trusts that hold the securities.
A final settlement with the US Justice Department is expected to be announced soon.
Mortgage-backed securities were sophisticated financial products created by many investment banks in the run-up to the financial crisis.
These special bonds contained a mix of investments but at their heart were supposed to be risk-free home loans.
When the housing bubble burst, the value of these assets fell sharply and the credit markets seized up. The balance sheets of many US and European banks, including those in the UK, became toxic and they had to be bailed out by their governments.
What JP Morgan is alleged to have done was sell the mortgage-backed assets knowing full well that many of the home loans were in fact very risky.
JP Morgan has reached a $5.1 billion settlement with the US Federal Housing Finance Agency (FHFA) over charges it misled mortgage giants Fannie Mae and Freddie Mac during the housing boom.
Meanwhile, a separate settlement with the US Justice Department is expected to be announced soon.
“This is a significant step to address outstanding mortgage-related issues,” the FHFA said in a statement.
It is the biggest settlement ever by a US bank.
In a statement, JP Morgan said the settlement resolves the biggest case against the firm relating to mortgage-backed securities.
JP Morgan added that the agreement relates to “approximately $33.8 billion of securities purchased by Fannie Mae and Freddie Mac from JP Morgan, Bear Stearns and Washington Mutual” from 2005 – 2007.
JP Morgan has reached a $5.1 billion settlement with the FHFA over charges it misled mortgage giants Fannie Mae and Freddie Mac during the housing boom
The bank purchased Bear Stearns and Washington Mutual at the height of the financial crisis of 2008-2009, and has tried to argue that it should not be punished for mistakes made before those deals.
As part of the agreement with the FHFA, JP Morgan will pay $4 billion to Fannie Mae and Freddie Mac to settle claims that it violated US securities law.
It will pay the agencies an additional $1.1 billion for misrepresenting the quality of single-family mortgages.
Fannie Mae and Freddie Mac are the biggest mortgage lenders in the US. They received $187 billion in US taxpayer aid to help them stay afloat during the financial collapse.
They have since repaid $146 billion of the loan.
JP Morgan has been under investigation for several months by US regulators.
The bank said that it hoped the settlement would be part of a “broader resolution” of the firm’s housing bubble woes – a nod to an expected settlement with the US Justice Department that is also likely to run to several billions of dollars.
The firm reported a rare loss last quarter, having set aside an additional $9 billion to help it deal with its mounting legal troubles.
JP Morgan has set aside a total of $23 billion to help the bank work through its many investigations by regulators in the US and abroad.
Last month, JP Morgan agreed to pay more than $1 billion to help it end various investigations into its 2012 “London whale” trading debacle, which cost the bank more than $6 billion and raised questions about its oversight procedures.
A federal jury has found Bank of America’s Countrywide Financial unit liable for defrauding two US government-backed mortgage companies.
Countrywide, which was acquired by Bank of America in 2008, was accused of selling thousands of defective loans to Fannie Mae and Freddie Mac.
The ruling is a major win for the US government, which launched the case in the wake of the financial crisis.
The Justice Department is seeking as much as $848 million in penalties.
The judge who presided over the trial said a civil penalty will be decided at a later date.
A former Countrywide executive Rebecca Mairone was also found liable on a civil fraud charge. She was the only individual to be sued by the government in the case.
The month-long trial focused on a Countrywide programme that was internally called “Hustle” or “high-speed swim lane” which allowed loans to be processed quickly without checking their quality.
The wrongdoing, which mostly took place before Countrywide was acquired, was discovered after a whistleblower filed a lawsuit against the firm.
Bank of America’s Countrywide Financial unit was found liable for defrauding two US government-backed mortgage companies
Manhattan US Attorney Preet Bharara welcomed the ruling.
“In a rush to feed at the trough of easy mortgage money on the eve of the financial crisis, Bank of America purchased Countrywide, thinking it had gobbled up a cash cow,” he said in a statement.
“That profit, however, was built on fraud, as the jury unanimously found.
“In this case, Bank of America chose to defend Countrywide’s conduct with all its might and money, claiming there was no case here. The jury disagreed,” Preet Bharara said.
Preet Bharara added that US authorities would “never hesitate to go to trial to expose fraudulent corporate conduct and to hold companies accountable, particularly when it has caused such harm to the public”.
The US economy witnessed a big boom in its housing market in the lead up to the 2007-08 global financial crisis.
As house prices continued to rise, many banks looked to cash in on the boom by creating complex financial products that grouped together home loans.
However, a collapse in the housing market saw the value of those investments plummet as the underlying mortgage holders became unable to repay their debts.
This snowballed into something called the subprime crisis, which hurt investors globally and caused billions of dollars in losses.
Since then, banks have been under pressure to resolve claims on potentially faulty mortgages.
The US Department of Justice is investigating at least nine banks over their sales of mortgage-backed securities.
Citigroup has agreed to pay $395 million to Freddie Mac to settle claims of potential flaws in mortgages it sold to the firm.
The sum covers nearly 3.7 million loans sold to Freddie Mac between 2000 and 2012.
It is latest in a series of settlements by US banks with agencies Freddie Mac and Fannie Mae – bailed out by the government during the financial crisis.
The two have claimed that banks sold them toxic debts and as a result should be responsible for the losses on them.
“Today’s agreement with Freddie Mac marks another important milestone in successfully resolving Citi’s remaining legacy mortgage issues,” Jane Fraser, chief executive of CitiMortgage, said in a statement.
Tom Fitzgerald, spokesman for Freddie Mac said the agreement was an “equitable one” and “allows both companies to move forward”.
Citigroup has agreed to pay $395 million to Freddie Mac to settle claims of potential flaws in mortgages it sold to the firm
In the run-up to the financial crisis of 2007-08, the US witnessed a big boom in its housing market.
The boom saw banks grouping together home loans and selling them as investments, including to firms such as Freddie Mac and Fannie Mae.
But as the housing market collapsed and financial crisis spread many of the underlying mortgage holders were unable to repay their debts.
As a result, the investments plummeted in value, with disastrous consequences for banks all over the world.
Freddie Mac and Fannie Mae lost more than $30 billion, partly because of their investments in the subprime mortgages, and had to be bailed out by the US government.
Since then, banks have been under pressure to resolve claims on potentially faulty mortgages sold to the two firms.
Citigroup announced a deal in July to pay Fannie Mae $968 million for loans over a similar period.
In January, Bank of America agreed to pay Fannie Mae $11.6 billion to settle claims relating to residential home loans.