Widely seen as a forerunner in national real estate trends, San Diego County is being viewed “with some trepidation” by lending giant Fannie Mae as its housing market cools.

“San Diego is one of the areas of the country that has had incredible . . . price gains,” Fannie Mae Chief Economist David Berson said yesterday during an economic and mortgage market report. “There is no question that the San Diego housing market has slowed.

“Inventories have surged in San Diego and the surrounding areas,” he continued. “Home price gains . . . are certainly down from their peak and perhaps will fall.”

San Diego is one region that is experiencing low affordability after a rapid and unsustainable rise in home prices, Berson said. Major metropolitan areas on both coasts are experiencing their lowest affordability levels “since the mid-1980s, when interest rates were considerably higher than they are now.”

While San Diego County’s economy is basically sound, the strong presence of investors in the housing market makes it subject to price fluctuations, he added. “We view it with some trepidation. It is one of the areas we are concerned about.”

Berson said the condo market here is at risk “because the supply has gone up dramatically.” There have been “lots of condo conversions. The investor share probably has been far more active in the condo market.”

Investors favor condos over single-family homes because they’re considered to be easier to sell quickly, he said. “Condos are far more commodity-like than single-family homes.”

Berson said the national housing market will continue to slow.

“We have had five years of record home sales,” he said. “That is unprecedented in the modern era. New home sales this year will fall by 9 to 10 percent. . . . Existing home sales, we think they will fall this year by about 7 to 9 percent.”

Union Tribune

WASHINGTON, DC – A Homeownership Alliance report by former White House economic adviser and best-selling author Todd Buchholz, demonstrates that the secondary mortgage market has become a vital technological and financial innovation that has helped open the door for millions to achieve the American Dream. The U.S. secondary mortgage market has helped spread risk, dampen economic crises, attract more investors into the housing market and has helped consumers save time and money when purchasing a home.

"The ultimate impact of the secondary market has been enjoyed by American families, who can become homeowners with lower costs, less hassle, more choice, and more peace of mind than ever before," said Buchholz in Home Sweet Loan: How Secondary Mortgage Markets Changed America.

"Over the past three years, the secondary mortgage market proved to be a wide and thick support beam for the U.S. economy, helping the economy maintain its strength and composure despite a global recession, the horrors of September 11 and a severe collapse in capital spending by manufacturers. More than just helping the abstract macro economy during the recent recession, the mortgage market has aided individual American families for the past 20 years."

Among Buchholz’s findings:

    * Prior to the creation of the secondary mortgage market, families were more vulnerable to being denied loans based on rumors, hunches, and stereotypes, instead of a lender looking at an objective analysis of their credit-worthiness. The secondary mortgage market encouraged the use of statistical tools that created a more level playing field for buyers and sellers.
    * The mortgage market has unleashed a fervent competition among lenders that has driven down closing costs, including points and fees. This competition has been aided, of course, by the advent of the Internet.
    * Interest rates have been pushed down by the secondary mortgage market, enabling more American families to buy homes. These rates are no longer so dependent on the ups and downs of the financial services industry, but reflect fundamentals in world capital markets.
    * The secondary mortgage market has smoothed regional disparities in mortgage costs so that families aren’t hindered by the economic strength of the local economy.
    * The secondary mortgage market has fueled innovation so that more mortgage choices are available both to home buyers and to investors in real estate, allowing more families to discover affordable and prudent methods of financing their homes, through different duration and adjustability terms.
    * The secondary mortgage market has attracted foreign capital into the U.S. housing market and into the U.S. economy, providing a more liquid financing climate and reducing interest rates.

"The homeownership rate in the U.S. has reached an all-time high of 68 percent. This monumental achievement would not be possible without the secondary mortgage market," said Rick Davis, president of the Homeownership Alliance.

The secondary market is a market in which banks and other primary mortgage lenders can sell the mortgages they originate to other investors through a process of mortgage securitization. This resale of residential mortgages allows more investors to finance mortgages and allows banks and other lenders to diversify their credit risk. The secondary market provides liquidity for primary lenders.

Buchholz is a leading expert on global economic trends and noted authority on monetary policy. He was a White House advisor under President George H.W. Bush from 1989 to 1992 and is an award-winning economics teacher at Harvard who has written several books in his field. He has written for Forbes, The New York Times and The Wall Street Journal.

In 2002, Buchholz conducted a study, Safe at Home, for the Homeownership Alliance about the effect of housing on the economy. He predicted housing would be a leading driver of economic growth over the next decade as it continues to expand without the dramatic booms and busts of prior cycles.

How The Secondary Mortgage Markets Changed America

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The chairman of the House Financial Services subcommittee with oversight of government-sponsored enterprises has accused former Fannie Mae chief executive Franklin Raines of perjuring himself before Congress.  Holding a hearing on a new federal report that officially accuses the mortgage giant of accounting fraud, Rep. Richard Baker, R-La., said Tuesday that, "There seems to be clear evidence to my mind that Mr. Raines perjured himself." In the fall of 2004, a then-embattled Mr. Raines testified before Rep. Baker’s GSE subcommittee, categorically dismissing charges that the company manipulated accounting rules back in 1998 so it could meet (to the penny) an earnings-per-share goal that triggered $27 million in bonuses paid to its top executives. At times defiant, Mr. Raines told members of the subcommittee then that, "This is a serious allegation, and we strongly disagree with it."  Mr. Raines was forced out by Fannie Mae’s board in December 2004.

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Associated Press

Employees at mortgage giant Fannie Mae manipulated accounting so that executives could collect millions in bonuses as senior management deceived investors and stonewalled regulators at a company whose prestigious image was phony, a federal agency charged Tuesday.

The blistering report by the Office of Federal Housing Enterprise Oversight, the product of an extensive three-year investigation, was issued as the government-sponsored company struggles to emerge from an $11 billion accounting scandal.

Earlier, a person familiar with the situation said that Fannie Mae was being fined between $300 million and $500 million for the alleged manipulation of accounting to facilitate executives’ bonuses, in a settlement with the housing oversight agency.

‘’The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,'’ James B. Lockhart, the acting director of OFHEO, said in a statement as the report was released. ‘’Our examination found an environment where the ends justified the means. Senior management manipulated accounting, reaped maximum, undeserved bonuses, and prevented the rest of the world from knowing.'’

The report also faulted Fannie Mae’s board of directors for failing to exercise its oversight responsibilities and failing to discover ‘’a wide variety of unsafe and unsound practices'’ at the largest buyer and guarantor of home mortgages in the country.

The OFHEO review, involving nearly 8 million pages of documents, details what the agency calls an arrogant and unethical corporate culture. From 1998 to mid-2004, the smooth growth in profits and precisely-hit earnings targets each quarter reported by Fannie Mae were ‘’illusions'’ deliberately created by senior management using faulty accounting, the report says.

The accounting manipulation tied to executives’ bonuses occurred from 1998 to 2004, according to the report, a much longer period than was previously known.

Regulators had earlier said that Fannie Mae in 1998 improperly put off accounting for $200 million in expenses to future periods so executives could collect $27 million in bonuses.

‘’By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders,'’ the report says. The manipulation ‘’made a significant contribution'’ to the compensation of former chairman and chief executive Franklin Raines, which totaled more than $90 million from 1998 to 2003, it says, including some $52 million directly tied to the company hitting earnings targets.

Fannie Mae employees falsified signatures on accounting transactions that helped the company meet the 1998 earnings targets, according to congressional testimony by the former director of OFHEO. The agency first discovered in 2004 the accounting-rule violations and alleged earnings manipulation by Fannie Mae to meet Wall Street targets — disclosures that stunned the financial markets.

In December 2004, the SEC ordered Fannie Mae to restate its earnings back to 2001 — a correction expected to reach an estimated $11 billion. The Justice Department has been pursuing a criminal investigation.

Raines and former chief financial officer Timothy Howard were swept out of office by Fannie Mae’s board in December 2004.

OFHEO levied a record $125 million fine in 2003 against Freddie Mac, Fannie Mae’s smaller rival in the multitrillion-dollar home mortgage market, for misstating earnings — mostly underreporting them — by $5 billion for 2000-2002.

On Friday, Fannie Mae said it was replacing the chairman of its board’s audit committee, a key position as the second-largest U.S. financial institution reworks its accounting and struggles to emerge from the scandal. The company said the board had named accounting professor Dennis Beresford to replace audit committee chairman Thomas Gerrity.

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