Tim Iacono
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The funniest thing about the recent developments at Fannie Mae (FNM) and Freddie Mac (FRE) - where they were recently given the go-ahead to fund more loans, in larger amounts, with relaxed lending standards - is that this is where all the housing problems started back in 2003.
After much hand-wringing when neither firm could produce understandable financial statements and the OFHEO threw up their hands before Congress claiming there was no way to effectively regulate the "Government Sponsored Entities", at the urging of former Fed Chief Alan Greenspan, much of Fannie's and Freddie's work was outsourced to Wall Street.
Everyone knows what happened next...
Oddly, this was the only "systemic risk" that the Maestro ever admitted to seeing in his 18+ year term as Fed Chief - too much government involvement in mortgage securitization.
Caroline Baum at Bloomberg takes note of the recent developments and we pick up the story after the amusing Fannie Mae fairy tale introduction:
Fannie announced it will now accept mortgages with a loan-to-value [LTV] ratio of up to 97 percent on a primary, single-family residence, even in areas where prices are declining.
"I'm not even sure this makes sense as public policy," says Michael Carliner, an independent housing economist in Potomac, Maryland. "Fannie should be making loans, but the underwriting standards shouldn't be lowered to that extent."
Just think about it: With home prices in a handful of hard- hit areas of California and Florida down 10-15 percent last year, according to data from the Office of Federal Housing Enterprise Oversight, or Ofheo, Fannie's regulator; and with widespread expectations that prices will continue to fall to attract buyers, Fannie Mae is loosening down-payment requirements when a house in these areas could be worth less than its loan value in a matter of months?
...
"We are able to adopt this new, national down-payment requirement, even in markets where home prices are declining, because our new automated underwriting risk assessment model DU Version 7.0 will limit risk layering and assess each loan more precisely," the company said in a statement.
I wouldn't know model DU Version 7.0 from model DU Version 6.0. It's still a model that uses information about the borrower and the property to determine the viability of a loan. Falling home prices, which can eliminate that 3 percent equity stake in a jiffy, aren't one of the inputs. (Fannie has other models that forecast house prices.)
Didn't we learn anything over the past two years?
No.
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This article has 14 comments:
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tcornelison
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95 Comments
May 22 08:32 AMI am a mortgage banker who works with both agencies.
All of your analysis misses the point. Fannie Mae and Freddie Mac do not make loans which do not have mortgage insurance. MI companies have more stringent requirements for reducing LTV in declining markets than Fannie & Freddie ever did. The Fannie & Freddie restrictions were meaningless anyway so they did away with them as a PR move in order to get good press coverage for trying to help ease the credit crunch to the consumer and to satisfy the lobbyists for the NAR & HBA. It did not really change anything. Markets designated as declining have a maximum LTV of 92% imposed by the MI companies for the 97% product and 90% for the 95% product. The only loans not impacted by the MI declining markets designation are loans not requiring MI below 80% LTV.
Fannie and Freddie have significantly tightened credit standards for approval of High 95+% LTV loans over the last year and continue to tighten those standards on an almost daily basis. In order to get one of their 97% loans you must have perfect credit, be well qualified and get MI from a company who will still not issue a guarantee in a declining market regardless of what the GSE's do.
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Rhett
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89 Comments
May 22 09:06 AM-
DCM
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20 Comments
May 22 10:02 AMSo now I have to wonder, why wouldn’t a bank want to make a mortgage loan if at all reasonably possible on an appreciating asset (vs. a depreciating asset) selling at a heavy discount? Why would a bank foreclose on a property only to have to turn around and sell it at a bigger discount and with additional costs (carrying costs, repair and maintenance) when they could go to their customer and say bring me a warm body with a possibility of making payments at a very competitive fixed interest rate? The worst case scenario is that sometime in the future they have to take the property back or find a new borrower.
The banks are getting smarter about how they handle risk loss with credit card and auto loan customers. The irony is that there is no security on one and depreciating security on the other. If I was a lender, I would much rather hold a portfolio of loans on assets that have the potential to appreciate. Right now is an excellent time for banks to increase their risk reward ratio. What I am suggesting is that banks/lenders look at the real estate market like a savvy investor looks at the stock market. The savvy investor buys when others are selling and sells when others are buying. Like investors who invested in stocks in 2000 and 2006, borrowers continued to increase mortgage amounts when housing prices were skyrocketing to finally an unsustainable level. Banks acted like greedy unprofessional investors and made loans when the reward risk ratio was extremely low. Now, when the reward risk ratio is high, lenders are not lending and borrowers can’t borrow. It makes no sense! Lenders supported by government backed securitization should be aggressively expanding their portfolios by loosening credit underwriting standards (property and borrower.) What better way to get REO’s off the books and liquefy the housing market.
Banks and borrowers need to approach home ownership and lending from a different perspective. Borrowers need to stop looking at home purchases as an investment or potential retirement nest egg. Owning versus renting should be strictly a lifestyle choice. The lenders need to approach home lending from a macro investment approach. They need to lend money at times when the risk reward ratio will support lending. This approach will eliminate the chance of making loans based on rising home prices versus lending to borrowers only when their income and net worth can justify higher home prices. This approach would in effect act like a governor controlling the speed of a train.
These are just some thoughts - comments welcomed.
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DCBill
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9 Comments
My Website
May 22 10:05 AM-
Tom Lindmark
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139 Comments
My Website
May 22 11:53 AM-
BerkeleyBob
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116 Comments
May 22 11:55 AM-
icandoitdon
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406 Comments
May 22 12:50 PMa 3 percent downpayment requirements is not low...it's miniscule. it might have worked for GIs in the 1950s when home prices were low relative to incomes and the speculative element in housing did not exist. but this ain't the 1950s any more.
as for mortgage insurance, it is not designed designed to replace reasonable downpayment requirements. massive defaults could render such insurance useless and leave taxpayers holding the bag. that's exactly what we have today.
the mortgage industry in particuar has willfully ignored the downside of easy credit with low downpayments and credit prices that do not reflect risk. in the recent past, they did it by offloading their bad loans to ignorant investors misled by incompetent rating agencies. they continue to do it because the government is rapidly become the backstop for irresponsible lending.
this isn't capitalism.
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jjason
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408 Comments
May 22 01:28 PMThe folks in the mortgage business will hope that everyone forgets the fact that they all screwed up.
Form a new company, pump it, BS the hell out of it and the fools will come running again for PROFITS FOR EVERYONE.
I was not affected by the 90-91 S&L crisis because I didn't own any financial stocks. I watched friends of mine lose their jobs and one friend lost $500,000 in the bank that he invested in. He was actually a member of the board of directors of the bank!
Then I made good money for about three years doing real estate appraisals for the FDIC on foreclosed properties. I did my appraisals the old fashioned way, by the book.
Too bad that the banking industry and mortgage brokers can't do things the old fashioned way too. Lets be honest about it...the trouble was (and is) caused by people who were not honest.
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gordon
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316 Comments
May 22 01:38 PM-
sivere
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123 Comments
My Website
May 22 03:02 PMYes. We learned that we need to
TakeBackTheFed.com
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mlambert890
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16 Comments
May 22 08:27 PM-
Bigbuilder
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8 Comments
May 23 08:00 AMI understand he makes house calls to OFHEO.
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secmaven
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300 Comments
May 24 02:19 AMFor millions of buyers the ability to make the payments never existed the first place. Using HELOC's to solve this problem worked for many for years. With the decline in housing prices this day has ended.
There will be no "recovery" in the housing market until incomes and housing prices get back in balance. With a recession putting the clamps on income the US is in a downward spiral. The folks with the capital to support the housing market in the US already own a home and most do not have a penchant for being a landlord. They will not step up.
The only answer I have heard that makes any sense, the current Congressional blatherings notwithstanding to the contrary, is Izzie Friedman's proposal that foreigners be given a green card if they will move to the US and buy a home.
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The Real Expert
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75 Comments
Jun 09 07:42 PMFor instance, you state "All markets are not seeing values crashing down but 0-10% will be the norm across most of the Nation." seekingalpha.com/artic...
What a joke! Sorry sub-prime boy but real estate is down on average by over 15% from peak prices, with much more downside on the way.
You also state: "Myth # 1: Mortgage money is not available.
Reality # 1: Mortgages are readily available to "qualified buyers".
Myth # 2: 20% downpayment is required.
Reality # 2: 100% financing is still available for low to moderate income borrowers and reasonably priced homes."
seekingalpha.com/artic...
Sure there are very very rare exceptions but overall you are wrong. Lenders have redefined "qualified buyer" to the highest standard seen in 2 decades. And 9 out of 10 lenders require 20% down. 20% down should be a law for home purchases.
Stick to shafting people with lies and bad loans. Leave the comments to people who know what's going on. Thank you.