Thursday, May 15, 2008

I am so glad I covered the FRE long

If there is anything close to ending PERMANENTLY the lending business in USA, then this is it.

Will it buy 1 year of time? Perhaps.

Is one year enough? Perhaps.

What happened after that? Doesn't matter.


Fannie Is Poised to Scrap Policy Over Down Payments
By JAMES R. HAGERTYMay 16, 2008

Fannie Mae is expected to announce Friday that it is scrapping a policy requiring higher down payments on home mortgages in areas where house prices are falling.
The change comes in response to protests from vital political allies of the government-sponsored provider of funding for mortgages, including the National Association of Realtors, the National Association of Home Builders and organizations that promote affordable housing for low-income people.

Those various groups have said the policy is hurting an already feeble housing market by shutting out too many potential buyers.
The current policy, adopted in December and now due to end June 1, limits loan amounts in areas with declining home prices, including most of the densely populated parts of the country.
For instance, if a loan program normally allows people to borrow up to 100% of the estimated property value, the maximum is cut to 95% in "declining markets."

Under the new policy that is taking effect next month, Fannie will have the same maximum loan percentages across the country for people purchasing single-family homes that they intend to occupy, according to people familiar with the plan.
For borrowers approved by Fannie's automated underwriting program, the maximum generally will be 97%. For those approved by other means, the maximum will be 95%. (Fannie also has some loan programs, typically offered through state or local housing agencies or nonprofit groups, that allow certain borrowers to make no down payment.)
Fannie is expected to continue to have variable down-payment requirements on mortgages considered riskier, such as those used to buy investment or vacation homes.
Fannie and its main rival,
Freddie Mac, own or guarantee the bulk of U.S. home mortgages and so set nationwide standards for lenders. Freddie also has a policy requiring higher down payments in declining markets. But Freddie earlier this month said it wouldn't require lenders to drop below 95% of the estimated value.

In a letter to the Realtors last week, Freddie also said that it is applying the policy flexibly. For instance, if appraisers can demonstrate that home prices in a given neighborhood are stable or rising even though values are falling in the wider metropolitan area, the declining-markets policy doesn't apply.

By softening the down-payment policies, Fannie and Freddie are taking more risks.
Borrowers who put just 3% to 5% down in many areas are likely to find within a year that they owe more than the homes are worth because prices have fallen, a situation known as being underwater.

In some cases, deeply underwater borrowers are choosing to walk away from their homes rather than trying to find a way to keep on paying, Patricia Cook, Freddie's chief business officer, told analysts this week.
But Fannie officials have argued that they have tightened lending standards in other ways -- for instance, insisting on higher credit scores for people who make small down payments -- to reduce default risk. Officials have also argued that underwater borrowers don't necessarily choose to walk away.

The concessions from Fannie and Freddie illustrate the conflicting pressures that they are facing. Many critics say they are taking far too many risks, increasing the danger that taxpayers may end up having to bail them out.
But politicians and the housing industry are pushing them to do more to prop up the housing market.

In a recent letter sent to Fannie and Freddie, the Realtors reminded the companies that the trade group in recent years helped them fend off Bush administration attempts to impose tighter regulatory constraints.
Fannie and Freddie may need the Realtors' lobbying support in the weeks ahead as Congress seeks to give final approval to long stalled legislation designed to improve regulation of the two companies.

Write to James R. Hagerty at


D said...

F*ck it!

I just saw this was just going to ask what your thoughts are on the timeline again for the FNM/FRE .gov handout.

I have literally bitched out my representative and Obama has stars in his eyes. The only thing that will distract from the steaming pile of sh*t our nation is becoming is a big ugly war.

To consistently f*ck up this bad, it means it is no accident and will get much worse.

D said...

the scions of industry...

MTGSPY said...

Well 2 probabilities and I dont want to insult your intelligence by asking what you think:

1. GSE will be able to intelligently pick, house by house, zipcode by zipcode, loans that they are willing to buy, and identify the lenders/system/underwriting standards that intersect with those houses in those areas.


2. Business runs as usual as if it's 2006, and they pray to Odin it's 2010 and not 2009 the day of reckoning cuz that's all they got.

Thanks for playing :D

D said...

Yea, I definitely understand the situation from from gordian knot standpoint. My question is, will .gov capitalize/de-lever the GSEs before 2008 is up or will they let Obama be the savior in Q1 2009?

What is the significance of 2010 v. 2009 aside from one more year of income, bonuses, and foreign estate planning for execs? Forget about 2009/2010, they should be dead now...the coma patient is on life support.

That article mentions social engineering and engineering human behavior...sickening.

MTGSPY said...

Just my personal understanding of someone who got "pushed" into taking a 10% downpayment (instead of 20% IF it were high risk area: CA FL NV AZ MA) and the house price is projected to drop 10%, 5% then 0% in 2008, 2009, 2010, per the GSE "talk" themselves.

So by their own admission, if choice #2 is taken, then the exit is 2009 or 2010 (if the pain threshold somehow is higher and they hold the job longer ).

By end of 09 regardless, using this standard, you can expect all 2008 loans to be underwater.

MTGSPY said...

There is no difference who's in charge. I have no ability to say what will happen to the current lending system WITH this additional stress. Truly no-man's land.

MTGSPY said...

What you sent me is very interesting. In using whatever I know, I completely agree with their assessment. I am surprised they got this right and the data is free.

D said...

I agree there is no difference of who is in the white's just a part of the screenplay.

I guess the question I should ask is, how do you define "exit"?

exit = recapitalization/nationalization?

Thanks...just trying to clarify your thoughts.

MTGSPY said...

I have to lie to you to define the exit.

The solution is to get the asset price above the value of the debt. I understand when hazard occurs (declining house prices) what you can do to take care of the loans and calculate damages.

But if you try to step in front of the truck ON PURPOSE, I will have to sit down and think about it because I cannot define the damage as yet. I will be back with some "groundbreaking" idea what kind of damage (loan volume, hazard rate, and who's hit) in the next few days once more details come up how the GSE want to implement this.

MTGSPY said...

By that I mean, once the damage # is in, you know whether we get "fire" or "ice".

I know for a fact that currently on average, overall in the US, there is still enough equity to handle the crisis. So sometimes I exaggerate things in conversations with people, because of excitement.

But this will bring the averages down and to what level is really really up for debate right now.

You don't have to get $0 equity nationwide average to have the "VOTE" to print money. I think the pain threshold is slightly positive ($2T, our equity is now adjusted for expected home price drop is $6T)

MTGSPY said...

If we get enough equity @ the exit, I forgot to say, we get "ice".

D said...

Gotcha, thanks for the color. What are your thoughts on why they would be adopting these kinds of policies?

They can't be this stupid...

1) Liquify
2) Refi
3) Recap 1st round on dumb money
4) Nationalization of some sort

That seems to be the path they are choosing. I accept that they have to step in, but moves like this will destroy the distribution model.

MTGSPY said...

They aren't stupid, but I believe there is very much that we ordinary people don't see.

I think finally there is a political pressure of INSANE proportion from special interest (NAR, NAHB, MBAA) and the Senate itself to task these two to "sustain" house prices, an impossible task which shouldn't be attempted in the first place.

If this somehow manages to ramp up the volume in any significant manner, then it will remind me of the giant battleship Yamato.

D said...

Well if that's the case, Yamato never made it to its final fight...

D said...

I will have to give Schaffer a call if he is elected to the Senate in Colorado...

He was beat by the drunk (Peter Coors) for the repub. nomination in the last election. He's been shilling for the energy industry since that defeat.

I am no longer a CO voter, but I know him from his days as a CO representative.

MTGSPY said...

Yes, you may want to. Very few understands the primal behavior that arises when home equity goes down. It's not straight forward at all. The best guru in this field, unfortunately, is retired. His name is Angelo Mozillo. I shit you not.

D said...

haha...on CFC.

One of my best friends growing up was/is (?) running a securitization team there. We went separate ways a long time ago and I found out about him taking the CFC position from his mother. Last fall I put a call in to his parent's to try and get a hold of him and never heard back... I asked how he was going on the voice mail.

I will put a call in this weekend and see if I can reach him this time around. He moved to LA in 2005...I am sure he has one of the shitty loans he created too.

I would probably get more useful info from him, but the biggest credit trades are really behind us at this point though. Now we have to work for our money...and hope we don't get our heads blown off when the pols/players decide to change the rules again.

If only I had know about ABX in 2006...


MTGSPY said...

Well, now that you know ABX, don't you think some of the price are on the, uh, low side? There's very good odds it really is 10-12% yields unlevered?