Deja Vu from Fannie Mae
I can barely believe I read this. I thought I had fallen through a time warp device, but no - this is what comes out of Fannie Mae this week -
Fannie Mae, the mortgage-finance company under U.S. government control, will loosen rules for homeowners seeking to lower their loan payments by refinancing.
Fannie Mae will drop some credit-score requirements, reduce income-documentation standards and waive the need for appraisals in some cases, according to a notice yesterday to lenders posted on the Washington-based company's Web site. The changes apply to loans that the company owns or guarantees.
The company, which accounts for more than 40 percent of the $12 trillion in U.S. residential mortgage debt, is seeking to break a "logjam" in refinancing and allow more homeowners to take advantage of near-record low interest rates, according to Brian Faith, a Fannie Mae spokesman. The increased flexibility for consumers isn't large enough to significantly harm mortgage- bond investors and mortgage insurers, analysts said.
"This is not yet the no-appraisal refi wave that many have feared," Matt Jozoff and Brian Ye, mortgage-bond analysts at New York-based JPMorgan Chase & Co., wrote in note to clients yesterday.
Fannie Mae's appraisal change doesn't mean borrowers with less than 20 percent home equity can forgo mortgage insurance, the analysts said. That's because Fannie Mae will likely use automated models to check home values listed on applications before offering to waive appraisals, the analysts said.
The company's DU Refi Plus program will start April 4.
Aiding Borrowers
"To allow more borrowers to take advantage of today's historically low interest rates and help the lending community break the logjam in mortgage refinancing, the company is extending its refinance offerings," Faith said in an e-mailed statement. The program "will streamline" refinancing "for potentially millions of current mortgage holders," he said.
While Fannie Mae, smaller rival Freddie Mac and the companies' regulator are considering permitting borrowers to refinance even when the consumers owe more than their homes' worth, they also must consider "the various hurdles and unintended consequences," Federal Housing Finance Agency Director James Lockhart said in a Feb. 2 interview.
Fannie Mae's changes will include allowing borrowers seeking to take out a loan that is 80 percent of the value of the home or less to qualify for refinancing with credit scores below its 580 minimum. Consumer credit scores as measured by Fair Isaac Corp. range from 300 to 850.
Easing Documentation
The program also lowers income-documentation requirements to one current pay stub, according to the notice.
The U.S. took control of Fannie Mae and McLean, Virginia- based Freddie Mac in September as their losses threatened to further roil the housing market. The government agreed to inject as much as $200 billion of capital to protect investors in their roughly $6 trillion of corporate debt and mortgage bonds.
The average rate on a typical 30-year fixed mortgage rose to 5.25 percent in the week ended today, according to Freddie Mac. Rates are up from 4.96 percent three weeks ago, a record low, and down from 6.46 percent in the last week of October.
Under their government charters, the companies must have borrowers or lenders buy mortgage insurance or other forms of so- called credit enhancement if their down payments or home equity are less than 20 percent. Mortgage insurers cover all or some of lenders' losses on defaulted debt.
Mortgage-bond holders who paid more than face value for the debt may incur losses if refinancing means the securities are repaid faster than expected, cutting the value of the premium coupons on the bonds. More than 95 percent of Fannie Mae or Freddie Mac-guaranteed fixed-rate mortgage securities are trading above face value, according to Bloomberg data.
Unfounded Concerns
"Absurd" concern about faster prepayments being potentially enabled by quick Fannie Mae and Freddie Mac policy changes can be seen in the only about 1-percentage-point gap between prices for Fannie Mae's 4.5 percent and 5 percent mortgage bonds, Ken Hackel, head of fixed-income strategy at RBS Greenwich Capital Markets, wrote to clients today.
Fannie Mae's changes are "unlikely to have a material effect on prepayments," Laurie Goodman, a senior managing director at Austin, Texas-based Amherst Securities Group LP, wrote in a report today. Derek Chen and Nicholas Strand, Barclays Capital mortgage-bond analysts in New York, agreed.
"We think the overall impact on borrower refinance-ability and prepayments is marginal," they wrote in a note to clients.
While lenders won't be required to make contractual promises about the value or condition of homes under Fannie Mae's Refi Plus program, they will still be required to represent that all data submitted to the company's computer underwriting program are accurate, according to the notice.
Faith said that the company will "expedite the refinancing process for Fannie Mae-owned loans by, under certain conditions, leveraging our automated risk assessment capabilities to validate the current market values in lieu of traditional appraisal or property inspection requirements."
Sorry - what are these guys not getting exactly? This is exactly the same shit that caused the current problem. Does Mr. Obama want to just pass this off to his grand kids? Guess so. Sign me up for a no deposit 120% no income mortgage tomorrow......
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Comments on Deja Vu from Fannie Mae
The big difference is that these are not cash out refinances and they are not purchases. This plan makes sense. If you only allow people who do not need to refinance refinance then you are lowering the returns on good performing debt and losing money. And this does nothing to stop the current deflation of Real Estate. If someone who is upside down on their home can not sell it and can not refinance it and can not afford it then there is only one other thing they can do and that is Default on it. This plan addesses that problem. It is not letting people refinance for 120% so they can go out and buy a boat.
It is not letting people go out and buy a house that is upside down for full price as a new purchase. We need programs like this to stop the foreclosure spiral and to plug the hole in the bucket. The bigger mistake is to keep pouring money into the banks to sure up their books while property values keep falling causing more people to be upside down and put in to a position of defaulting. If you had a hole in a bucket what would you do keep pouring water in the top to try and keep it full or plug the whole first?
You may be right, but I do not think so. The foreclosure spiral is not the problem and I do not think it is possible to stop it in this way. Social pressures will stop the spiral. Sherrifs around the country are already refusing to evict any more families. Refinancing a $250,000 loan on a home that is now worth $100,000 is not going to do a thing. If they cannot afford the current loan, they will default on a refinanced loan.
You have been sold a bill of goods. Real estate is going to continue to deflate until such a time as prices average around 3 times average annual salaries, and with jobs disappearing all over the world, who knows where this is?
Foreclosures are not the problem. The problem is that these loans were repackaged, leveraged, sold on repackaged again and releveraged – who knows how many times and the banks are now insolvent because their last 10-15 years profits were largely based on this “increasing asset value.”
The current discussions all around the world center around creating “bad banks” to buy up these assets. They are saying “These assets are difficult to value.” This is a lie. These assets are worthless.
Every single penny put into the banks was to prevent the banking system from collapsing. Not to prop up the housing market. Not one penny put into the banks will go towards this. Whatever the politicians may say, they have no choice but to let real estate devalue – or we are back on the same treadmill. Quite apart from that – how much money would be needed? No one knows but it is almost certainly enough to create massive inflation.
Sure, FM will squeeze a few bucks out of every new loan, the mortgage broker will squeeze a few bucks etc, but all it will do is add to the taxpayers burden at the end of the day.
There is not a hole in the bucket. there is no bucket. How much money has been dumped into the system already? Because if the gov tells you it was a trillion dollars, you know it is really three trillion. And not just in the USA – look at Britain, Iceland and Europe. They were sucked into the repackaged “assets” along with all the other banking systems. It was too tempting not to be. All that “profit” for no work.
our entire economy was based on increasing real estate values and over valued assets. That had to stop at some point. This is the point and nothing you, I or Fannie Mae do will stop it.