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Posts Tagged ‘Fannie Mae’

[Credit Spiral] Declining Home Prices Primary Cause Of Declining Home Prices

May 6, 2008 | 9:51 am | |

The FRB’s April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices showed that:

In the April survey, domestic and foreign institutions reported having further tightened their lending standards and terms on a broad range of loan categories over the previous three months. The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey.

In other words, it’s a lot harder to obtain financing.

Chairman of the Federal Reserve said in a speech yesterday that the decline in home prices was different this time and more flexibility in solving the problem is called for.

In a 10-page speech, Mr. Bernanke said (is 10 pages double spaced supposed to be significant?) that some regions of the country including California, Florida, Colorado and parts of the Midwest have experienced sharp increases in the number of homeowners who are delinquent on their mortgages, despite data that does not reveal the classic causes of foreclosures, like higher unemployment rates.

Instead, much of the problem can be attributed to a decline in home prices, which, Mr. Bernanke said, can “reduce the ability and incentive of homeowners, particularly those under financial stress for other reasons, to retain their homes.”

(image of lightbulb turning on) Borrowers were allowed to have mortgages they could not afford and speculators have less incentive to hold on to their properties. Economic vulnerability is made even more precarious by the vulnerability of the GSEs. (Today, Fannie Mae Posted unexpected losses associated with credit performance).

Bernanke’s comments on GSEs

Separately, the government-sponsored enterprises (GSEs)–Fannie Mae and Freddie Mac–could do more. Recently, the Congress expanded Fannie Mae’s and Freddie Mac’s role in the mortgage market by temporarily increasing the limits on the sizes of the mortgages they can accept for securitization. In addition, because the GSEs have resolved some of their accounting and operational problems, their federal regulator, the Office of Federal Housing Enterprise Oversight, has lifted some of the constraints that it had imposed on them. Thus, now is an especially appropriate time for the GSEs to move quickly to raise significant new capital, which they will need to take advantage of these new securitization and investment opportunities, to provide assistance to the housing markets in times of stress, and to do so in a safe and sound manner.

As the GSEs expand their role in housing markets, the Congress should move forward on GSE reform legislation, which includes strengthening the regulatory oversight of these companies. As the Federal Reserve has testified on many occasions, it is very important for the health and stability of our housing finance system that the Congress provide the GSE regulator with broad authority to set capital standards, establish a clear and credible receivership process, and define and monitor a transparent public purpose–one that transcends just shareholder interests–for the accumulation of assets held in their portfolios.

Bernanke actually says “Location, Location, Location”
There is significant locational disparity in the performance of housing markets across the country. Bernanke showed a very cool set of heat maps on a variety metrics.










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[GSE Searchlight] Oversight Is So Not Over

April 23, 2008 | 12:35 am |

There is a whole lot of oversight going on these days. OFHEO [Office of Housing Enterprise Oversight] and others are very concerned about the ability of the GSEs to avoid getting into trouble.

I wonder why there was so little oversight before the credit crunch? Was it an…oversight (sorry)?

It’s pretty scary to think that Fannie and Freddie (and HUD) are seen as the saviors of the housing market in the creation of a jumbo conforming mortgage product, expanded portfolio size and a housing market condition that continues to weaken (default rates rise as prices decline). They are already vulnerable.

Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor’s recently placed an estimated price tag on this worst case scenario — $420 billion to $1.1 trillion of taxpayer’s money.

Fannie Mae and Freddie Mac are getting a lot more attention from the Treasury Department these days.

Treasury officials have stepped up efforts to strengthen the regulation of Fannie Mae and Freddie Mac, the two largest buyers of home mortgages, pressing key senators to break a legislative stalemate that has lasted for years.

In OFHEOs Report to Congress, it summarizes the concerns quite efficiently:

$5.0 trillion in guaranteed mortgage-backed securities outstanding and mortgage investments. Their market share of total mortgage originations grew from 37.4 percent in 2006 to 75.6 percent by the fourth quarter of 2007. There is increasing pressure for Fannie Mae and Freddie Mac to do even more to support the mortgage market, which is problematic in absence of GSE reform legislation to strengthen the regulatory process.

As evidenced by the lack of market enthusiasm for the new jumbo conforming mortgage product that was supposed to help the housing market (allowing some homeowners to refi their way out of trouble – which can’t be good for FNMA’s portfolio). And OFHEO is just wrapping up actions against former FNMA executives who manipulated earnings to enhance their bonus income.

It doesn’t seem reasonable to place all of our hopes for a solution on the GSEs.

Consider oversight in the classroom: How students see their classroom today.


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[WaMu Goes Retail] Wholesale Mortgage Pipeline Goes Dry

April 8, 2008 | 6:08 pm | |

Back in the day, WaMu was one of the fasted growing mortgage originators and was affectionately known as the lender of last resort to mortgage brokers. Their appropriate “Power of Yes” advertising campaign was particularly accurate.

Implode-O-Meter reports that:

Washington Mutual will announce later today they are backing out of Wholesale entirely, and Retail is retreating to the bank footprint. Expect an email blast to Brokers later today.

Word is “They will leave the retail division in Jacksonville & Downers Grove” and all wholesale deals must close by June 30th.

It appears there may have been some conditions attached to that $5 billion.

Last week they reportedly allayed investor concerns that they were receiving a cash infusion of $5B.

I believe there are only a handful of national lenders left that are providing wholesale mortgage products in significant quantity. With this trend unfolding, combined with Fannie Mae’s upcoming ban on appraisal ordering by mortgage brokers, the high fees and unfavorable rates of jumbo conforming mortgages, a return to more core lending practices, proposed mortgage broker legislation, it’s not a good time to be a mortgage broker.

The mortgage bankers association expects the industry to contract in the current regulatory environment. There are many good mortgage brokers out there, but the profession needs weeding out, not unlike appraisers and real estate agents.

There is no love lost between WaMu and me because of the poor way it treated its long-time residential appraisers in 2006.

My question is: how will WaMu make money now? I had assumed wholesale mortgage origination was a big part of their business and their growth was fueled by mortgage origination. Their servicing business must be very lucrative.


UPDATE: Consolidation effort to eliminate 3,000 jobs
UPDATE 2: WaMu: Only for the Bravest of Investors

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[OFHEO Guidance] Stuck With Mudd On $417,000

March 28, 2008 | 12:57 am |

The Office of Federal Housing Enterprise Oversight, which has actually had to engage in a lot of oversight as of late, has been in the unenviable position of deciding whether to expand the conforming loan limit. It has been stuck at $417,000 for the past three years. OFHEO Director James B. Lockhart, who was nominated by President Bush and approved by Congress back in 2006, just as things began to get interesting. OFHEO used to be a sleepy oversight agency, responsible for the two GSEs: Fannie Mae and Freddie Mac that appear to rubber stamp everthing the GSE requested. No more.

Here’s the official guidance.

President and Chief Executive Officer of Fannie Mae, Daniel Mudd agrees with Lockhart on expanding the conforming loan limits to ease the credit crunch.

OFHEO is now on the hotseat because the GSEs have become a key ingredient to restoring investor confidence in the secondary mortgage market, which is a key ingredient to returning liquidity to the credit markets. I have been fairly critical of the agency of the years, but I have to say that Lockhart’s timely and tireless actions seem to be what the doctor ordered.

In theory, the conforming loan limit should float with the housing market but as the market has been declining, the conforming mortgage ceiling has remained unchanged. OFHEO decided that the rate should not be dropped because of the existing complexity of implementing the temporary increase of the conforming loan limit beginning on Setember 1st as a step to help the credit markets.

The conforming loan limit is adjusted annually through a calculation of year-over-year October changes to the level of home prices based on data from the Federal Housing Finance Board’s (FHFB) Monthly Interest Rate Survey (MIRS). As many commenters suggested, the small and voluntary MIRS price survey is volatile, which is another reason for this guidance to emphasize stability. Pending GSE reform legislation would allow the selection of a broader and more comprehensive price index.

It sounds like there will be more transparency in selecting the way the mortgage cap will be adjusted in the future. While I think that the rate should be adjusted up and down, not just up, it’s a catch-22 really. Lowering the rate will reduce financing availability for markets on the fringe, and that in turn, will weaken certain housing markets causing more defaults. Of course, it has the potential to make investors more skittish about conventional mortgages because the risk/value relationship is being expanded (market values drop, mortgage cap remain the same, risk spread widens).

And why do we borrow until it hurts?

No offense to Daniel or Roger intended, but what’s mud spelled backwards?


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[PMI Report] Nice Spreads Cloud Credit

March 25, 2008 | 12:19 am |

David Berson, the highly respected former Chief Economist at Fannie Mae, moved over to PMI to become its Chief Economist and Strategist. PMI just released their publication The Housing Mortgage Market Review, a timely publication given the swirl of information being released.

The U.S. economy, housing activity, and financial markets all deteriorated over the past month, increasing the likelihood that the economy is in recession. While we expect the downturn to be relatively short and mild, the odds of a more serious slump are rising.

I struggled in Econ 101 class.

In other words, things are going to be weaker in the near term for a short period, but the odds are rising that it will remain worse for a longer period of time. Other interesting topics were that lower priced houses have been hit harder than higher priced houses.

The Fed easing will soften the downturn, but the financial market turmoil could unravel the benefits.

Credit spreads continue to widen.

This is also evidenced in the rise in mortgage rates despite the Fed’s aggressive actions to ease credit.

Fixed rates are dominating lending now.

The pace of foreclosures is rising.


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Billion Mortgage March: GSEs To Make Waves

March 19, 2008 | 12:57 pm | |

This is huge.

Federal regulators said Wednesday they would allow mortgage finance giants Fannie Mae and Freddie Mac to reduce the capital they are required to keep on hand, a move that could pump $200 billion into mortgage markets.

The rule change was announced by the Office of Federal Housing Enterprise Oversight, (OFHEO), a normally low-profile agency which sets rules for the two government sponsored companies that between them hold or guarantee nearly $5 trillion in mortgages.

Here’s the OFHEO press release.

OFHEO estimates that Fannie Mae’s and Freddie Mac’s existing capabilities, combined with this new initiative and the release of the portfolio caps announced in February, should allow the GSEs to purchase or guarantee about $2 trillion in mortgages this year. This capacity will permit them to do more in the jumbo temporary conforming market, subprime refinancing and loan modifications areas.

Fannie Mae and Freddie Mac (as well as FHA) have evolved into critical roles in stabilizing the credit market panic and have assumed important roles in providing greater liquidity to the mortgage markets, a key component in avoiding long term damage to the economy.

The OFHEO assures us that the 20% capital requirement is enough cushion for safety and the GSEs will begin to aggressively raise capital starting now. The $200B in extra funds will allow Fannie Mae and Freddie Mac to buy more mortgage securities and new home loans and increase mortgage guarantees.

Not too sound too rah rah here but I am amazed that we continue to see creative solutions to the credit crisis, seemingly everyday. Of course OFHEO missed the boat while the problems developed but at least now we are seeing some action.

Mandatory reading today: Can’t Grasp Credit Crisis? Join the Club by the NYT’s David Leonhardt. Please read it.

Raise your hand if you don’t quite understand this whole financial crisis.


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[Client #9] You Don’t Get What You Pay Borrow For

March 11, 2008 | 9:52 am | |

Can there be a bigger story than the housing/credit market/economy/weak dollar/recession right now? Client #9, George Fox…good grief.

Which begs the question: Do you get what you pay for?

I have been struck by all the recent solutions to the financial crises that we have slipped into, whose severity, by most accounts, caught government officials and financial institutions mostly unaware. Of course my favorite bubble bloggers have been saying so for quite a while, including The Housing Bubble Blog, Bubble Meter and Housing Doom. In fact, they have been screaming about it. Their perspective has largely been from the stand point of the absurdity or the void of logic of high prices paid and the greed. Not much dialog about the cause until recently, because few actually saw it, let alone understood it.

In retrospect, it was never about high housing prices alone, it was mainly about easy credit that enabled the purchase of property at seemingly any price. cart before the horse

The naming convention for the housing boom/bubble/bust should have been based on “mortgage” or “credit” rather than “housing.”

Anyway you slice it, we are in the middle of a real financial crises and I am hopeful that the recent stimulus package does not convince the powers that be that the problem is solved. The stimulus package is simply a baby step, but at least it is in the right direction. It looks like more reforms are being debated and discussed and (surprise, surprise) all deal with mortgages. A bailout is not on the table, nor would it be a solution, or fair to homeowners who were not greedy or did not take responsibility for what they were signing.

While ultimately, markets need to find their own balance and it is good for home prices to decline as part of the cycle, the exposure to our financial system based on ill conceived mortgage lending needs to be fixed. It really is scary how exposed our economy is on this one.

Innovative solutions will be next up on the Congressional agenda because rate cuts don’t ahem cut it.

With worsening strains in credit market threatening to deepen and prolong an incipient recession, analysts are speculating that the Federal Reserve may be forced to consider more innovative responses -– perhaps buying mortgage-backed securities directly.

As credit stresses intensify, the possibility of unconventional policy options by the Fed has gained considerable interest, said Michael Feroli of J.P. Morgan Chase. He said two options are garnering particular attention on Wall Street: Direct Fed lending to financial institutions other than banks and direct Fed purchases of debt of Fannie Mae and Freddie Mac or mortgage-backed securities guaranteed by the two shareholder-owned, government-sponsored mortgage companies.

Some legislative actions in the works right now:

I am actually impressed by the creativity of solutions being proposed but the details make or break their effectiveness. Right now we have sort of the inverse of the period which saw immense creativity of mortgage packages during the housing (mortgage) boom. Hopefully the solutions are not as complicated as the problems that caused this situation. I don’t need to find another tranch loaded with problems.

For some, this financial crises will teach many that you actually don’t get what you pay for and you don’t get what you borrowed either.

To digress…On the Beatles’ Revolution #9 single, parts of the song, when played backwards with a turntable, sound like “turn me on dead man.”

Coincidence?

Ok, back to work.


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More Than Just Guidelines, OFHEO/Cuomo Agree On The Code

March 4, 2008 | 12:36 am | | Public |

…the title…imagine the voice of Captain Jack Sparrow’s first mate…arrr

OFHEO and NYS Attorney General Andrew Cuomo reached a deal today that may help create an environment for appraisers to be independent. Karen Freifeld and Sharon L. Lynch’s Bloomberg News article Fannie, Freddie to Overhaul Appraisals in Cuomo Deal says:

“The goal of the office is to find out what went wrong and how to fix the problem,” Cuomo said today at a news conference. “What we identified as the common denominator, if you will, was appraisal valuation.”

“We believe the appraisals were often fraudulent because there were conflicts of interest and pressure on the appraisers,” Cuomo said.

Cuomo strategy was to get the GSEs to agree and the other markets will follow.

And long time mortgage lending critic NY Senator Charles Shumer chimes in:

Accurate, independent appraisals are very important to ensuring the safety and soundness of Fannie Mae, Freddie Mac and the mortgage market,” Lockhart said in a statement. “The agreements should help restore confidence in the mortgage market by enhancing underwriting practices, reducing mortgage fraud and making home valuations more reliable.”

In James R. Hagerty and Amir Efrati’s WSJ article Fannie, Freddie Set Stricter Appraisal Rules quotes me:

“In my opinion, 70% to 80% of appraisals that were done during the housing boom are probably not worth the paper they’re written on because the appraisers…were rewarded with more volume,” said Jonathan J. Miller, a New York appraiser and longtime critic of industry practices. He estimates that home values are overvalued nationwide by at least 10% because of inflated appraisals.

My significant concerns over appraisal management companies aside, important element of this agreement are spelled out in the Home Valuation Code of Conduct.

The first part of the code was what interested me most:

No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner including but not limited to:

  1. withholding or threatening to withhold timely payment for an appraisal report;

  2. withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser1;

  3. expressly or impliedly promising future business, promotions, or increased compensation for an appraiser;

  4. conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary estimate requested from an appraiser;

  5. requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report, or provide estimated values or comparable sales at any time prior to the appraiser’s completion of an appraisal report;

  6. providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided;

  7. providing to an appraiser, appraisal management company, or any entity or person related to the appraiser or appraisal management company, stock or other financial or non-financial benefits;

  8. allowing the removal of an appraiser from a list of qualified appraisers used by any entity, without prior written notice to such appraiser, which notice shall include written evidence of the appraiser’s illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice (USPAP. or state licensing standards, substandard performance, or otherwise improper or unprofessional behavior;

  9. ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model in connection with a mortgage financing transaction unless there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the loan file, or unless such appraisal or automated valuation model is done pursuant to a bona fide pre- or post-funding appraisal review or quality control process; or

  10. any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, or impartiality.

arrrrgh, matey (sorry – but I have been waiting for years for some progress on this).

Update: Large lenders agree to new appraisal codes [UPI]

Update 2: In Deal With Cuomo, Mortgage Giants Accept Appraisal Standards [NYT]


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Cuomo Makes Progress In Appraisal Disconnect Problem

February 26, 2008 | 9:11 am | |

New York State Attorney General Cuomo is close to striking a deal with the two mortgage GSE’s Fannie Mae and Freddie Mac to instill some separation between the quality and sales function of banks that do business with them. Although this was initiated by New York, the deal would have ramifications for all lenders of conforming loan products that sell their mortgage paper.

Its not a done deal yet but its being reported as “close” by the Wall Street Journal’s Amir Efrati in this morning’s article Deal Nears to Curb Home-Appraisal Abuse. Here’s my contribution:

Jonathan J. Miller, a veteran New York appraiser and longtime critic of industry practices, said the proposed deal “sounds like a promising step, and that Mr. Cuomo’s office is addressing some of the key problems that appraisers have had to deal with and that have led to the disconnect between value and risk in the mortgage markets.” He estimates that home values are overvalued nationwide by at least 10% because of inflated appraisals.

My 10% estimation is very conservative and was based on my New York area experience and interactions with colleagues across the country.

Reuters and American Banker have also issued stories on the negotiations.

The deal proposes the following actions by Fannie and Freddie:

  • They will not do business with lenders that use in-house appraisers.
  • They will not buy mortgages from lenders that who use appraisals from wholly owned subsidiaries. (I believe this would apply to Landsafe, Countrywide’s Appraisal Management company).
  • Require lenders not to use appraisals arranged by individual mortgage brokers.
  • Create a clearinghouse for appraiser information and provide reports to the public.

Note: I will be updating this post throughout the day – the ramifications are huge

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Economic Dog Ready To Be Stimulated By Booster Shot From Trainer

February 13, 2008 | 6:47 pm | |

Well its official, a beagle finally won the Westminster Dog Show after being shut out since 1874 Roger Clemens finally testified in front of Congress today President Bush signed the Economic Stimulus Act of 2008, describing it as a “booster shot” for the American economy.

The bill I’m signing today is large enough to have an impact, amounting to more than $152 million this year, or about 1 percent of the GDP (gross domestic product),” the president said in the brief ceremony in the East Room of the White House.

About 130M Americans are going to get rebate checks by May.

A recent Associated Press-Ipos poll indicates most people have other plans. Forty-five percent said they planned to pay off bills, while 32 percent said they would save or invest it. Only 19 percent said they would spend their rebates.

The relevant benefit, as it relates to housing, concerns the expansion of the conforming loan limit from $417,000 to $729,750. However there have been concerns raised, based on past issues, with the GSE’s ability to manage the additional risk and the distraction that this temporary increase will have with their mission to encourage affordable housing (I think Paulson’s primary concern is the additional risk exposure because I fail to see how this prevents the GSE’s from their mission).

The temporary conforming loan limit expansion is still unknown and may prove to be of little benefit. As new mortgages that were once jumbos become conforming, the following could happen:

  • Payments could drop because conforming loans are lower risk (in theory) and therefore have lower rates.
  • Wall Street investors who buy mortgage-backed securities could demand a premium for the larger loans now purchased by Fannie Mae and Freddie Mac so rates may not change at all or could fall in between the current rates for conforming and jumbo.
  • The economy could get worse which seems likely given the FOMC futures market prediction of a 50% probability that the FOMC will drop rates by 50 basis points at their next meeting.


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Commitment Letter Is No Letter Of Commitment

February 9, 2008 | 11:46 pm | |

In the fog…

The proverbial American Dream homeownership scenario suggests that a citizen scrimps and saves to achieve their goal… homeownership. In fact, thats the mission statement of Fannie Mae.

The government established Fannie Mae in order to expand the flow of mortgage funds in all communities, at all times, under all economic conditions, and to help lower the costs to buy a home.

But in the wake of damage caused by the overzealousness to fullfill this goal (I am not singling out Fannie Mae) by getting the homeownership rate up to 69% in the past several years, there has been a change in the relationship of housing to its owners.

In other words, the offset to making it so easy to purchase property, is that its a whole lot easier to walk away. Les Christie’s CNN/Money piece called Homeowners: Can’t pay? Just walk away

Current lending practices have created an environment where a measure as extreme as abandoning a home actually makes sense to some people.

Many buyers put little or no money down, so they don’t have much invested in them. That leaves them with little incentive to keep making payments when a home’s market value dips below the balance of the mortgage.

The most serious consequence is a tremendous hit to credit scores. For some, that’s better than throwing away money they’ll never recover by selling their home.

And while a mortgage default can savage a person’s credit record, trying to pay off a loan they can’t afford could be worse for borrowers if it leads to bankruptcy, said Craig Watts, a spokesman for the credit reporting firm Fair Isaac.

The first time buyer’s biggest challenge is not affordability of the monthly payments but accumulation of the down payment. Prior to the recent housing boom, typical mortgage loan to value ratios were 80/20 at a fixed rate. The homeowner literally bought into homeownership because it was a challenge to get that first home. One could infer that many were emotionally vested into the property.

During the mortgage application process, the potential homebuyer worked towards getting that commitment letter from the lender, and then if all went well, the property would close and for the rest of their lives, they would be able to enjoy homeownership.

However for the past several years, the key to homeownership shifted from the downpayment to the monthly payment. Believe, I am not against innovative financial products to improve affordability, but common sense has to be built in. For example, it was inconceivable to me how a borrower could be qualified at a 1% teaser mortgage rate and the rate go to 6% in a year or two even though they barely qualified at 1%. Compound that with declining real estate values and it becomes illogical and bad business practice for a borrower to stick with the property. The new mortgage payment is 6 times higher and the mortgage is higher than the equity of the house as their market continues to decline.

I am not lamenting the loss in the traditional buying process of housing, rather the ramifications of fast and loose credit. I think easy credit changed many American’s views on their relationship to homeownership and in many ways, the mandate for greater homeownership, while successful on paper, has been a failure.

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Prices Decline…Across The Red Line?

February 6, 2008 | 12:26 am |

The other day, I was discussing the Countrywide soft market list and the Fannie Mae guidance notice with several colleagues and it made me wonder how long it would be before the issue of redlining came up.

Kenneth R. Harney’s column this week brought up the topic in his article Zip Code ‘Redlining’: A Sweeping View of Risk.

But first, some background…

There has been a lot of discussion and evidence of tightening underwriting standards for home mortgage applications. One of the most visible changes post cred-crunch of last summer has been the greater restrictions placed on underwriting standards in declining markets. In other words, a market that is experiencing price declines represents a higher lending risk since the home equity erosion provides the lender less collateral. Pretty straightforward.

This is not a new concept. Declining markets are to be accounted for in the measurement of risk by reducing exposure (size of the mortgage).

And its one of the cornerstone complaints I have held with the pressure of appraisers by the lending industry. Appraisers are often not allowed to characterize markets as declining or falling on their reports because it would “upset underwriting” and likely result in the eventually loss of the client.

Underwriting standards were expanded extensively and sloppily over the recent housing boom. Yet the restrictions now in place were employed almost overnight and will likely have the effect of damaging the very collateral they are trying to protect because they are often implemented in critical mass. In other words, a handful of lenders may dominate mortgages in a local market and their collective actions, when in sync, could have a significant adverse (and unintended) impact on local housing prices as a result.

The introduction of broadbased policies by GMAC, Fannie Mae, Countrywide and others will have the effect of restricting the number of sales, which impacts prices. In theory thats the way it should be, but broad based policy decisions based on questionable indexes or methods and after considering the virtual non-existence of standards last year, that it seems to open the door to accusations of redlining.

Labeling these areas as “declining” and then imposing higher down payment requirements “becomes a self-fulfilling prophecy,” Skeens said. “People can’t buy there because they need more cash upfront, the houses don’t sell and prices go down.”

Harney concludes…

The takeaway for now: If a major lender has tagged your Zip code, county or entire metropolitan area with a scarlet letter — and they exist in nearly every state, including many in places generally assumed to have relatively healthy market conditions — you’re going to need more cash upfront. That will be the case even if the risk designation has no real applicability to the house you hope to buy or finance.


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