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Posts Tagged ‘GSE’

[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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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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[Talking Points] The National Appraisal Clearinghouse

February 28, 2008 | 1:29 pm | | Public |

I am hopeful that the severe losses announced by Fannie Mae and Freddie Mac over the past 24 hours will stimulate some sort of shake up in the mortgage industry to prevent what happened over the past several years to not happen again.

$3.6B here, $2.5B there,
soon or later its real money

I have been a long time proponent of the lending process to be open and honest about actually knowing how much the collateral is worth that mortgages are issued against. If the value is in the property, then whats the problem? It’s an underwriting decision, not a valuation placement whether to make the deal when guidelines are strayed from. Appraisers are to simply report what is happening in the market and move on to the next assignment as a disinterested third party.

It’s all about appraiser neutrality – thats essential to maintain credibility of values.

Sharon Lynch at Bloomberg News in her article Fannie Proposes Ban on Lenders’ In-House Appraisers presented my thoughts on the current problem:

About three quarters of residential mortgage appraisals are arranged through brokers who only get paid if a loan closes, Miller said today in a phone interview. He called the practice “laughable” because it creates a financial incentive for mortgage brokers to push appraisers toward higher valuations. Higher appraisals also mean more homeowners qualify to refinance their homes and take cash out, he said.

and broke the story about the placement of a Fannie Mae talking points memo on the American Banker web site yesterday which lays out the key points in the negotiation with NYS AG Cuomo.

“It would be a monumental change because it would require a shift in the way that the lending industry does business,” said Jonathan Miller, chief executive officer of Manhattan-based appraisal company Miller Samuel Inc. and a longtime proponent of creating a firewall between residential appraisers and mortgage originators. “I think it would be tremendous.”

I fretted in an earlier post that the large losses would slow down progress for reform, simply because any reform would slow down transaction activity until the lending industry adjusted to them and that would hurt the GSE’s near term financial performance.

Here is the text of the talking points memo (items in bold appeared in bold in the original memo):

THE NATIONAL APPRAISAL CLEARINGHOUSE TALKING POINTS

In November, 2007, the New York Attorney General’s Office sued First American (and its subsidiary, eAppraiseIT) for allegedly inflating the appraised values of homes.

The lawsuit is part of a broader investigation into alleged fraudulent practices in the mortgage industry, specifically related to appraisal practices.

Fannie Mae wishes to cooperate with the New York AG’s investigation and, as part of a cooperation agreement, will likely agree to a number of items, the most significant being:

  1. Requiring as part of our reps and warrants, and as a precondition of the sale of any mortgage to Fannie Mae, that the lenders or brokers do not have and did not utilize either in house appraisers to conduct the subject property appraisal NOR do they have any wholly owned subsidiary or other subordinate entity that performs appraisals.
  2. Requiring as part of our reps and warrants, and as a precondition of the sale of any mortgage to Fannie Mae, that LENDERS not rely on appraisals provided by brokers, either for purchase transactions or refinancing transactions. This would, in effect, require lenders to always secure their own appraisal of any property purchased through a broker.
  3. A CLEARINGHOUSE of appraiser information, conduct and activity will be established.
    a. All lenders will be required to provide post-purchase copies of appraisal documents to the Clearinghouse.
    b. It will be an independent entity with an executive and board of directors (no Fannie Mae employee involved).
    c. It will staff a hotline for industry and consumer complaints.
    d. It will provide annual reporting publicly.
  4. These requirements will go into effect for loans acquired by Fannie Mae after September 1, 2008.

In my next post, I am going to expand on what I think the ramifications of this are. Of course, the big assumption is whether this deal will even happen.

UPDATE: Catch the comments on Mortgage News Daily about this post.

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As Fannie And Freddie Hemorage, Little Incentive To Reform?

February 27, 2008 | 11:29 am | |

Before the champagne bottles could be uncorked by appraisers who felt vindicated by the potential agreement to be reached where Fannie Mae and Freddie Mac would agree to only buy loans from lenders who took some logical precautions on the valuation of the collateral (install the protections for competent appraisers, by creating firewalls), I think we all need to consider what the incentive for change their approach to lending would require, and its made me more skeptical after a good nights sleep.

Both GSE’s are likely to show reduced earnings throughout 2008 because of the rise in default rates. Their stock prices have fallen by more than half since last summer.

As of December, 2.2% of all prime mortgages were at least 60 days past due, up from 1.5% a year earlier, and the highest level since 1998, according to First American CoreLogic. More than one-fifth of subprime loans were 60 days or more past due. A check of delinquency rates for large, high-quality mortgages shows that “credit quality is now deteriorating sharply even for prime mortgages,” Morgan Stanley analyst Kenneth Posner wrote in a recent research note reiterating a negative outlook on Fannie. Delinquency and foreclosure rates for jumbo loans in December were more than double the previous January.

So if their don’t ask, don’t tell mentality still exists (avoiding focusing on the problem of realistically estimating the value of collateral pledged against mortgages by lenders), why would the GSEs want to place additional burdens on the lending industry right now which would slow down sales activity?

They need the flow of new mortgages through their pipeline to boost potential revenues don’t they? Investors seem to be more likely to buy conforming paper than jumbo paper these days but as new problems come to light, that sense of safety with the GSE’s could vanish too.

I suspect that NY AG Cuomo is going to have to play hard ball to get this deal done with Fannie and Freddie. His office has been impressive on this front and gets what the problem. From the news coverage yesterday, it sounds like negotiations have been ongoing for a long time (probably due to their scope of suggested change) and there will be future litigation if it doesn’t happen.

There probably needs to be the same actions from other state AG offices to turn this ship around. AG’s in Ohio, Colorado, Massachusetts and Georgia have been particularly active on dealing with the appraisal situation but not in the national context like New York has.

If investors can’t feel comfortable with appraised values as they relate to mortgages, the perceived risk level goes off the chart. Let’s start dealing with common sense and reality and break away from past practices. If an appraiser can’t perform their valuation without pressure to hit the needed number, the credit markets are not going to get comfortable with the risk/value relationship in mortgage lending.

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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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[In The Media] CNBC Power Lunch Clip for 1-25-08

January 25, 2008 | 10:12 pm | | Public |

I got a last second call from CNBC to provide commentary on the stimulus plan, specifically how and increase in conforming loan limits for both the GSE’s and FHA helps housing, if at all.

To view the clip.

The key point with the expansion of the loan limits is the potential increase in availability of mortgage products in higher priced home markets. Right now the east and west coasts have less representation in conforming loan pools because their price points are much higher. For example, the cost of living, specifically to housing in San Jose, CA is 5x as much as Cleveland, OH. This proposal could spread the access around. However, it also has the effect of restricting access in lower priced markets because the portfolio caps the GSEs abide by aren’t on the agenda to be raised. That limits the effectiveness of the expansion of loan limits (if you believe Fannie Mae and Freddie Mac can be receive adequate oversight).

OFHEO raises legitimate concerns about oversight of the GSE’s and the higher potential for risk. However, OFHEO was asleep at the switch when FNMA had accounting issues a few years back so I am not convinced OFHEO would be able to understand what changes would be needed to better oversee GSE actions. Also, any stimulus plan form needs to be implemented quickly or not at all. Government is not known for being nimble.

Interestingly, Diane Olick, who was interviewed in the above clip, mentions (via Housing Doom) that the Fannie Mae home page has changed in the past 2 years to reflect a different mission. I wonder if OFHEO understands what that change means?

The rate actions by the Fed this week and this expansion of loan limits, if passed, seem to push us in the right direction (symbolically and politically), in finding a solution to the weakening economyt. Much of the solution is correction and letting time go by.

In reality, its all about credit. So far, the symbolism in these gestures would go toward restoring confidence, but I suspect there is a long way to go.


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Better Than Coffee: Stimulating Discussion About Stimulus

January 25, 2008 | 12:44 pm | |

The White House and the House agreed to a $150B plan to reinvigorate the economy, which because of the housing market slide, may either be in a recession or about to enter one.

Democratic and Republican congressional leaders reached a tentative deal Thursday on tax rebates of $300 to $1,200 per family and business tax cuts to jolt the slumping economy.

Its not a done deal, however, since the Senate still has to approve the measure and Senate Democrats are talking about tacking on additional items which could slow down its approval, but the speed at which the House approved may influence the Senate’s speed to approve as well.

Actually, the speed at which this was approved was annointed as a new sign of bi-partisan cooperation. The rebate elements and newfound cooperation are because its an election year and people vote with their wallets. I had fleeting thoughts that they know something we don’t know which prompted the quick action. I’ll try to keep those feelings in check as this unfolds.

Yesterday I participated in a roundtable discussion that addressed the impact of the stimulus package. The take away was that the rebate component was an important gesture, albeit political, but won’t be enough to prevent recession or further weakness. After all, the total stimulus plan represents about 1% of the US economy. Since 70% of the economy is consumer generated, the rebates are seen as a way to prime the pump. Whether its spent or saved, its a plus but a very small one at best. For a sense of Deja Vu, go here.

The idea of a expanding the OFHEO size restriction on conforming loans from $417,000 to $625,000 is a good thing, I believe, as well as doubling FHA loan limits from $367,000 to $729,750.

The California Association of Realtors has been saying that the conforming loan limit restriction is an impediment to economic recovery and I probably agree with them with some caveats. The existing conforming loan limit set by OFHEO seems to be arbitrary, simply because it doesn’t float with the housing market. When housing prices slipped, OFHEO kept the loan limit unchanged. The coastal markets, where housing prices are significantly higher, is disproportionately penalized by OFHEO restrictions.

By expanding the loan limits to be more consistent with local housing markets in higher priced areas, the availability of credit, may be expanded and that would help with refi and sales activity which could temper foreclosure actions and temper the slow down in transactions.

My concern is that there would be more risk placed on the GSE’s (Fannie and Freddie) and thats OFHEO’s concern as well. Congress forced portfolio size restrictions on the GSE’s in light of their accounting problems and I have yet to find whether this issue was addressed in the package. In other words, will more loans actually fall under this change or would there simply be a reallocation of mortgage types.

Media Appearance: I’ll be on CNBC Power Lunch at about 12:30 today on a panel discussion covering this issue.

UPDATE: As far as I can tell, the portfolio caps on the GSE’s are not being expanded, which significantly mutes the benefit of expanding the loan limit because it will result in the spreading around of loans taking from lower priced markets and moving availability to higher priced markets. Hopefully the Senate version will expand them.


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Drinking The Mortgage Kool-aid And It Tastes Like Sour Grapes

December 26, 2007 | 1:11 am | |

After a busy day, the house is again quiet, so I had aspirations of figuring out how to set up my new coffee machine and to decide whether to ever wear the gift of green boxer shorts that say “blogworthy” on them.

For some reason, and perhaps it was the excess food of the past days, but it occurred to me just how unbelievably widespread the flaws in the lending universe of the past few years were. I mean, really, really unbelievable.

I have been outspoken on the topic of appraisal pressure for a number of years, from my front line experience as an appraiser. Though not solely for altruistic reasons. Good (=ethical, not financial) appraisers did not thrive during the housing boom. I focused on what turned out to be more lucrative appraisal work outside of the mortgage business and kept the good clients who understood it was actually important to understand what the collateral was worth. It wasn’t sour grapes on my part, but my wide-eyed amazement at the enormity of the problem.

No one seemed to understand the widespread issue of ethics lapses and building instability of the lending industry while it was happening. It seems that everyone drank the kool-aid, with the thought that “everyone wins.”

Now the damage created by the ethical lapse in judgement is pretty clear and its a 4-6 year mess many of us will have to deal with.

Sour grapes summary

  • affordability waned in 2004, causing lenders to loosen the reigns to keep the pipeline flowing.
  • orientation moved from down payment (which I recalled, was a real bear to save for) to monthly payment (falsely characterized as a demographic shift in consumer habits)
  • the bulk of mortgage origination came from mortgage brokers, who were incentivized to generate loan volume from lenders who took a “don’t ask, don’t tell” view on mortgage quality.
  • appraisers became order takers (well, 80% of appraisers are) and had to either sell our soul or get out of the mortgage appraisal business.
  • the sales function gained political clout over the underwriting function of the typical retail bank (revenue vs. cost).
  • consumers and media readily accepted national housing statistics and drank NAR kool-aid every month.
  • real estate surpassed stock market conversations at the backyard bbq.
  • carpenters and nurses were quitting their jobs in droves to flip real estate.
  • developers were opening sales offices in new projects to serve the flippers and mortgage money was as easy to get as a morning newspaper.
  • no doc, “liar loans” were deemed necessary.
  • lenders had no idea that it was illegal and unethical to pressure appraisers to make the number.
  • banks were built on mortgage loan volume.
  • secondary mortgage market investors accepted loan pools purchase with very little understanding of the collateral.
  • NAR and local reports were used to guess loan pool values which were then used to judge portfolio purchase spreads (disconnect between risk and value).
  • foreign investors were one step removed from secondary market investors and had even less understanding of the content of the mortgage pools they were purchasing.
  • mortgages were sliced into varying slivers of risk.
  • no Federal Reserve or any meaningful banking oversight as the disconnect from risk was occurring.
  • mortgage tranches were so complicated that no one really understood what was in them.
  • credit crises became falsely synonymous with subprime.
  • the breadth and scope are termed “temporary” and projected to be behind us within a few months.
  • low mortgage rates are deemed the savior of housing problems but don’t solve the credit crises.
  • GSE’s (Fannie & Freddie) are shaken financially and may have a bunch of subprime under their belts.
  • Greenspan acknowledges that there may have been an overheated asset bubble (housing) but it was really all about shakey financing practices that made housing roar.

Sour grapes are enough to give anyone indigestion.


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A Jumbo Mortgage Problem May Be Conforming

October 10, 2007 | 8:04 am | |

David Berson, Chief Economist for Fannie Mae, in his weekly commentary discussed a possible sign that there was improvement in the jumbo mortgage market because the spread between conforming and non-conforming mortgage rates was stabilizing, if not contracting. Jumbo mortgages are currently anything over $417,000. Mortgages at or below this threshold are considered conforming and are the type that GSE’s (government sponsored enterprises: Fannie Mae and Freddie Mac) can purchase from banks. This helps promote liquidity and lower mortgage rates throughout the country.

The problem with the credit markets (coming to a theatre near you: Mortgage Meltdown, Subprime Crisis, Credit Crunch) over the summer, was that investors came to the sudden realization that they did not know what loan products were actually in the portfolios they were buying. Did prime portfolios include slices of subprime or Alt-A in prime portfolios? Apparently they did. In other words, the risk did not match the pricing being paid for these loans pools. Thats why American Home Mortgage, Countrywide and others ran into difficultly when selling their mortgage paper in order to free up capital to continue to lend.

Without the GSE’s, investors were especially reluctant to buy mortgage paper from jumbo mortgage originators and as a result, jumbo rates began to spike because it was harder to get a jumbo mortgage. (Fannie and Freddie by definition can’t buy their paper.) The lack of liquidity caused widespread concerns that mortgage money in higher priced housing markets would evaporate, causing housing prices to decline. No buyers, falling prices, etc. At the same time, I suspect the flight to safety seen in the financial markets was also seen in falling conforming mortgage rates to a certain degree. In fact, because of restrictions placed on the GSE’s last year due to the accounting scandal, they were forced to comply with a cap on the volume of mortgage paper they could buy and perhaps that may have eased the liquidity problem somewhat. Fannie and Feddie wanted to buy more mortgage paper but were not allowed to under these restrictions (The debate over raising the conforming mortgage rate or mortgage volume limit by GSE’s is for another post).

To this day, when I talk to agents, clients and appraisers in the field, there is still the impression that jumbo mortgages are scarce. Yet I have had conversations with chief credit officers at various national and regional lending institutions whom are all chomping at the bit (non-equestrian) that this is a sigificant opportunity to grab market share. In addition, jumbo mortgage rates are falling, indicating that that financing is available. However, the reality is that underwriting guidelines are actually being followed now rather than using exceptions as the basis, so it is still more difficult to get financing on marginal deals.

Its very, very early, but the contraction of spreads between conforming and non-conforming mortgages suggest that the mortgage investors are getting a getting a little more comfortable with what mortgage risks are out there and how they should be reflected in pricing, rather than simply waiting on the sidelines. After all, thats their business.


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#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
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