Deteriorating Lending Standards at Fan and Fred

By Reuters Staff
May 17, 2008

Does anyone remember when Fan and Fred were still thought to be “prudent” lenders? Relative to the CFCs and WMs of the world they may always have been, but they still have far more risk in their portfolios than they should given the taxpayer guarantee backstopping their balance sheets.

The WSJ reported two days ago (sorry I’m getting around to this late) that Fan and Fred have decided to scrap a rule that required higher down payments for mortgages in markets that were experiencing especially large price declines.

Why the change in policy?

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.

Too many overlevered and unqualified borrowers were the problem that expanded the housing bubble in the first place. When lenders require no down payment and are offering low teaser rates, it makes sense for borrowers to take on debt to buy a house. Their mortgage amounts to a free call option on continued house price appreciation.

The policy that “NAR/NAHB/political allies” were protesting was the following:

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.”

And the result of ending this policy?

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.

Does anyone recall the days when a 20% down payment was the norm? It’s not a bad idea to have borrowers with skin in the game in the form of substantial equity.

A final, and crucial, analytical point made in the article:

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.

You can’t prop up the housing market forever. Prices have to return to a level where the market clears, where buyers and sellers can agree on a price. We’re a long way from that point as obnoxiously high inventories continue to remind us.

Comments

Another corporate conglomerate “news” oped aimed at misleading the American public (again). Haven’t we had enough of this shit yet?

Posted by Chrysta | Report as abusive
 

Let’s see: irresponsible lenders and investors lose money they recklessly gambled on real estate, people who irresponsibly bought homes they couldn’t afford lose those homes and their credit scores are lowered to reflect their inability to make responsible financial decisions, and housing prices drop to levels that would allow responsible people buy them without putting themselves in financial jeopardy. Sounds like economic sanity to me. Why would we want to prevent that?

Posted by Anonymous | Report as abusive
 

The most shameful thing, is that the Times cut off its feedback interface when the sentiment of the feedback was so dramaticly against the editorialist.http://thelastgoodidea.blog spot.com

Posted by Dead End | Report as abusive
 

What about those that have been saving to buy a home? Their own tax money is used against their interests by propping up over-priced homes. Gosh, there is so much wrong with a bailout its hard to know where to start. Do we help the banks and greedy mortgage holders in the process? Is there a “Moral Hazard” to consider here? When is this generation of Americans going to be responsible for their own actions?

Posted by Anonymous | Report as abusive
 

I was one of those greedy investors who bought several properties with creative hybrids of every imagination. now 200k in plastic and walking from those properties….BAILOUT??hahaha we were greedy and deserve the 375 fico and the massive judgements, we all knew what we were doing DIDN’T WE?we certainly did

Posted by greed | Report as abusive
 

Foreclosure prevention is the dumbest thing I’ve ever heard. As prices decline to become attractive at the current salary level, people will buy again. But until this happens, people will stay away from artificially inflated house prices. That is smart. These forclosure prevention programs only prolong the housing bust, not cure it. Also keeps home prices high, where now consious buyers are very weary to risk high debt. Does the Nat’l Assoc. of realtors sponcer this kind of propaganda?

Posted by Victor | Report as abusive
 

Foreclosure prevention is the dumbest thing I’ve ever heard. As prices decline to become attractive at the current salary level, people will buy again. But until this happens, people will stay away from artificially inflated house prices. That is smart. These forclosure prevention programs only prolong the housing bust, not cure it. Also keeps home prices high, where now consious buyers are very weary to risk high debt. Does teh Nat’l Assoc. of realtors sponcer this kind of propaganda?

Posted by Victor | Report as abusive
 

I propose we tell the times and the government to stick this foreclosure prevention measure where the sun doesn’t shine. Though I’m sure they’d stop accepting comments like the times did.

Posted by Anonymous | Report as abusive
 

Look at comments to the editorial though. Overwhelming negative sentiment toward the NYT position. (Dead End, They always have a short window to leave feedback on their editorials. They were gracious enough to make my negative comment an ‘editor’s selection though :)

Posted by Mark in SF | Report as abusive
 

Hey, if this catches on (sticking the taxpayers with the bill) I’d like to propose the same thing for stocks – only not just for the Rich Guys at Bear Stearns – but for all of us Joes that take risks and when the tide moves against us, shovel the loss to the taxpayers. We deserve a risk free society where things always work to our advantage. One of the cornerstones’ of the educational system that our government has fostered with the “no child left behind” is that we have lost the ability to think critically and we really shouldn’t have to be penalized for our short term thinking. I can buy a car that I can’t afford by showing a paystub. I don’t have to think. I figure if the bank is loaning me the money, I must be able to pay it back before I die, right?

Posted by Anonymous | Report as abusive
 

What prevents people from buying? Is it falling prices? No, its high prices.When I buy a house, it will be a place to live, not an investment. If the price is right, I won’t care if prices are still falling. If I have to move, and the market has plummeted since I bought, no big deal. I’ll lose money on the house I sell, but I’ll also get a lower price on the new place I buy in my new location. That’s the beauty of a large down-payment, it gives you flexibility in a delining market. But a large down-payment is only feasible with lower prices.If I can’t withdraw equity, no big deal. If I don’t pay too much for a house, I’ll have a savings account and disposable income, and I won’t need to withdraw equity.High prices, enabled by reckless credit, are the root CAUSE of the foreclosure crisis – not the SOLUTUION.

Posted by Refuse to buy overpriced | Report as abusive
 

No bailout. The funds to pay for this bill are going to be diverted from a fund to establish affordable housing. Doesn’t Congress see the stupidity of this scheme? Why not let the market work and bring prices down. This will help to lessen the affordable housing problem and reduce the tax dollars needed for it. I guess this makes too much sense. Stealing from the responsible and prudent to bailout the reckless and foolish is wrong. No bailout.

Posted by Anonymous | Report as abusive
 

Hmmm…take money from an affordable housing program to prop up inflated, unaffordable housing prices. It’s just like the brain trust in DC to come up with such a stupid, self-contradictory idea. Ugh!Government’s ham-handed intervention at this stage of the game will only make matters worse and prolong the recovery. Let the housing market correct itself. Everyone with an ounce of common sense knew that there was a housing bubble. Those who gambled, defied common sense, and got caught should pay the price. Those who patiently and responsibly waited for sanity to return to the market deserve an affordable home. That is fair.

Posted by Anonymous | Report as abusive
 

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