Sunday, May 18, 2008

Using Countrywide as an Example of Housing Excellence.

Voltron says: another attempt by the government to re-inflate the housing bubble.

You are going to need to sit down for this one. If you have any heart conditions you may want to stop reading at this point. Many of you recall that Fannie Mae and Freddie Mac had their caps raised in January during the great Wal-Mart voucher experiment. It was sneaked into the “stimulus” package set forth and most of the attention was diverted to the fact that you now were going to receive enough to fill up your car for one month. At this time, many pundits and bloggers thought this was much to do about nothing. I saw this as a slippery slope that would only allow the government to further push their experiment in ruining the financial balance sheet of America.

Many that first saw the bill thought that there were sufficient guidelines in place and raising caps to $729,750 was simply a way to inject liquidity into the market; plus the ultimate stop would be the verification of incomes and also a down payment. Well now that is out the window and the government sponsored entities are following the fantastic model developed by Countrywide and New Century Financial:

May 18, 2008 - Washington Post

“The gears of the mortgage market are starting to unlock for borrowers needing big loans. In expensive markets such as Washington, that covers most people looking to refinance or move up from an entry-level home.

Just in the past two weeks, interest rates on the new “conforming jumbo” mortgages — for amounts between $417,000 and $729,750 — have come down enough to make a difference to borrowers. And mortgages allowing down payments of just 3 to 5 percent are coming back to the market for borrowers who have good credit.

“The bottom line is rates are lower than they were,” said Kevin Connelly, a vice president at BB&T.

Last week, for example, BB&T was offering 30-year, fixed-rate mortgages for a conforming loan, which is for $417,000 or less, at 6 percent interest with no points, a type of prepaid interest. A conforming jumbo cost only one-quarter of a percentage point more, 6.25 percent. Loans for amounts beyond $729,750, now called “jumbo jumbo” loans, were at 7.25 percent.”

First, could it be that borrowers need super jumbo mortgages because we are still in a housing bubble? You would think that folks would have learned their lesson after being hit in the face with a subprime 2 x 4 but leave it to our government to go ahead and compound the stupidity. The market in California for example is adjusting because that is what happens when markets correct after a gluttonous decade long bubble! Somehow, the market forces are working and the government wants to prop up a bubble through corporate welfare - the same people who wanted the government out of their hair when the bubble was roaring like a caged in tiger. Keep in mind that the new caps were implemented in March yet they weren’t doing a damn thing because folks simply do not have down payments (10% in California can still be $50,000 to $70,000 for a so-called starter home); so now Freddie and Fannie are taking a play out of Countrywide; lower down payments and also take lower credit scores:

Other good news for borrowers: Fannie Mae is removing its demand for higher down payments in areas it considers “declining markets,” which includes most of the Washington area. Beginning June 1, Fannie will again accept mortgages with as little as 3 percent down.

In December, Fannie and Freddie started to require an extra 5 percent down in areas where it had determined that home prices were falling. The policy applied even to neighborhoods where prices have been stable or increasing slightly.”

Bwahahaha! Fannie and Freddie are now going to be subprime or maybe we should call them jumboprime (JP) - not to be confused with Optimus Prime from Transformers. Just wait until you see what they consider to be stellar credit. In what is now becoming a bigger and bigger joke where financially responsible folks are the butt of ridicule, they are going to remove the safe guards of giving money to folks in declining markets without them putting more skin in the game. Forget about the fact that the markets are declining because folks went into the housing game with no skin and lower standards to begin with! We are living in a Twilight Zone episode in which the “solution” to our problem is the problem. This is utterly stupid and virtually guarantees a taxpayer bailout whether we want it or not:

“FHA has really, really been taking off,” said Jim Foley, senior vice president of George Mason Mortgage’s Bethesda branch. “You can have a lower FICO [credit] score; 620 and above is what they’re looking for.”

In December, Fannie and Freddie started to require an extra 5 percent down in areas where it had determined that home prices were falling. The policy applied even to neighborhoods where prices have been stable or increasing slightly.

Officials at Freddie Mac announced that loans with 5 percent down or less can still be made in declining markets if the loan is for a single-family home that is the borrower’s main residence, and the borrower has good credit. It must not be a cash-out refinance.

Fannie and Freddie, government-chartered corporations that purchase mortgages and repackage them for sale to bond investors, cover a huge portion of the mortgage market, and so their standards influence the whole industry.”

I am almost speechless at this utter incompetence. It was a smart move to require higher down payments for distressed areas which was a move in the right direction. This will mitigate what we are now learning to be a cause of people walking away from their homes; negative equity is a major reason for being at risk for foreclosure or being tempted to walkaway. Instead of keeping this good practice in place, Fannie and Freddie took some advice which looks pretty similar to this:

NEW YORK, Dec 5 (Reuters) - Countrywide Financial Corp’s (CFC.N: Quote, Profile , Research) chief executive called on the U.S. Congress to temporarily raise the maximum size of mortgages that Fannie Mae (FNM.N: Quote, Profile , Research), Freddie Mac (FRE.N: Quote, Profile , Research) and the Federal Housing Administration may buy or insure by 50 percent to $625,000.

In an opinion piece in the Wall Street Journal on Wednesday, Chief Executive Angelo Mozilo, whose company is the largest U.S. mortgage lender, said the increase from $417,000 should be implemented for up to a year.

He said this would go a long way toward alleviating a nationwide housing crunch, which analysts expect to pinch borrowers and lenders throughout 2008 and probably beyond.

“It should be enacted as part of a broader package of reforms to ensure that these linchpins of our mortgage system can aggressively support the housing market in a time of need, and that the appropriate controls and oversight are in place to protect taxpayers,” Mozilo wrote.

Well so much for that oversight. I guess Fannie and Freddie think that Mozilo is a bit too stringent on his lending standards. I’ve received a few e-mails from readers saying that this bailout talk is recent. It is not. Given the utter financial illiteracy of our leaders it wasn’t hard to see where they would want to steer this ship. For some reason back in March of 2007 I feared that there would be a massive bailout where the government instead of taking its medicine would step in to fill the void of the subprime mortgage market


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