Monday, June 22, 2009

Fannie And Freddie Looking At Allowing 125% LTV Refinancings

We here at TILB are revolted by this Bloomberg news story:
Fannie Mae and Freddie Mac may get permission to begin refinancing mortgages with loan-to-value ratios above 105 percent as the Obama administration seeks to boost participation in its anti-foreclosure programs.

“We’re actively considering how to structure a program that makes sense over 105 percent,” Federal Housing Finance Agency Director James Lockhart said yesterday. He said a ratio of 125 percent “is a number” that’s on the table, though “not necessarily the number we’re going to end up with.” [emphasis added]

President Barack Obama’s Home Affordable program announced Feb. 18, sought to help as many as 5 million Americans who may owe more on their mortgages than their homes are worth. Fannie Mae and Freddie Mac have refinanced 80,000 loans under that program, Lockhart told a National Association of Real Estate Editors Association conference in Washington yesterday. He didn’t say when the loan-to-value ratio could be raised.[emphasis added to highlight yet another failed policy...thankfully]


Home Affordable has been “seeing a slowdown” as mortgage rates increase, Lockhart said. The average rate on a typical 30- year fixed loan was 5.38 percent in the week ended yesterday, according to Freddie Mac. The rate is up from a record low of 4.78 percent at the end of April.


Expanding the program to a 125 percent loan-to-value level may benefit about 10 percent of borrowers that have loans backed by Fannie Mae or Freddie Mac, according to Mahesh Swaminathan, a mortgage strategist for Credit Suisse in New York. He said an additional 4 percent of borrowers with Fannie Mae or Freddie Mac loans are further underwater.

“If home prices decline further, this bucket” of underwater borrowers could expand, he said.

A drop in values has left about 20.4 million of the U.S.’s 93 million houses, condos and co-ops with mortgages higher than the properties are worth as of March 31, Seattle-based real estate data service said in a report May 6.
We didn't highlight it, but there's also some useful color on how Treasie Mae and Feddie Mac intend to manipulate warehouse lending as well.

Unless the government also chooses to forgive mortgage balances when an owner chooses to sell, refi'ing someone at a 125% LTV (that is still worsening!) is like trapping them in that house forever. You want to see the housing transaction market dry up? Make it so the seller literally cannot sell because you have financed them a mortgage so big that no buyer will pay enough to cover it.

Ironically, the prospective buyer - as a taxpayer - will be paying the would be seller to keep said house off the market via We The People's support of Fannie and Freddie. An odd and horrible arrangement.

As we've said in prior posts, such as this one on the nature of indebtedness, the solution to the housing crisis is not cheap credit nor broadly available credit (in fact, those will worsen and lengthen the crisis). No, the solution is to allow prices to fall to a point that brings buyers off the sidelines as has happened in Southern California and the Inland Empire.

It is important to recognize that in a world where buyers purchase things based on monthly payments, if we combine artificially low interest rates (i.e., artificially low monthly payments) with unnaturally available credit to borrowers and the owner owns the property on the basis of those low payments, that buyer essentially owns long interest rate duration risk and most likely has no idea.

For example, if in order to afford a given bouse price, you require a 4.75% mortgage rate and four years later rates have risen and you need to sell it to another monthly payment slave based on a 6.5% mortgage, you stand to get crushed.

In essence, the U.S. government is setting new borrowers up to get absolutely destroyed. They will have stabilized nothing if the stabilization requires rates to be held below their natural level.

We need prices to reset and transactions to pick up in order to move homes from weak hands to strong hands and give the new owner a sound base to build on.

Happy green shoots!