Tuesday, May 20, 2008
The funniest thing about the recent developments at Fannie Mae and Freddie Mac - where they were recently given the go-ahead to fund more loans, in larger amounts, with relaxed lending standards - is that this is where all the housing problems started back in 2003.
After much hand-wringing when neither firm could produce understandable financial statements and the OFHEO threw up their hands before Congress claiming there was no way to effectively regulate the "Government Sponsored Entities", at the urging of former Fed Chief Alan Greenspan, much of Fannie's and Freddie's work was outsourced to Wall Street.
Everyone knows what happened next...
Oddly, this was the only "systemic risk" that the Maestro ever admitted to seeing in his 18+ year term as Fed Chief - too much government involvement in mortgage securitization.
Caroline Baum at Bloomberg takes note of the recent developments and we pick up the story after the amusing Fannie Mae fairy tale introduction:
Fannie announced it will now accept mortgages with a loan-to-value (LTV) ratio of up to 97 percent on a primary, single-family residence, even in areas where prices are declining.No.
"I'm not even sure this makes sense as public policy," says Michael Carliner, an independent housing economist in Potomac, Maryland. "Fannie should be making loans, but the underwriting standards shouldn't be lowered to that extent."
Just think about it: With home prices in a handful of hard- hit areas of California and Florida down 10-15 percent last year, according to data from the Office of Federal Housing Enterprise Oversight, or Ofheo, Fannie's regulator; and with widespread expectations that prices will continue to fall to attract buyers, Fannie Mae is loosening down-payment requirements when a house in these areas could be worth less than its loan value in a matter of months?
"We are able to adopt this new, national down-payment requirement, even in markets where home prices are declining, because our new automated underwriting risk assessment model DU Version 7.0 will limit risk layering and assess each loan more precisely," the company said in a statement.
I wouldn't know model DU Version 7.0 from model DU Version 6.0. It's still a model that uses information about the borrower and the property to determine the viability of a loan. Falling home prices, which can eliminate that 3 percent equity stake in a jiffy, aren't one of the inputs. (Fannie has other models that forecast house prices.)
Didn't we learn anything over the past two years?