In my diatribe about the sub-prime industry (how it created the bubble and is now suffering for it's sins), Freddie Mac, a major purchaser of Mortgage Backed Securities on the secondary market, has seen the light and is now clamping down. Hard.
From Dina ElBoghdady @ the Washington Post.
'Freddie Mac, one of the biggest investors in U.S. mortgages, plans to toughen its standards and stop buying certain types of risky loans that have been linked to a high number of delinquencies and defaults.
The decision, announced yesterday, is the latest sign of the deep problems roiling the subprime mortgage market, which caters to borrowers who could not qualify to buy a house with a conventional loan, including people with blemished credit records.
During the recent housing boom, subprime lenders eager to cash in on the home-buying frenzy relaxed their standards. They allowed borrowers to take out mortgages with low teaser rates that ballooned after the first few years. Now that the higher rates are kicking in, many borrowers are struggling to make their monthly payments, and dozens of small lenders are losing money, shutting down or filing for bankruptcy protection.'
Well put. One thing I didn't mention is yet another source of agony on the market - existing homeowners who discovered their new-found "paper wealth" due to the bubble evaluations on their homes. Many turned around and refinanced their once inexpensive residence. Sure, it seemed like a good idea, but many of these folks were guided into toxic loans that are now biting them in the a$$.
Back to the article - some discussion on the importance of Freddie Mac's announcement. How serious is the situation?
'Freddie Mac's decision to clamp down on these types of mortgages signals heightened alarm about the course of events. If the damage is not contained, a crippled mortgage industry could destabilize the economy, several economists said.
"This is one of the biggest voices in the mortgage market saying in a very public way that the mortgage and housing markets are very troubled," said Mark Zandi, chief economist at Moody's Economy.com.
The trouble is most apparent in the fourth-quarter mortgage delinquency rate, which climbed to its highest level in four years, the Federal Reserve said yesterday. The portion of loan payments at commercial banks that were at least 30 days overdue rose to 2.11 percent in the quarter, up from 1.72 percent in the previous three months. Other measures of mortgage delinquencies have also increased recently.
All indications are that delinquencies are rising faster in 2007. Typically, if there's a surge in delinquencies, defaults follow. Many blame the surge on subprime mortgages, which, according to the Mortgage Bankers Association, made up about one-fifth of all new mortgages last year.
That's why Freddie Mac plans to apply stricter standards to subprime mortgages written on or after Sept. 1, 2007, that have "a high likelihood of excessive payment shock and possible foreclosure."'
So, you see - Freddie Mac will continue to purchase low quality loans for another 6 months. I think this is waiting a little too long, but at least they're giving the market time to adjust.
By the way, I beg to differ on that 1/5 number being quoted by the MBA - the number is much higher, but should we be suprised that they are quoting flawed statistics? Like the NAR, the MBA's employment of denial, cooked numbers, and outright lies to the public are the last defense in keeping their gravy boat from sinking.
Now, as to the particulars of the new restrictions....
'The company will buy securities backed by the 2/28 and 3/27 loans only if the borrowers qualify for the highest rate the loan can have. For instance, if the teaser rate is 2 percent but eventually kicks up to 8 percent, the borrower must qualify for the 8 percent loan.
To protect future borrowers from "payment shock," Freddie Mac will no longer buy securities backed by subprime loans that lack documentation of the borrower's income and the value of the property being financed.
The company also is developing a standard to limit the purchase of securities backed by loans in which the income was stated but not documented.
Freddie Mac also wants lenders to consider the cost of taxes and insurance when they write mortgages.'
This is a very good start. We will all benefit in the long run when credit is extended on the ability to re-pay, not on the perceived inflation of the underlying asset.
Unfortunately, the previously mentioned jagoffs who've been making a boatload of money from this scam are now sounding the alarm, all in the name of "helping" first-time buyers. Complete and utter bull$hit.
'The Mortgage Bankers Association questioned Freddie Mac's decision, saying the people who will be hardest hit will be first-time, underserved or minority homebuyers who will suddenly find themselves without access to credit.
"We worry that people who could buy a home today won't be able to qualify for credit in the future if these kinds of subprime loans are driven from the market," said Kurt Pfotenhauer, one of the association's senior vice presidents.
Hogwash. We're now heading towards a record number of foreclosures and people losing their homes, yet Kurt wants to make it easier for more people to fall into the same trap?
More realistically, it sounds like he owns some overpriced bubble real estate that'll become even more difficult to unload with the implementation of better lending practices. Also, less scam mortgages means less scam money in Kurt's (and his brethren's) bank account. Poor guy - he needs a hug!
Time for yet another reality update: when prices drop to realistic valuation levels, then people WILL be able to qualify for homes. Until then, it's just a sucker's market, with a continually decreasing supply of IBs (idiot buyers).