Thursday, December 11, 2008

Fannie, Freddie Considering Waiving Appraisals for Refinancings

I used to use words like "unbelievable" as I read proposal after proposal brought forward in late 2007 and 2008 to save us, but nothing in this hoax of a market is anymore. I wrote that 2009 will bring us "innovations" and "interventions" like nothing before (with Fannie and Freddie as the centerpiece of the toolbox) so I guess I should not be surprised by this proposal. That said, my jaw hit the floor when I read it. I hit refresh a few times - checked the calendar (nope, not April 1st) - certainly this must be a hoax. So get ready for this; no matter what your home appraises for - if it falls 10%, 20%, or 30% below purchase price, and you are underwater - you can STILL refinance under the latest proposal being floated at the full original mortgage value. Imagine a nation of people whose value of home when bought was $280K and now its $180K (as it would be appraised), but instead of being underwater $100K (i.e. out on the street when unable to refinance) the generosity of government gives the full $280K at a lower rate - 4.5% of course as part of the Treasury plan being floated. So you see where this is heading - a nation full of phony mortgage values (set by government) at a phony rate (set by government). Hello USSAR.

The counter argument will be, hey the market rate is wrong! Of course its wrong - everytime we make money off the market, then "the market" is accurate and correct - but when "the market" works against us, there must be something wrong with the system. Who cares if the market appraisal says fair value is $180K - that's wrong! Because if that's the truth, then Sally and Joe who put 0% down (ok ok maybe 2% down) and now are underwater could not refinance! And we don't want borrowers punished with an "incorrect" market values. Because the market is wrong! (on the way down) but always correct! (on the way up).

Sorry, I just have to laugh at this whole level of desperation.... if this is the stuff they are floating I can only imagine what they are thinking of in the back room meetings that they don't float, as they 'save the system'.
  • Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. government, are considering forgoing new appraisals on refinanced loans to help struggling homeowners, their regulator said.
  • Doing away with appraisals may allow the government- sponsored enterprises to get around a law that prohibits them from financing loans to borrowers who hold less than 20 percent of the equity in their home without mortgage insurance. (yes that is what it's all about - getting around laws)
  • “If they refinance someone, rather than doing a loan mod, do they need a new appraisal if they already have the credit?” Federal Housing Finance Agency Director James Lockhart told reporters after a speech in Washington today. “That’s an issue that’s being discussed. They’re looking at it.”
  • Fannie and Freddie, which own or guarantee $5.3 trillion of the $12 trillion U.S. home loan market, must consider that some homeowners who need to refinance owe more than their property is worth and wouldn’t qualify for the necessary mortgage insurance, Lockhart said. (and who will determine this if there is no appraisal? Oh let me guess - almost NO ONE will owe more than the property is worth under this new proposal)
  • It sounds like a disaster,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia. “What you’re doing is postponing the problem into the future and not giving the system time to fix itself,” he said, adding that regulators are bowing to political pressure.
  • To refinance loans without any concern for collateral value suggests a world in which no lender would ever hold a loan they refied and no investor would ever buy, unless it carried an explicit federal guarantee,” said Josh Rosner, an analyst for research firm Graham Fisher & Co. in New York. (yes all rules and regulations are thrown out - sort of like a banana republic... wait did I say sort of? But don't worry if you federally guarantee everything in the system - all our problems go away)
  • Lockhart also said today the Federal Housing Administration will likely supplant Fannie and Freddie as the largest source of new home loans as borrowers find it harder to obtain the mortgage insurance necessary to qualify for non-government financing. (boy, I wonder what they have up their sleeve at FHA) FHA, a government agency that insures loans for private lenders, may overtake Fannie and Freddie within the next quarter
  • “You will probably see in the next quarter the Fannie and Freddie lines going down and FHA coming up,” Lockhart said. “Fannie and Freddie are so dependent on mortgage insurers because they can only buy loans with 80 percent loan-to-value ratios and they aren’t able to do as much.” (aha, that nasty rule that Fannie and Freddie rely on people to actually have 20% equity or they are "forced" to buy insurance - with the FHA I can only assume no such nasty rules and regulations) “In some markets, the mortgage insurers have tighter standards than Fannie and Freddie,” Lockhart said. “So if someone wants more than an 80 percent loan-to-value, they have to go to FHA.” (yes... yes of course, I see the vision now)
  • FHA has taken a larger role in helping troubled homeowners refinance their mortgages partly because of Fannie and Freddie higher equity requirements.
  • Those standards have become more of an obstacle as mortgage insurers including PMI Group Inc. and Radian Group Inc. are now charging higher prices and being more selective in their coverage to curb losses stemming from a surge in foreclosures. (so you are saying private enterprises who actually worry about their survival are actually thinking rationally? We cannot have that - free market is irrational! bring in the government!!)
Seriously... these guys never cease to amaze me. Once more I ask - after we (investors) are done cheering government "saving us", how will markets ever be the same again - and how will we find a true market with the government fingerprints everywhere? How many years before we return to a "market" again? I guess I'll have to ask my friends on Venezuela or Russia to chime in on how exactly this all works. Although their answers would probably be "it never goes back". One day we will wake up from this cheery stupor of thankfulness for the government saving everyone and ask "how did we get here?". But for now we giggle in glee as every portion of the market is heading for backstop.

As for FHA? Cmon now... we are going from semi government (Fannie/Freddie) to fully government "efficiency"? Cripes.
  • ...some housing industry experts worry that F.H.A. may soon be hit by a wave of mortgage-related fraud and abuse that it is ill prepared to deal with.
  • Over the years, the Department of Housing and Urban Development, which oversees F.H.A., has been slow to weed out mortgage lenders that abuse or defraud the agency and profit through means like certifying unqualified borrowers. (the circle of life - isn't this how we got here in the first place?)
  • There are also growing concerns that subprime fraud artists have set their sights on F.H.A. “It looks like an incoming tsunami,” said HUD’s inspector general, Kenneth M. Donohue.
  • The fallout for both homeowners and taxpayers could be substantial if F.H.A. becomes the next housing domino to teeter.
  • In 1991, Congress was forced to increase the premiums that F.H.A. homeowners pay to the agency’s insurance fund when it was overwhelmed by claims from bad mortgages. And a HUD audit released this month suggests that fund may soon face trouble again; over the fiscal year, its capital ratio dropped to 3 percent, from 6.4 percent, reflecting a sharp increase in claims. By statute, that capital ratio must be at least 2 percent.
  • Howard Glaser, a onetime HUD official who is a mortgage industry consultant in Washington, said that F.H.A. had largely been treated as a stepchild. Over the last five years, for instance, the agency’s staffing levels have remained essentially flat. “If we don’t have the capacity to monitor systemic risk in F.H.A., then we are in real trouble,” he said.
  • To track lenders, HUD monitors how frequently their loans are defaulting, a sign that a firm may be certifying unqualified borrowers or possibly even engaging in fraud. But while officials can take action when a firm’s default rate reaches twice the local average, they often act after it is far too late, said several mortgage industry experts. “You can find lenders with ridiculous default rates,” said Brian Chappelle, a consultant in Washington.
And those are the least egregious claims in the New York Times story... well, this looks like the hands the national housing fate will soon be in. Enjoy.

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