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Freddie, Fannie To Provide 125% Ltv Mortgages,

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Freddie, Fannie to Provide 125% LTV Mortgages, Worse Than Extremes of Subprime Frenzy

If you had any doubt that the intent of policy, such as the heroic efforts by the Fed to channel money to the mortgage market my manipulating spreads of mortgage paper so as to lower borrowing costs, was not merely to clear inventory but boost prices, today's action should put your mind at rest.

The powers that be have just put in a big time above market bid, now permitting refis of 125% LTV for borrowers who are current. That is, assuming they get any takers.

The effort is presumably to address borrowers who are already under water, and so would be swapping out of a mortgage that is in negative equity land for one that has a lower coupon. That lowers their payments (ex costs) and frees up some of the money formerly spent on the mortgage to spend on other stuff, like paying down their credit card debt (that was a lame attempt at humor, the authorities hope this will lead to more consumption). In addition, the new mortgage in theory is less prone to default than the old, since it consumes less of the borrowers' income.

But theory may not map on to practice, First, in most states, a purchase money mortgage is non-recourse, but a refi is. So some borrowers will put themselves in worse shape it they take up this offer.

Second, defaults are more likely with negative equity loans, apart from payment stress. Why? Let's face it, even if you make your payments, you still expect a big bill when you sell the house unless the market appreciates enough to enable you to sell it for your mortgage balance. The other exit is negotiating a short sale with the bank, but that still leaves the hapless seller with a large tax bill.

Lousy endgames leave buyers not highly motivated to work hard to make payments when adversity arises. They realize, correctly, that they are better off not throwing good money after bad.

But this program nevertheless suggest that the authorities sincerely believe that current price levels for housing are the result of panic, and not a return to historic relationships of housing prices to incomes and rental prices.

From CNBC (hat tip reader Marshall):

Homeowners refinancing their mortgages through loans backed by government agencies will be able to borrow up to 125 percent of their homes' value under new regulations enacted Wednesday.

The rule changes, part of the government's attempts to restore housing affordability and stem the foreclosure crisis, apply to loans backed up by Fannie Mae and Freddie Mac.

Yves here. Huh? This is beyond Orwell, it's patently silly. "Housing affordability" has traditionally meant "let's do things so people can afford to BUY houses." It even once included stuff like Section 8 housing, giving tax breaks for rental housing targeted to lower income people. The intent is to prop up prices by keeping stressed borrowers from selling their houses and possibly also sending an information signal through the 125% figure, that housing really ought to be priced higher. That is anti affordability. And the concept of "affordability" to my knowledge has never before been extended to keeping homeowners in place. Back to the article:

Previously, homeowners could borrow up to 105 percent of their home's value. The new loan-to-value ratio is set up at 125 percent in a further effort to address those mortgage holders who owe more than their homes are worth.

"By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly,'' Treasury Secretary Timothy Geithner said in a statement....

The new LTV rate will be offered only to borrowers who are current on their mortgages that are owned by either Fannie or Freddie.

"This is a change that will put affordable refinancing opportunities within reach of performing borrowers who have suffered the effects of local home price erosion," Freddie Mac Executive Vice President Don Bisenius said in a statement.

Home values in many markets have sunk by 18 percent in the last 12 months, according to Standard & Poor's/Case Shiller home price index.....

In a separate move, the government is encouraging borrowers to take advantage of a chance to lower their mortgages from 30-year to 25-year in order to save on interest charges.

The government will reduce the processing fee for borrowers who take advantage of the 25-year option.

Other than this policy being completely insane, where is the bloody money going to come from? State sponsored instant negative equity!

Intergenerational mortgages will be the next step.

Pure madness!

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Freddie, Fannie to Provide 125% LTV Mortgages, Worse Than Extremes of Subprime Frenzy

Other than this policy being completely insane, where is the bloody money going to come from? State sponsored instant negative equity!

Intergenerational mortgages will be the next step.

Pure madness!

This is the policy response for Option ARM in particular. They will need 500 billion to fill the hole if everyone applies.

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Guest BAREBEAR_soon to be ALIVA

There must be catches to it, they cant be offering it to everyone. Can they :o

Well if it spreads here, I'll get the biggest 125% mortgage I can get, hide the money and go bankrupt.

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Freddie, Fannie to Provide 125% LTV Mortgages, Worse Than Extremes of Subprime Frenzy

Other than this policy being completely insane, where is the bloody money going to come from? State sponsored instant negative equity!

Intergenerational mortgages will be the next step.

Pure madness!

presumably this is just for those who already own, not for new purchase? makes sense in USA where homeowner can just walk away, i assume this is to tempt them not to - ie to stop more foreclosures?

so on the basis that this is only for current OO then i don't think this is mad at all, even though i am a bear!

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What's even more insane is the Government reduced the capital requirement for Fannie and Freddie meaning they hold even less of a buffer.

If I have a capital requirement of 30% and you change it to 20% I have more money to lend.

If you make it zero I can lend an infinite amount to anyone with no risk based requirements.

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presumably this is just for those who already own, not for new purchase? makes sense in USA where homeowner can just walk away, i assume this is to tempt them not to - ie to stop more foreclosures?

so on the basis that this is only for current OO then i don't think this is mad at all, even though i am a bear!

Yup.

There is no more money here, just a lower rate in return for a transfer of risk from lender to borrower. Anyone who understands what is going on will not apply for one of these products.

That's why it's evil, but also why it's not mad.

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"printy printy" Injin

Hmmm....

So who funds Freddie and Fannie and why would they supply finance for 125% mortgages with more falls to come?

VMR.

h'mmm, know what you mean VMR, doesn't make sense does it CIM ? edited - I would have expected a year or 2 more drops in the US before the major printing runs come...

I wonder if it's a case of watch what they do, not what they say on this one.

Edited by grumpy-old-man-returns

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The rules are very different in the UK and US. In the US you can walk away from mortgage debt by mailing the keys to the lender and you have no further liability. In the UK you would still be liable for whatever debt was remaining after the lender had sold the property. Therefore, the US needs to take quite remarkable steps, such as this, in order to try and encourage people to stay in their houses and keep paying mortgages that are worth more than their properties. If they don't do that, and people just continue to walk away from their liabilities, house prices will fall even further than they need to.

Yes, this looks stupid, but it's much less stupid than the alternative.

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Hmmm.... So who funds Freddie and Fannie and why would they supply finance for 125% mortgages with more falls to come? VMR.

Lets say someone bought a house in the US for $100k, with a $90 teaser rate mortgage.

The house is now worth $75k, the mortgage is resetting to a higher rate, and the owner is tempted to walk away, leaving the lender with a $15k loss.

Or, the lender can offer them a new mortgage for the same $90k, but change the rules so that if the borrower defaults, they are still liable for the full amount.

This is what is happening here - the lenders are trying to stop the borrowers dropping the negative equity on the lender.

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Lets say someone bought a house in the US for $100k, with a $90 teaser rate mortgage.

The house is now worth $75k, the mortgage is resetting to a higher rate, and the owner is tempted to walk away, leaving the lender with a $15k loss.

Or, the lender can offer them a new mortgage for the same $90k, but change the rules so that if the borrower defaults, they are still liable for the full amount.

This is what is happening here - the lenders are trying to stop the borrowers dropping the negative equity on the lender.

& what stops them walking away from the new deal ?

edited - or do you mean this just buys the lender more time, prolonging the repo ?

Edited by grumpy-old-man-returns

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Yup.

There is no more money here, just a lower rate in return for a transfer of risk from lender to borrower. Anyone who understands what is going on will not apply for one of these products.

That's why it's evil, but also why it's not mad.

Indeed. And why would you want a 125% mortgage when you can just walk away from the debt by using jingle mail?

$300k house, $375k mortgage.

With little prospect of a recovery in HPs the US, why would you bother to continue servicing the debt? And even if you thought prices would recover, why not move to another identical 300k house with a 300k mortgage? Assuming you can get that mortgage of course.

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& what stops them walking away from the new deal ?

edited - or do you mean this just buys the lender more time, prolonging the repo ?

I think Timm is saying that jingle mail would no longer be an option because they would sign that right away by accepting the new lower rate. Fiendish rather than irresponsible.

Edited by bobthe~

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Indeed. And why would you want a 125% mortgage when you can just walk away from the debt by using jingle mail?

$300k house, $375k mortgage.

With little prospect of a recovery in HPs the US, why would you bother to continue servicing the debt? And even if you thought prices would recover, why not move to another identical 300k house with a 300k mortgage? Assuming you can get that mortgage of course.

that's the catch though isn't it ?

if you walk away you leave a nasty credit trail on your file.

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Indeed. And why would you want a 125% mortgage when you can just walk away from the debt by using jingle mail?

$300k house, $375k mortgage.

With little prospect of a recovery in HPs the US, why would you bother to continue servicing the debt? And even if you thought prices would recover, why not move to another identical 300k house with a 300k mortgage? Assuming you can get that mortgage of course.

I would add you maybe able to rent for less and save money.

Economically it makes no sense to stay in the current mortgaged house if you are in NE.

I wonder how many US households would need a larger mortgage than 125% LTV?

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that's the catch though isn't it ?

if you walk away you leave a nasty credit trail on your file.

It is. And of course it assumes that things aren't irrevocably changed in that area. I can see a possibility that it would become a permanent blight, as lending stays tight and banks look to ration credit.

But if you have to wait a couple of years to repair your credit, prices could be lower still.

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Freddie, Fannie to Provide 125% LTV Mortgages, Worse Than Extremes of Subprime Frenzy

Other than this policy being completely insane, where is the bloody money going to come from? State sponsored instant negative equity!

Intergenerational mortgages will be the next step.

Pure madness!

The money is already there... all they are doing is offering people the chance to remortgage what debt they have against a negative equity situation. The article makes it seem like its an obvious bad deal for consumers so if so no one will take it up.... I suspect though that if the US housing drop is nearing its conclusion in certain areas then for some consumers it will make sense.... take the 125% ( it doesn't add any debt, and makes no legal difference if the home has already been remortgaged before) take with it the lower interest rate, keep the family home avoiding all the angst of moving, hope for some appreciation recognising that theres more upsdie risk than downside risk.......... if I was in that situation I'd seriously consider it as it would structurally have a good chance of improving my position.

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