Follow Up- Fannie and Freddie

Posted by kevin on October 22, 2014 under Foreclosure Blog | Comments are off for this article

Well, on Tuesday (10/21), most newspapers indicated that the FHFA and major mortgage lenders had entered into an agreement in principal to loosen lending requirements. The announcement was made by FHFA boss, Mel Watt, at a speech before mortgage bankers in Las Vegas.

Las Vegas, that is precious. John Stewart’s writers could not have come up with a funnier story line.

To increase access to credit for lower income borrowers, Watt called for loan to value ratios of 95-97%. With only 3-5% down, borrowers have little skin in the game. If housing prices decline, they will be underwater. How is that different from 2008? One way it will not be different is Fannie and Freddie will insure the loans, therefore, the taxpayer will be bailing out lenders on defaulted loans.

The devil is in the detail as they say. So, we will see in the next few months what safe harbors are given to lenders.

When Dodd-Frank was promulgated, it included a specific provision that stated, in general terms, that a lender must grant a mortgage loan based primarily on the ability of the borrower to repay and not on the value of the collateral. The analysts railed on that such an onerous standard would kill the housing market. Well, my research indicates that the Dodd Frank standard is the fundamental definition of predatory lending, and has been around in Interagency guidelines, regulations, and OCC Advisory Letters since the mid 1990’s.

History has a tendency to repeat itself. I just did not think that it would happen so soon.