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Posts Tagged ‘Freddie Mac’

[Client #9] You Don’t Get What You Pay Borrow For

March 11, 2008 | 9:52 am | |

Can there be a bigger story than the housing/credit market/economy/weak dollar/recession right now? Client #9, George Fox…good grief.

Which begs the question: Do you get what you pay for?

I have been struck by all the recent solutions to the financial crises that we have slipped into, whose severity, by most accounts, caught government officials and financial institutions mostly unaware. Of course my favorite bubble bloggers have been saying so for quite a while, including The Housing Bubble Blog, Bubble Meter and Housing Doom. In fact, they have been screaming about it. Their perspective has largely been from the stand point of the absurdity or the void of logic of high prices paid and the greed. Not much dialog about the cause until recently, because few actually saw it, let alone understood it.

In retrospect, it was never about high housing prices alone, it was mainly about easy credit that enabled the purchase of property at seemingly any price. cart before the horse

The naming convention for the housing boom/bubble/bust should have been based on “mortgage” or “credit” rather than “housing.”

Anyway you slice it, we are in the middle of a real financial crises and I am hopeful that the recent stimulus package does not convince the powers that be that the problem is solved. The stimulus package is simply a baby step, but at least it is in the right direction. It looks like more reforms are being debated and discussed and (surprise, surprise) all deal with mortgages. A bailout is not on the table, nor would it be a solution, or fair to homeowners who were not greedy or did not take responsibility for what they were signing.

While ultimately, markets need to find their own balance and it is good for home prices to decline as part of the cycle, the exposure to our financial system based on ill conceived mortgage lending needs to be fixed. It really is scary how exposed our economy is on this one.

Innovative solutions will be next up on the Congressional agenda because rate cuts don’t ahem cut it.

With worsening strains in credit market threatening to deepen and prolong an incipient recession, analysts are speculating that the Federal Reserve may be forced to consider more innovative responses -– perhaps buying mortgage-backed securities directly.

As credit stresses intensify, the possibility of unconventional policy options by the Fed has gained considerable interest, said Michael Feroli of J.P. Morgan Chase. He said two options are garnering particular attention on Wall Street: Direct Fed lending to financial institutions other than banks and direct Fed purchases of debt of Fannie Mae and Freddie Mac or mortgage-backed securities guaranteed by the two shareholder-owned, government-sponsored mortgage companies.

Some legislative actions in the works right now:

I am actually impressed by the creativity of solutions being proposed but the details make or break their effectiveness. Right now we have sort of the inverse of the period which saw immense creativity of mortgage packages during the housing (mortgage) boom. Hopefully the solutions are not as complicated as the problems that caused this situation. I don’t need to find another tranch loaded with problems.

For some, this financial crises will teach many that you actually don’t get what you pay for and you don’t get what you borrowed either.

To digress…On the Beatles’ Revolution #9 single, parts of the song, when played backwards with a turntable, sound like “turn me on dead man.”

Coincidence?

Ok, back to work.


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More Than Just Guidelines, OFHEO/Cuomo Agree On The Code

March 4, 2008 | 12:36 am | | Public |

…the title…imagine the voice of Captain Jack Sparrow’s first mate…arrr

OFHEO and NYS Attorney General Andrew Cuomo reached a deal today that may help create an environment for appraisers to be independent. Karen Freifeld and Sharon L. Lynch’s Bloomberg News article Fannie, Freddie to Overhaul Appraisals in Cuomo Deal says:

“The goal of the office is to find out what went wrong and how to fix the problem,” Cuomo said today at a news conference. “What we identified as the common denominator, if you will, was appraisal valuation.”

“We believe the appraisals were often fraudulent because there were conflicts of interest and pressure on the appraisers,” Cuomo said.

Cuomo strategy was to get the GSEs to agree and the other markets will follow.

And long time mortgage lending critic NY Senator Charles Shumer chimes in:

Accurate, independent appraisals are very important to ensuring the safety and soundness of Fannie Mae, Freddie Mac and the mortgage market,” Lockhart said in a statement. “The agreements should help restore confidence in the mortgage market by enhancing underwriting practices, reducing mortgage fraud and making home valuations more reliable.”

In James R. Hagerty and Amir Efrati’s WSJ article Fannie, Freddie Set Stricter Appraisal Rules quotes me:

“In my opinion, 70% to 80% of appraisals that were done during the housing boom are probably not worth the paper they’re written on because the appraisers…were rewarded with more volume,” said Jonathan J. Miller, a New York appraiser and longtime critic of industry practices. He estimates that home values are overvalued nationwide by at least 10% because of inflated appraisals.

My significant concerns over appraisal management companies aside, important element of this agreement are spelled out in the Home Valuation Code of Conduct.

The first part of the code was what interested me most:

No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner including but not limited to:

  1. withholding or threatening to withhold timely payment for an appraisal report;

  2. withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser1;

  3. expressly or impliedly promising future business, promotions, or increased compensation for an appraiser;

  4. conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary estimate requested from an appraiser;

  5. requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report, or provide estimated values or comparable sales at any time prior to the appraiser’s completion of an appraisal report;

  6. providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided;

  7. providing to an appraiser, appraisal management company, or any entity or person related to the appraiser or appraisal management company, stock or other financial or non-financial benefits;

  8. allowing the removal of an appraiser from a list of qualified appraisers used by any entity, without prior written notice to such appraiser, which notice shall include written evidence of the appraiser’s illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice (USPAP. or state licensing standards, substandard performance, or otherwise improper or unprofessional behavior;

  9. ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model in connection with a mortgage financing transaction unless there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the loan file, or unless such appraisal or automated valuation model is done pursuant to a bona fide pre- or post-funding appraisal review or quality control process; or

  10. any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, or impartiality.

arrrrgh, matey (sorry – but I have been waiting for years for some progress on this).

Update: Large lenders agree to new appraisal codes [UPI]

Update 2: In Deal With Cuomo, Mortgage Giants Accept Appraisal Standards [NYT]


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Cuomo Makes Progress In Appraisal Disconnect Problem

February 26, 2008 | 9:11 am | |

New York State Attorney General Cuomo is close to striking a deal with the two mortgage GSE’s Fannie Mae and Freddie Mac to instill some separation between the quality and sales function of banks that do business with them. Although this was initiated by New York, the deal would have ramifications for all lenders of conforming loan products that sell their mortgage paper.

Its not a done deal yet but its being reported as “close” by the Wall Street Journal’s Amir Efrati in this morning’s article Deal Nears to Curb Home-Appraisal Abuse. Here’s my contribution:

Jonathan J. Miller, a veteran New York appraiser and longtime critic of industry practices, said the proposed deal “sounds like a promising step, and that Mr. Cuomo’s office is addressing some of the key problems that appraisers have had to deal with and that have led to the disconnect between value and risk in the mortgage markets.” He estimates that home values are overvalued nationwide by at least 10% because of inflated appraisals.

My 10% estimation is very conservative and was based on my New York area experience and interactions with colleagues across the country.

Reuters and American Banker have also issued stories on the negotiations.

The deal proposes the following actions by Fannie and Freddie:

  • They will not do business with lenders that use in-house appraisers.
  • They will not buy mortgages from lenders that who use appraisals from wholly owned subsidiaries. (I believe this would apply to Landsafe, Countrywide’s Appraisal Management company).
  • Require lenders not to use appraisals arranged by individual mortgage brokers.
  • Create a clearinghouse for appraiser information and provide reports to the public.

Note: I will be updating this post throughout the day – the ramifications are huge

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Economic Dog Ready To Be Stimulated By Booster Shot From Trainer

February 13, 2008 | 6:47 pm | |

Well its official, a beagle finally won the Westminster Dog Show after being shut out since 1874 Roger Clemens finally testified in front of Congress today President Bush signed the Economic Stimulus Act of 2008, describing it as a “booster shot” for the American economy.

The bill I’m signing today is large enough to have an impact, amounting to more than $152 million this year, or about 1 percent of the GDP (gross domestic product),” the president said in the brief ceremony in the East Room of the White House.

About 130M Americans are going to get rebate checks by May.

A recent Associated Press-Ipos poll indicates most people have other plans. Forty-five percent said they planned to pay off bills, while 32 percent said they would save or invest it. Only 19 percent said they would spend their rebates.

The relevant benefit, as it relates to housing, concerns the expansion of the conforming loan limit from $417,000 to $729,750. However there have been concerns raised, based on past issues, with the GSE’s ability to manage the additional risk and the distraction that this temporary increase will have with their mission to encourage affordable housing (I think Paulson’s primary concern is the additional risk exposure because I fail to see how this prevents the GSE’s from their mission).

The temporary conforming loan limit expansion is still unknown and may prove to be of little benefit. As new mortgages that were once jumbos become conforming, the following could happen:

  • Payments could drop because conforming loans are lower risk (in theory) and therefore have lower rates.
  • Wall Street investors who buy mortgage-backed securities could demand a premium for the larger loans now purchased by Fannie Mae and Freddie Mac so rates may not change at all or could fall in between the current rates for conforming and jumbo.
  • The economy could get worse which seems likely given the FOMC futures market prediction of a 50% probability that the FOMC will drop rates by 50 basis points at their next meeting.


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A Jumbo Mortgage Problem May Be Conforming

October 10, 2007 | 8:04 am | |

David Berson, Chief Economist for Fannie Mae, in his weekly commentary discussed a possible sign that there was improvement in the jumbo mortgage market because the spread between conforming and non-conforming mortgage rates was stabilizing, if not contracting. Jumbo mortgages are currently anything over $417,000. Mortgages at or below this threshold are considered conforming and are the type that GSE’s (government sponsored enterprises: Fannie Mae and Freddie Mac) can purchase from banks. This helps promote liquidity and lower mortgage rates throughout the country.

The problem with the credit markets (coming to a theatre near you: Mortgage Meltdown, Subprime Crisis, Credit Crunch) over the summer, was that investors came to the sudden realization that they did not know what loan products were actually in the portfolios they were buying. Did prime portfolios include slices of subprime or Alt-A in prime portfolios? Apparently they did. In other words, the risk did not match the pricing being paid for these loans pools. Thats why American Home Mortgage, Countrywide and others ran into difficultly when selling their mortgage paper in order to free up capital to continue to lend.

Without the GSE’s, investors were especially reluctant to buy mortgage paper from jumbo mortgage originators and as a result, jumbo rates began to spike because it was harder to get a jumbo mortgage. (Fannie and Freddie by definition can’t buy their paper.) The lack of liquidity caused widespread concerns that mortgage money in higher priced housing markets would evaporate, causing housing prices to decline. No buyers, falling prices, etc. At the same time, I suspect the flight to safety seen in the financial markets was also seen in falling conforming mortgage rates to a certain degree. In fact, because of restrictions placed on the GSE’s last year due to the accounting scandal, they were forced to comply with a cap on the volume of mortgage paper they could buy and perhaps that may have eased the liquidity problem somewhat. Fannie and Feddie wanted to buy more mortgage paper but were not allowed to under these restrictions (The debate over raising the conforming mortgage rate or mortgage volume limit by GSE’s is for another post).

To this day, when I talk to agents, clients and appraisers in the field, there is still the impression that jumbo mortgages are scarce. Yet I have had conversations with chief credit officers at various national and regional lending institutions whom are all chomping at the bit (non-equestrian) that this is a sigificant opportunity to grab market share. In addition, jumbo mortgage rates are falling, indicating that that financing is available. However, the reality is that underwriting guidelines are actually being followed now rather than using exceptions as the basis, so it is still more difficult to get financing on marginal deals.

Its very, very early, but the contraction of spreads between conforming and non-conforming mortgages suggest that the mortgage investors are getting a getting a little more comfortable with what mortgage risks are out there and how they should be reflected in pricing, rather than simply waiting on the sidelines. After all, thats their business.


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[Periscope] Moving From Housing To Lending Via Subprime

February 27, 2007 | 12:13 pm | |

As I lamented in yesterday’s post Banking On Profits, Not Risks, the lending industry and investors have had short attention spans when it comes to understanding risk. As the housing market continues to either cool or stabilize, depending on what local market is being discussed, a new focal point is arising…lending.

With the housing bubble as a media topic nearly worn out, or even with a few kicks left in it, subprime has taken the torch as one of the next hot (er…sorry) topic. Today alone, the Wall Street Journal had seven stories on subprime lending. And here is an endless supply of other sources on the topic as well.

Institutions looked at subprime as a growth sector in an otherwise highly competitive mortgage landscape. Large fees, higher margins were some of the attractions of the lenders like HSBC, Novastar, New Century Financial and Citigroup. Now its all about damage control.

In today’s Heard on the Street column Subprime Game’s Reckoning Day [WSJ]:

If these so-called subprime borrowers continue to have problems paying their debts, the lenders that target them likely will have to boost how much money they set aside for bad loans, cutting into their bottom lines. That could mean even lower stock prices.

There also is a concern that if the real-estate market remains cool, some borrowers with better credit histories might also begin struggling to make payments on certain popular, but unorthodox, mortgages. These types of loans allow borrowers to skip monthly payments, carry low short-term teaser rates or don’t require detailed financial documentation. If that happens, companies such as BankUnited Financial Corp. and Countrywide Financial Corp. could suffer.

And today, Freddie Mac announced that it will toughen subprime lending standards [Reuters]. Here’s Freddie’s press release. Ever notice how these things are announced AFTER its a problem? After all this is a quasi-government corporation that sets standards for secondary market investors. Seems like there was a lack of foresight on this issue.

Here’s a great primer on the topic by Jouhn Makin called Risk and Return in Subprime Mortgages [AIE].


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OFHEO Is Trying Hard Not To Conform

December 4, 2006 | 11:34 am |

The hoopla over this issue occured last week but I have been trying to wrestle with it.

The agency who was responsible for oversight of Fannie Mae and Freddie Mac, who had essentially evolved in rubber stamp agency for the GSEs (government sponsored enterprises).

These enterprises seemed to have free reign in their dealings with the mortgage markets. The risk taken by these government enterprises started to balloon and the reported earnings were being manipulated to enhance compensation by their officers. I guess that means that the competitive advantage these enterprises have over their secondary market competitors breeds this sort of behavior. GSE’s have been a stabilizing factor in the mortgage markets in general. Thats why mortgage rates are relatively uniform across the country by property type.

After the Fannie Mae accounting scandal evolved a few years ago, OFHEO started to wake up and re-take control. One of their first public actions was initiated, after a miscalculation was made by Fannie Mae in calculating conforming loans limits, OFHEO took over this role as well (as well they should). It was off by a few thousand dollars, which is probably not a significant issue, but the symbolism of OFHEO’s actions was what I found important to maintain the trust and integrity of the US mortgage market.

Last week, OFEHO (incorrectly presented by the LA Times as Fannie and Freddie making the decision) kept the loan limit of conventional mortgages unchanged [LA Times]:

The conforming loan limit, perhaps the most intently watched number in the mortgage business, will remain unchanged next year at $417,000.

The limit is the legislatively set ceiling on the size of loans that can be purchased or guaranteed by Fannie Mae and Freddie Mac, the two government-sponsored financial institutions that keep local lenders awash in cash for home loans.

Because the enterprises bring a certain amount of standardization to the market, and because investors throughout the world believe the government-sponsored enterprises’ securities are backed by the full faith and credit of Uncle Sam, rates charged on loans at or below the limit are often 0.25% to 0.5% less expensive than so-called jumbo loans above the ceiling.

The official loan limit sizes for conventional mortgages in 2007 [SOSD] are:

  • $417,000 for mortgages on single-family properties
  • $533,850 for mortgages on two-family properties
  • $645,300 for three-family properties
  • $801,950 for four-family properties

Its interesting that the decline of national median housing prices per OFHEO would have resulted in a $667 drop in the limit to $416,333, but OFHEO director James Lockhart said he would not order a lower limit next year “so as not to disrupt the end-of-year pipeline.

I don’t follow his reasoning, but nevertheless, I think its a good idea to keep investors from getting jittery, especial given the role the housing market plays into our economy, with the risk of recession rising for 2007.

OFHEO ESTABLISHES PROCEDURES FOR 2007 CONFORMING LOAN LIMIT [OFHEO (pdf)]
2007 CONFORMING LOAN LIMIT TO REMAIN AT $417,000 [OFHEO (pdf)]


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Mortgages: Off The Wall, Cashing Out

August 4, 2006 | 7:11 am | |

According the Mortgage Banker Association press release mortgage applications fell 1.2% (seasonally adjusted) from the prior week. Those who are regular readers of Matrix know how much a dislike such short time frames for comparative analysis, but lets go with this for a minute.

Mortgage rates rise, mortgage volume eventually falls.

There has been a lot of discussion about what the magic number is that will break the proverbial camel’s back (housing prices) in the context of mortgage rate levels. For example, if the 30 year fixed reaches 8%, will that be the point at which buyers throw up their hands and give up? I don’t think so. What I mean is, I don’t believe in specific thresholds.

The National Association of Realtors suggests [WaPo],

each percentage point increase in interest rates knocks about 3 million potential buyers out of the housing market, including about 300,000 to 350,000 people considered likely buyers.

Thats about 5% of all home sales for each full percent? No way. The swing has to be far greater and depends on how quickly rates move. However, please stay with me on this point.

I have no idea how buyers and likely buyers were distinguished here but the general concept is reasonable. Each incremental change in mortgage rates knocks people out of the market or brings them back in depending on which way rates go. I am sure its not an instantaneous response and I would guess the lag time is less than a few weeks. Less buyers means less competition for listings: equals declining appreciation rates or prices, depending on the market.

_Cash out Refi’s_
One other development that has been caused by rising mortgage rates is the shift toward cash-out refi mortgages. I was surprised by this because I was under the impression that cash-out refi’s were a thing of the recent past (in terms of large numbers).

Rising interest rates on home equity loans are influencing people to refinance in order to wrap them in. Inman news reports today [Subscr] that some 88 percent of Freddie Mac-owned loans refinanced in the second quarter of 2006 resulted in new mortgages with loan amounts at least 5 percent higher than the original mortgage balances. That’s the highest cash-out rate Freddie Mac has seen since the second quarter of 1990.

I think the reason the refi mortgage balances are higher because housing prices generally increased in the first half of 2006 (at below the pace seen in recent years). Property owners refinanced, but who can say it was because they paid off their home equity loans simply because cash out refi volume increased? A 5% increase on the median house price ($220,000 est) would suggest a home equity balance of $11,000. That seems a little low to me but I may be influenced by my New York housing price orientation.

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Another Possible Mortgage Oversight Agency And More Acronyms Than A Bowl Of Alphabet Soup

March 29, 2006 | 12:01 am |

[apology in advance – this post has more acronyms than you deserve.]

HUD says GSE reform would not affect housing prices [MW]. U.S. Housing and Urban Development Secretary Alphonso Jackson said Tuesday that the cost of housing would not change if Congress created a new regulator for Fannie Mae and Freddie Mac.

“HUD is supporting legislation that allows a regulator to limit the GSE’s portfolio to those investments necessary to carry out its mission, without trying to cripple or put it out of business,” Jackson said in a speech to the National Association of Mortgage Brokers.

Firstly, how can anyone say that with such confidence, especially a housing-related government employee? Even if you believe what he says, it makes me suspicious at the naivete.

You are tinkering with the GSE’s investments and that can have a potential affect on mortgage rates. Availability, pricing and volatility are all fair game.

This is a very delicate path to walk, I would think. Its not clear why OFHEO would not have this repsonsibility since they are responsible for the GSE’s. Although they were asleep at the wheel when former Fannie Mae executives supposedly did some things they were not supposed to, the last thing we need is another federal agency.

Why not gut, revamp or empower OFHEO to provide meaningful oversight to the GSE’s?


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