Tricia,

There are a lot of ideas flying around Washington to soften the subprime problem and, I think, the reset wave that will hit in the next few years. Lifting the caps on Fannie/Freddie's portfolios, tweaks to Ch 13 bankruptcy, the FDIC Chair's call to freeze the interest rates on ARMS at their introductory rates (shudder) etc.

It seems to me that many of these "fixes" will undermine the non-conforming secondary market. Do you think so and do you think banks will return to their prior stringent lending criteria if forced to hold more loans on their books. Or will banks price loans to account for the greater risk born by bond investors? In other words, what's the fallout?

Hi nova...

I don't think lenders will return to the days of holding most conforming loans in their portfolios. There's just too much performance pressure...way beyond what most banks can support by deposits alone. So, I believe they will just pass on any increased pricing from the agencies & continue selling off most of what they underwrite.

DH's bank holds all prime non-conforming loans in their portfolio. They need the income & with a .23% delinquency rate there's no reason not to hold them. They underwrite these non-conforming loans to the bank's criteria which is stricter than the agencies. They use a propriatory credit rating system that's tougher than the three majors. DH does not want loans written to agency standards.

The caps probably need to be raised...at least in some geographical areas. They are hardly relevant on either coast, for example. Assuming they don't raise the cap to $1M it shouldn't do much harm to the non-conforming jumbo marketplace. The BK tweaking is nuts, IMO & I doubt it will pass (?). Freezing ARMs is even crazier.

Bottom line is that, yes, I believe lenders will just reprice risk to the consumer. Some of that is good provided it doesn't get out of control. With the new Freddie underwriting guidelines many of the problem borrowers will be weeded out early in the underwriting process. It's going to hurt the group known as alt-As though. They will be paying more as risk is repriced in the secondary market.

In general, I think there will be a whiplash effect for a while though. For the next couple years, high-quality borrowers will definitely have an easier time getting a loan. Also, it's not just purchase money mortgage loans but cars, RVs, boats also...the sub-prime problem is hitting all of the credit markets.

In all of the headlines it's good to remember though that many (if not most) local & regional banks have never written a sub-prime loan. It's easy to assume, based on media reports, that every bank in the country is suffering under the weight of defaulting borrowers & that's not a true portrait of the situation...thank goodness, or I'd be grabbing my 5-ga bottle of water & heading for the hills! rofl Personally, I think the problem is large enough to push a sluggish economy into a light recession but certainly not depression. I will say, however, that the foreclosure numbers that are coming in are staggering. Those lenders who did make sub-primes certainly made a LOT of them, didn't they? :(

Does anybody know the foreclosure rate during the Depression? Maybe, I don't want to know...

/tricia

I've been thinking about the BK thing...since DH is also an attorney, I'm going to ask him this weekend about the cram down of primary home mortgage loans. If he has anything interesting to say, I'll post.

/tricia

Tricia,

Thanks for the insights. Your knowledge of the wonderful world of lending is so valuable.

The BK cram down proposal is interesting but the process is slow...from what I've read, the current Ch. 13 process is no cake-walk. Apparently, the debtor is placed on an allowance for living expenses which are set by the IRS. Whatever money remains goes to the debt repayment. Imagine having a court tell you how much money you can spend every month on food for the next 3-5 years? Does your husband know if current Ch. 13 law allows a a BK judge to modify loans on investment properties?

It's somewhat reassuring to hear your views about regional and local banks. Sheila Bair (FDIC chair) is no idiot. She has to know the massive ramifications of freezing interest ARM interest rates. Makes one suspect that the banking system may be in more trouble than we know. Or maybe, hopefully, she is an idiot.

The foreclosure rate is very high but I am more concerned about eroding home values and the impact on the consumers' psyches. I think the country can handle a mild recession but a severe, extended one is another matter. Too many people are counting on their home values and aggressive stock market growth to fund their futures. When the head of the flipping Bank of England publicly announces his fear that we're in for a severe global stock market crash, one gets a little nervous. Better make that a 10 gallon water bottle. My DH has ordered me to stop reading the Financial Times and start watching Dancing with the Stars.

About the only thing I DO know is that were in uncharted waters and the lending climate three years from now will look very different from today.

Ladies and Gentlemen, we now return to our regularly scheduled programming...Freddie Mac.

It's always something.....

Freddie Posts Loss, May Cut Dividend; Shares Plunge (Update8)

By James Tyson
Enlarge Image/Details

Nov. 20 (Bloomberg) -- Freddie Mac fell 29 percent, the biggest decline since it went public in 1988, as the second- largest U.S. mortgage-finance company posted a record loss, warning of a possible dividend cut and the need to raise capital.

The worst housing slump in 16 years caused ``significant deterioration'' in the third quarter that will continue through year-end, McLean, Virginia-based Freddie Mac said in a statement. The net loss was $2.02 billion, or $3.29 a share, three times what some analysts estimated.

``It's as bad as it possibly could be,'' said Howard Shapiro, an analyst at Fox-Pitt Kelton in New York. Shapiro recommended investors sell Freddie Mac shares, reversing his opinion to hold more of the stock than is contained in benchmark indexes.

Freddie Mac and the larger Washington-based Fannie Mae, created by Congress to foster American home ownership, have lost $41 billion in market value this year as mortgage defaults and foreclosures rose to record levels. The companies, which own or guarantee 40 percent of the $11.5 trillion U.S. home loan market, will have less money available for new mortgages.

``There is nothing we see right now to be more optimistic,'' Chief Financial Officer Anthony Piszel said in an interview. He told analysts on a conference call that the fourth quarter ``is not going to be pretty.''

The shares extended their slump to a fifth day, on concern that losses will continue into next year. Freddie Mac fell $10.76 to $26.74 in New York Stock Exchange composite trading and have tumbled 61 percent so far this year. Fannie Mae dropped 25 percent to $28.25 today and is down 52 percent on the year.

No Optimism

``These companies have lots of problems yet to come, I don't think they really know,'' how bad the losses will get, investor Jim Rogers, chairman of New York-based Beeland Interests Inc., said in an interview today. ``I'm still short those companies.''

Fitch Ratings said it may reduce Freddie Mac's AA- preferred stock ranking.

Freddie Mac had $1.2 billion in provisions for credit losses and reduced the value of assets by $3.6 billion. The third-quarter loss was almost triple the $715 million a year earlier.

The fourth quarter will also prove difficult, Chief Executive Officer Richard Syron told analysts on a conference call today.

A slump in the value of mortgages reduced core capital by two-thirds to $600 million more than Freddie Mac's regulatory requirements, prompting the company to seek more money. Freddie Mac's required capital level is 30 percent larger than typical as the company recovers from accounting mistakes revealed in 2003.

Raising Capital

The company ``almost in the immediate future'' will announce how it will increase capital, including the possibility of reducing its fourth-quarter dividend by 50...

novahomesick: "Does your husband know if current Ch. 13 law allows a a BK judge to modify loans on investment properties? "

Well, I'm not Triciae's husband and never could be since I like my thermostat set at 75 (smile), but the answer to your question is yes. Under current law, mortgages on primary homes are the only type of secured debt that is ineligible for bankruptcy protection. Owners of vacation homes - yes, vacation homes - farms, and commercial property can modify those debts in bankruptcy court. But not your everyday homeowner. So why shouldn't homeowner's have the same opportunity?

Bethesdamadman,

Thanks for the info and I don't disagree that homeowners should have an opportunity to have their primary home debt treated like other secured debt in Ch. 13. I do wonder what impact this and other foreclosure prevention moves will have on future mortgage lending. Brave New World.

72 degrees and holding.

"Does anybody know the foreclosure rate during the Depression? Maybe, I don't want to know.."

Not exactly, but I can go one worse and look at bank failure rates (and yes, most bank failures were directly due to having to foreclose on too many properties, mostly farms)

"During the 20s, there was an average of 70 banks failing each year nationally. After the crash during the first 10 months of 1930, 744 banks failed 10 times as many. In all, 9,000 banks failed during the decade of the 30s." - wessel's living history

So, by my math, 900 bank failures a year for the 30's vs 70 bank failures a year for the 20's is about... really ugly.

I've studied the Depression in more detail than most people, and furthermore my grandparents lived it. I can assure you that whatever stories you have heard about how bad it was, the reality was far worse. Homeless people today have it better than many average people had it back then.

The average american now lives in unimaginable wealth compared to the 1930's. Kings and Presidents didn't live as comfortably.