Fannie Floats 120% Loans

[Mike Kennedy]

http://www.mortgagenewsdaily.com/5122008_Fannie_Mae_Aid.asp

 

[John Hassler]

If I read this right, and I don't know that I have, the following two thoughts come to mind:

1) Fannie Mae will loan up to 120% of the current value and will take the hit when/if the borrower can not meet the terms of the new loan.

2) The existing lender will get paid off with the new loan proceeds up to 120% of the current home's value instead of the 80-90% they would normally net if they went the foreclose route.

This sounds like a great plan for the existing lender who got everybody into this mess.

 

[Brad Ellis]

John,

If I read this right, and I don't know that I have, the following two thoughts come to mind:

1) Fannie Mae will loan up to 120% of the current value and will take the hit when/if the borrower can not meet the terms of the new loan.

2) The existing lender will get paid off with the new loan proceeds up to 120% of the current home's value instead of the 80-90% they would normally net if they went the foreclose route.

This sounds like a great plan for the existing lender who got everybody into this mess.

I did not read it that way. I thought the article noted that these are on mortgages Fannie already owns. If so, they are on the hook and the originating lender does not have credit loss risk. Fannie then, IS the existing lender for all practical purposes.

You'll have to trust me on this one as I deal with it nearly daily- if Fannie had a basis to put back a loan to the originating lender they would have already done so or tried to.

So, I do not know that these mortgages were necessarily toxic deals done by the originators. It could be that some- perhaps most- were really just very high LTVs. And lenders typically do not want to make loans they cannot sell so the willingness of the secondary markets to buy them- GSEs or others- was also a contributing factor. And of course, price declines can turn what appears to be an OK loan into an upside down loan.

My consternation continues to be- and I have said this to bankers both inside and outside my organization- is that we went for decades requiring borrowers to have skin in the game.

Then very recently, instead of requiring MI for loans over 80% as was the historical practice, everyone went to 80/20s or even 125s. I continue to wonder just what they thought was going to happen?

Brad

 

[Alison Swain]

My consternation continues to be- and I have said this to bankers both inside and outside my organization- is that we went for decades requiring borrowers to have skin in the game.

Then very recently, instead of requiring MI for loans over 80% as was the historical practice, everyone went to 80/20s or even 125s. I continue to wonder just what they thought was going to happen?

Brad

Ask them sometime, Brad. You're closer than any of the rest of us will ever get.




.

 

[John Hassler]

John,

I did not read it that way. I thought the article noted that these are on mortgages Fannie already owns. If so, they are on the hook and the originating lender does not have credit loss risk. Fannie then, IS the existing lender for all practical purposes.

You'll have to trust me on this one as I deal with it nearly daily- if Fannie had a basis to put back a loan to the originating lender they would have already done so or tried to.

Thanks for your thoughts and you may very well be correct as it does say loans that "Fannie either owns or insures" however it also states "Fannie Mae's new program would not ... require existing lenders to write-down mortgages to a level where refinancing is feasible." Apparently it's a bit confusing for this simple appraiser.

So, I do not know that these mortgages were necessarily toxic deals done by the originators. It could be that some- perhaps most- were really just very high LTVs. And lenders typically do not want to make loans they cannot sell so the willingness of the secondary markets to buy them- GSEs or others- was also a contributing factor. And of course, price declines can turn what appears to be an OK loan into an upside down loan.

High LTV loans are a good and even safe product but only for a very small number of borrowers. The lenders were in a position to pick up on this increased demand and I would guess they did. Wall Street did a sell-job Madison Avenue would be proud of. Perhaps a pump-and-dump stock analogy is more accurate in some cases. I applaud those lenders who made prudent decisions and hope they fill the current market void.

My consternation continues to be- and I have said this to bankers both inside and outside my organization- is that we went for decades requiring borrowers to have skin in the game.

I completely agree, skin in the game makes a difference - for the borrower and the lender. The private money and local lenders I work/talk with treat the money like it's their own because it usually is to some degree.

Then very recently, instead of requiring MI for loans over 80% as was the historical practice, everyone went to 80/20s or even 125s. I continue to wonder just what they thought was going to happen?

Brad

It was a huge red-flag however I suspect management at most lenders who sold on the secondary market were slaves to their addiction (and annual bonuses).


But what do I know, I'm just a simple appraiser.