Fannie Mae Plays “Let’s Make a Deal”
Posted by Larry Doyle on March 5, 2010 12:38 PM |
“Let’s see, do you want to go for the prize behind Door #1 or take a chance on what’s in the big box?”
“Well Monty, I’m playing with your money so it doesn’t really matter now, does it?”
1970’s vintage TV may have been entertaining, but is the current deal-making used by Fannie Mae to liquidate housing inventory truly the way to develop a healthy and robust housing market?
Just what is Fannie Mae doing?
Let’s go behind the curtain to see how they are trying to work their magic. The American Banker opens the door on this story in writing, Fannie Cuts FHA-Like Deals to Sell Homes:
Even as Fannie Mae tightens standards on most new mortgages, the government-sponsored enterprise is offering buyers of its repossessed homes financing with some of the most generous terms available today.
Fannie’s HomePath program lets borrowers put down as little as 3%, without paying for mortgage insurance, which is usually required for conforming loans where the borrower has less than 20% equity. HomePath also accepts borrowers with credit scores as low as 660 — 60 points below Fannie’s standard cutoff. Appraisals, a traditional prerequisite for getting a mortgage, are optional under HomePath.
The program underscores Fannie’s motivation to clear its inventory of homes, which swelled 36% last year, to 86,155.
“Only time will tell if the risk is worth the reward, but Fannie is giving up little to eliminate a nonproducing asset,” said John Dutra, a mortgage broker in Fremont, Calif. “Once closed, Fannie has a productive loan again,” instead of an empty house that is not generating cash.
This high risk “heads I win, tails you lose” housing finance policy is merely another reality within a socialized housing system.
Do not think for a second that this low down payment, no mortgage insurance housing finance does not have a slew of unintended consequences across the housing and banking industries. It does.
What are the implications here? People once again are incentivized to reach beyond their means to get a home that would otherwise be outside their range. Fannie Mae wants to move homes. Great. The American taxpayer already is bearing the costs of Fannie Mae. Great. Are we really getting ahead here? In my opinion, it is more reshuffling of deck chairs.
This policy is just another in the continuation of Uncle Sam’s extend the problem and pretend we’re getting better.