More Reckless Home Lending, Courtesy of Fannie and Freddie

Can I borrow the full amount and an extra 25% too?

Apparently the answer to this question is yes. CNBC is reporting that home ‘owners’ who refinance their mortgages through loans backed by Fannie (FNM) and Freddie (FRE) will be able to borrow up to 125% of their homes’ value (hat tip Marshall Auerback). That’s not a typo: we’re talking no-money down and 25% cash back. Sign me up.

Homeowners refinancing their mortgages through loans backed by government agencies will be able to borrow up to 125 percent of their homes’ value under new regulations enacted Wednesday.

The rule changes, part of the government’s attempts to restore housing affordability and stem the foreclosure crisis, apply to loans backed up by Fannie Mae and Freddie Mac.

Previously, homeowners could borrow up to 105 percent of their home’s value. The new loan-to-value ratio is set up at 125 percent in a further effort to address those mortgage holders who owe more than their homes are worth.

"By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly,” Treasury Secretary Timothy Geithner said in a statement.

Is this sitting well with you? Doesn’t this seem like the reckless lending which got Fannie and Freddie nationalized? Well, if you were wondering whether Obama, Geithner and Summers were trying to reflate the economy by bringing back the bubble, I don’t imagine you will find better proof.

Apropos borrowing 125%, you will recall that over a year ago I was wondering why U.K. mega-lender HBOS wasn’t writing down more assets because they were a recklessly lending – you guessed it – 125% loan-to-value.

Looking through old e-mails, I read an article from the FT in 2006 that surfaced claiming that HBOS (Halifax Bank of Scotland) were poised and ready to go offer loans for 125% of value. That’s right, HBOS thought it a good idea to cover 95% of the house price and loan another 30% over appraised value unsecured as a personal loan.

Now that the UK has joined the housing bust, one must ask where are the massive writedowns that have to be sitting on HBOS’ books? Why aren’t they looking to do another rights issue like RBS? I fully expect some pretty horrific things coming from HBOS as the housing crisis heats up in Britain.

We know what happened there: HBOS would have gone bust after Lehman had Gordon Brown not foisted it upon Lloyds (LYG). And Lloyds was a bank that subsequently was almost fully nationalized despite having a relatively clean balance sheet – all because of its merger with HBOS and HBOS’ reckless lending.

Now that the U.S. government is underwriting similar policies on this side of the pond, shouldn’t we expect things to go seriously pear-shaped here too?

Addendum: just in case it isn’t clear, this measure is intended to keep banks from taking writedowns. A homeowner now 20% underwater can borrow the full amount of the original loan even though the house is worth 20% less than that amount. The home ‘owner’ stays in the house. The bank gets its regular payments (and a nice re-financing fee to goose earnings in Q3). And no one defaults. It’s all good, right?

Second addendum: Yves Smith, who also got the same e-mail, notes:

In most states, a purchase money mortgage is non-recourse, but a refi is. So some borrowers will put themselves in worse shape it they take up this offer.

Check out her post here.

Comments

[Graham and ...:]

And when the (Biblical) Israelis crossed the Red Sea and started wandering the Sinai desert, they longed for "the fleshpots of Egypt."

Jul 02 09:38 AM

[FDNY RET:]

An electorate that trained on "American Idol" deserves no better.

Jul 02 10:31 AM

[rm:]

I believe the primary purpose of this provision is to allow homeowners to refinance out of loans wherein the remaining balance exceeds the value of the home.

In case you didn't know, it's in the Constitution that overencumbered homeowners are endowed by their Creator with the right to keep their homes at all costs, and that "no loss may befall a mortgage investor, should a quasi-governmental agency be able to prevent it."

Jul 03 11:34 AM

[John Lounsbury:]

Edward - - -

I wrote an Instablog on this subject with some case studies before I saw your article. I will put as link in the blog piece to your article. My conclusion from a couple of hypothetical case studies is that not many distressed home owners will benefit from this (nor will they have incentives to apply). A few homeowners can benefit but my conclusion is that the number will just be in the noise level.

Thanks for sharing the information you have collected and your thoughts on this subject. Good article.

Jul 03 11:57 AM

[SoCalGal:]

Edward Harrison wrote: That’s not a typo: we’re talking no-money down and 25% cash back. Sign me up.

Please become fully informed. This is not a "purchase money" program. It's for refinances only; that is, for people who already own homes that are under water. No cash back allowed, either. It's designed to lower the interest rate so that the payment is more affordable so that the home is less likely to default.

Jul 03 01:37 PM

[Edward Harr...:]

Thanks, John. You might want to have a look at Bruce Krasting's take as well. He draws similar conclusions. I would say that I agree that few will take the administration up on this offer. I think it merely a PR piece they can point to down the road to show they have been helping out homeowners too. If they can get anyone to do this, it just means fewer writedowns and that's the real purpose.

SoCalGal, you obviously haven't heard sarcasm that often or you would realize I referenced the fact that it's for refis only.


On Jul 03 11:57 AM John Lounsbury wrote:

I wrote an Instablog on this subject with some case studies before I saw your article. I will put as link in the blog piece to your article.

Jul 03 03:20 PM

[Loan Survivor:]

Edward, please explain how the 125% LTV program on only exisiting FNMA/FHLMC debt will be bad for banks?

The only facts you present are that HBOS in the UK had problems because they offered 125% PURCHASE loans.

We're talking 125% LTV REFINANCE loans here that FNMA/FHLMC are already on the hook for, meaning taxpayers are on the hook.

If lowering interest rates to lower payments, means taxpayers have to bailout fewer foreclosures, why are you against that?

Before responding, please read my post that discusses this in detail and addresses many of the misplaced concerns about the porgram - seekingalpha.com/insta...

Jul 03 03:37 PM

[Edward Harr...:]

Loan Survivor, It's not bad for banks. It's good for banks. This is the scenario:

I have a house with a mortgage. That house has declined n value. While everyone else is out refinancing their mortgage at lower cost. I am stuck with the mortgage I have because I am in negative equity. What do I do?

Normally, I would either stick it out with the present terms. Or if my state is a non-recourse mortgage state like California, Florida or Arizona where house prices have fallen dramatically, I can just walk away.

This adds a third option i.e. the ability to refinance at a lower interest rate. The sticking point of course is that I am trading a non-recourse loan for a recourse loan.

In my view, this is a bad trade - and also predatory because most people will no know that they have made this trade. As for the bank, it continues to receive payment instead of having an empty property and being forced to write down the mortgage.

End result: Great for the lender/MBS holder who gets the payment and a recourse loan, giving it more assets and income as security. Bad for the mortgagee who, despite a potentially lower payment, is shackled to the house via a recourse loan for MUCH more than the home's present value.

On Jul 03 03:37 PM Loan Survivor wrote:

> Edward, please explain how the 125% LTV program on only exisiting
> FNMA/FHLMC debt will be bad for banks?
>
> The only facts you present are that HBOS in the UK had problems because
> they offered 125% PURCHASE loans.
>
> We're talking 125% LTV REFINANCE loans here that FNMA/FHLMC are already
> on the hook for, meaning taxpayers are on the hook.
>
> If lowering interest rates to lower payments, means taxpayers have
> to bailout fewer foreclosures, why are you against that?
>
> Before responding, please read my post that discusses this in detail
> and addresses many of the misplaced concerns about the porgram -
> seekingalpha.com/insta...

Jul 03 08:07 PM