Countrywide's Call For Increased Mortgage Limits Must Be Ignored

I read Countrywide (CFC) CEO Angelo Mozilo’s editorial in the December 5th edition of the Wall Street Journal with shock. In the editorial, Mozilo implored Congress to temporarily raise the limits it now imposes on conventional mortgages securitized by Fannie Mae (FNM), Freddie Mac (FRE), and FHA in order to ease the strain now permeating in the credit markets. Mr. Mozilo opined that it was important to act now in order to stabilize the mortgage markets as the cap, currently at $417,000, was simply too low to meet the needs of buyers in many communities across the country! Simply put, Mr. Mozilo identified this as the current “problem” in the mortgage markets. Is this really the problem, though, or would raising the cap simply perpetuate mortgage excesses (accentuated by Countrywide and others) that have led us to where we are today?

To find the answer, we have to research what Mr. Mozilo did not mention in his piece and that is the history behind the conventional loan limits. Fannie Mae publishes a historical reference on their website and looking at the data yields striking conclusions. To illustrate my point, I will highlight several examples. In 1990, the conforming loan limit for a “1 Unit” first mortgage was $187,450. By 1997, the conventional loan limit had appreciated to $214,600 for a gain of $27,150 over this time period. In percentage terms this worked out to be a gain of 14.5%. Conversely, in 2000, the conventional loan limit stood at $252,700 and appreciated to $417,000 by 2007 (it actually reached this level in 2006 but held steady in 2007). In any case this works out to a nominal gain of $164,300 and on percentage terms it equates to a 65% gain over a similar time period on a comparable basis!

From this analysis, it should be clear that the increase in conventional loan limits contributed to the excesses in the mortgage and housing markets. With higher conventional loan limits, sellers, buyers, and speculators were able to rely on securitization in order to generate liquidity for increasingly questionable mortgage backed debt (as well as other asset backed debt). Purveyors of innovative first and second mortgages like Countrywide and others accelerated the mortgage credit and housing bubbles by adding to the liquidity for anyone who wanted to “leverage-up” knowingly or unknowingly.

As housing prices spiraled higher driven by underlying mortgage availability and affordability innocent people seeking to own a home and pursue the American dream were sucked along for the ride.

Somewhere along the way the government or the private sector could have/should have helped with increased regulation or tighter lending standards. Instead everyone chose to look the other way in unison as tremendous profits were generated. Only now, when the boom has gone bust, is Mr. Mozilo calling for government intervention; and of course, an increase in the loan limits would benefit his company (Countrywide has one of the biggest mortgage exposures to the reeling California market where many mortgages are above the conventional loan limit).

The reality of the situation is Countrywide, Wall Street, and millions of homeowners are paying the price for their own greed when they should have known better. The innocent people that were hurt should be helped (which doesn’t mean locking them into a home that they can’t afford when they are insolvent), but those who facilitated the excesses while earning outsized profits in the good times should be punished in the bad times if they did not prepare their companies properly. That is capitalism.

Disclosure: none

Comments

[climb1212]

Thanks for pointing out the obvious reality. House prices are still ridiculously inflated and increasing the loan limits will merely deepen the extent of the current crisis. Mozillo and so many on Wall Street are pathetic.

[PF]

Interesting article in conjunction with news re: the mortgage industry lobbying over the past few years.

[Jomo]

This is ridiculous. You establish no link - just two unrelated facts. And the fact of the matter is it was non Fannie and Freddie loans, priced at rates just over the government loans, but with far riskier underwriting criteria, that created the credit problem. How many 80% LTV loans do you hear going bust (government limits)? Minimal. It was 95% and 100% LTV paper that is non-performing. Clearly, it is not a FNMA issue, rather the non-governmental loans that creates the problem. Thus, my question is what is the risk of the government programs, with the toughest underwriting criteria and LTV limits of 80%, making loans up to $800K - which is California is middle class? The alternative is for customers to pay far higher interest rates in a non-liquid mortgage market.

[climb1212]

800k for a house is middle class? Maybe a few select cities, but even then, that seems a bit outrageous. 800k these days gets you a nice bungalow in Oakland.

[kurt walter]

There was a major collapse in the credit market, caused by the fact that for most of this decade, every other radio commercial has been some guy selling mortgages to people who clearly should not have mortgages. ("No credit? No job? On death row? No problem!") It got so bad that you couldn't let your dog run loose because it would come home with a mortgage. The subprime mortgage fiasco resulted in huge stock market losses, and the executives responsible, under the harsh rules of Wall Street justice, were forced to accept lucrative retirement packages.

[mortgagebankingpro]

" Disclosure none" appears to do well throwing numbers statistics and percentages around but apparently knows little about the Mortgage Industry. I assure you I have no loyalty or love for either Countrywide or Mozillo and have never worked for either during my 35 years working in the industry. In fact I have worked for nearly every other major lender in the country (Wells Fargo, Wachovia/1st Union/The Money Store, Washington Mutual, Long Beach Mortgage, Clayton Holdings and many others consulting on every part of the business from underwriting to foreclosure and asset management including risk management. Fannie Mae, Freddie and FHA all set their own underwriting guidelines which must be adhered to by all private sector lenders. An increase in lending limits would only improve current market conditions and make better quality loans available to responsible borrowers. In all the years I've been in the business I've never seen a lender hold a gun to any so called "innocent borrower" and tell them to fabricate their income or commit fraud or agree to buy a home they realistically knew they could not afford.

[mortgagebankingpro]

I must add to my previous comments above. In addition to agreeing with "jomo" and "climb1212". Take a moment; think and look beyond your nose! We spend so much time, money and resources looking compiling HMDA and other reports for government so they can try and try to paint a picture of lenders redlining or worse "predatory lending". All for political gain and notoriety, don't we. I feel the Government's lending limits on Fannie Mae, FHA, VA and Freddie loans clearly is "reverse redlining" by restricting loan amounts as they do. Find me a average home outside the Midwest or Metro ghetto! where the heme's value falls within current limits. NOT! "Reverse Discrimination"? Perhaps" "Reverse Redlining" against the middle class in New York, California, Illinois ? I think so. Not in Texas where they forgot to teach Mortgage 101.

[kkinva68]

What a stupid article... $417,000 means many different things depending on where you are looking for a home. A builder cannot even get a 6000 SQ FT lot for $417,000 in Arlington, VA so responsible people with good credit must get 2 mortages even with a $50,000 down payment. All this limit does is make things more complicated and expensive for those otherwise qualified. What rock have you been living under for the past 15 years?

[Jay Jay]

Well written article. The distorting influence that the GSE's have had on the mortage market would take more than the space I have here to list. And just because conforming loans don't directly apply in the rich high income wealthy coastal areas doesn't mean that they don't have an effect to artificially juice the residential real estate market. Think $400k condos and trade up buyers. The unfair dominance of the conventional market due to their unearned doubious goverment backing pushes private institutions to focus on the riskier areas of lending in which the GSE's cannot directly compete.

If you're buying a house that costs more than half million dollars, you don't need a subsidy from the tax payers. Isn't it ironic that the very GSE's that were supposed to make housing affordable have actually caused huge price inflation? How is this making housing more affordable? You know this is true because the biggest critics of reducing the GSE's say that prices will plunge to affordable levels if you attempt to control them.

It isn't that the jumbo market is illiquid or high priced, its that the GSEs are temporarily selling loans below the real market cost by way of their insurance from tax payers.

Mozillo is looking for a public fool to take over his private bad loans. Mortgage pros are looking to keep the party going just a little longer before they have to go get real jobs.

[Kaos]

There were many excesses throughout this finance based growth cycle. Countrywide participated in many of the mortgage related excesses, but there are others. For one, the explosion in personal investing sites to include publishing lots of prose written by complete and utter incompetents. This article is a great example of this excess.

Consider, the mortgage excesses had many aspects and many players to blame. However, the "crisis" we are working through is entirely due to non Agency collateral. Wall St, rating agencies, lenders (including Countrywide), investors, borrowers, brokers, etc. all have culpability in creating the excesses we are working through. But the Fannie/Freddie securities market is performing just fine. No investors are losing money there. Banks are not writing down the value of Fannie guaranteed loans. So, it makes zero sense to place blame on the increased loan limits used by the Agencies over the years.

Second, millions of taxpayers in California, Florida, New York, Chicago, etc. are now stuck with materially higher financing rates and larger downpayment requirements just because they live and work in higher property value locations than, say, their counterparts in Charlotte or Dallas. To the extent the Agencies benefit from an implicit US Govt guarantee (and they do!) these taxpayers are not getting any benefit due to the obvious flaws of using a national average price for setting the limits that Fannie and Freddie operate with.

Finally, the author states that CEO Mozilo is looking for govt help "only now". A journalist would have to be lazy or stupid to make such a statement. Even a cursory level of research would uncover that Mozilo has been one of the Agencies strongest and most consistent supporters. All throughout the boom, when Wall St continuously tried to kill them off (i.e. eliminate their competition) by arguing they were not needed, Mozilo came to their defense arguing they were needed for periods of stress. I know this because I listened and, at the time, disagreed with him. I was wrong and Mozilo was insightful and correct. This author, however, lacks even a basic understanding of the mortgage market and seekingalpha editors should be ashamed for publishing his tripe!