Philip Gvinter

The WSJ digs deep into data from 30 million loans and sees that - much more than subprime terms, rate resets or liar loans - low- or no-money down loans, leading to upside-down owners, are chiefly responsible for the foreclosure crisis. (See chart.) Since late 2006, most foreclosures have come on homes with prime loans.

You are 100% wrong. While FNM and FRE underwriting standards are loose by historic standards they reflect what was traditionally labeled ALT-A until the 2003-2007 credit bubble. The loans are all fully documented but allow for over high (up to the low 50s) debt-to-income ratios (DTIs) and still require private MI on any loans > 80LTV. This is sloppy but far from subprime underwriting. Also any FICO below 720 gets hit with pricing adjustments so things have improved from the days of GSEs buying Stated Income Stated Asset loans with high FICO scores and not making FICO adjustments for FICOs until 660. The asset requirements are also still too low with the typical necessary to push a deal through being 2 months PITI (principle interest taxes insurance) reserves.

At the same time where you are totally wrong is in the GSE's slice of market share. They currently control about 1/3 of the market. The FHA's share of mortgage originations went from 24% to 63% ( www.safehaven.com/arti... ) and the GSEs have about 90% of the rest with some VA and some private money loans also playing into the mix. The real vehicle for taxpayer risk taking is the FHA. 3.5% down payments, 55bip MI rates and no asset requirements plus allowing for blood relatives to be non occupant co borrowers and fairly high 45DTIs make these loans just a few notches above what used to be (before the age of stated income or in other words before the credit bubble of 2003-2007) subprime loans.

The eventual prime mortgage delinquency rate in my estimation will top out somewhere just south of 4.5% while the current batch of FHA loans may touch the low 3s with a predictable range of 3.00 to 3.25% due to the low down payment, no asset reserves and continued job loss. The GSE 125LTV refi program will not work and volume will be low. With any pricing adjustments and todays rate the program will only help those who can still afford to stay in their homes with a 10% reduction in PI mayments and likely no reduction in taxes for a total payment reduction of perhaps 8% to 9%. This is simply not going to be a major boon which allows otherwise soon to be defaulters to stay current. Some bank financing fees will turn into GSE/taxpayer losses but the scale of this will be very minor in a relative sense and as a proportion of total taxpayer losses born at the expense of propping up bank balance sheets.

We are indeed still a ways off from any meaningful bottom in the housing markets as Option ARMs are yet to adjust and the ALT-A and jumbo "prime" defaults still have a ways to climb before reaching their inevitable peaks and as job losses continue at extremely high rates. Housing will only recover with jobs and the weak accounting trick economic growth being forecast for 2010 will not bring that about .

It seems like we have learned from but are nethertheless repeating the mistakes of the 20s/30s as we have taken the opposite fiscal and monetary approach (a good thing) but abandoned the enforcement of the necessary regulations which need to be put in place for the system to heal. We have targeted only the top of the financial system and expect the aid to "trickle down" even though it is this kind of economic theory which got us here in the first place!


On Jul 04 11:07 PM Moon Kil Woong wrote:

> It is easy to figure out what is trash. Usually it's whatever Fannie
> Mae and Freddie Mac are buying. They are the mortgage sewage reprocessing
> centers for the residential real estate market. They now control
> over 90% of all new loans being written meaning, now you know the
> market is complete bunk. So much for the Fed and Treasury saying
> they were going to shrink the roles of these too institutions because
> they were a systemic risk to the system. Can you yell to them, "Liar
> liar pants on fire." on their next press conference on this topic.