Fannie Mae and Freddie Mac Drop Bomb on Mortgage Market

Inland Consumer News reports:

On Friday, July 13th (of all days), Fannie Mae and Freddie Mac dropped a bomb on weak home and mortgage markets. The new damage will take time to quantify, but may be considerable. The tale behind the act is clear, and just shy of unbelievable.

On Friday, Sept. 29, 2006, the Federal Reserve (joined by all other banking regulators) issued a "guidance" on nontraditional mortgage risks. It demanded that any mortgage containing an interest-only feature be underwritten at the highest possible interest rate or subsequent amortizing payment, and that any mortgage containing a negative-amortizing feature be underwritten at the highest possible balance and interest-rate adjustment.

No consideration for size of down payment or strength of borrower or for length of fixed-rate interval, one-month adjustable-rate mortgages (ARMs) treated the same as 10-year. No thought given to the "option ARM," offered by the trillion since 1980, the oldest ARM in the industry, and not a shred of evidence since roll-out that its option structure had caused outsize foreclosures in any market. I don't like option ARMs and don't sell them (neg-am is too great a temptation to self-deception), and salespeople have abused them, among other things claiming that neg-am helps to prepay loans. It is surprising that the sales propaganda has not done more harm, but it has not.

Read about the changes coming July 22.