OK, I did a little more research on this. It looks like Freddie has a no cash-out refinance program up to 95% LTV. Fannie appears to have a cash-out refinance up to 90% LTV.
So it doesn’t look like Fannie or Freddie will be able to buy/guarantee all of these worthless mortgages at bubble prices. It appears they will be able to buy/guarantee all mortgages originated after July 2007. However, for the 2002-June 2007 vintage of crappy mortgage, Fannie/Freddie would only be able to buy/guarantee those under the new limits if the borrower does a refi. The refis appear to have LTV limits so it doesn’t look like the banks will be able to put all those 2002-June 2007 $417,000+ mortages that are now on homes that are way under the original mortgage amount to the taxpayer. Instead, the banks will have to hope the borrower refis. At least that’s how I’m interpreting this bill.
It will be interesting to see if the banks allow borrowers to refi for much less than the mortgage amount just to get the loan off their books. For example, say Crooked Borrower (CB) took out a mortgage in 2005 for $600K. Let’s say the house securing that mortgage is now only worth $500K. Will the bank allow the borrower to refi at $475K (95% of $500K) just to get the loan off their books? It doesn’t seem like they would if the house is really worth $500K. Better to take a short sale at $500K and then sell that to Fannie/Freddie. Of course, with all the crooked appraisers out there, it may be better to do a refi at an inflated value.
With the July 2007 cutoff date, this bill doesn’t look as horrible as I thought it would be. I don’t like it (and I’m sure I’m missing a ton of things in my amateur analysis), but it sure looks like it could have been worse. So what am I missing?
