How much will tougher Freddie & Fannie underwriting standards affect prices?

[TemekuT]

I just read this article and need Piggintonian Posters’ Braniac Analysis Power. Calling all financial analysis and statistical analysis types…please dissect and comment and project! Thanks.

http://www.mortgage101.com/partner-scripts/inman.asp?ID=63875

[DaCounselor]

Is it just me or is the linked “article” somewhat rambling and incoherent?

As far as what happened, yes Fannie & Freddie have offically stated that they will follow the Interagency Guidance on Nontraditional Mortgage Product Risk prescription. And it is mostly that – a general prescription. The only real bright-line requirement is that borrowers utilizing “non-traditional” mortgages (aka products where either principal or interest are deferred) must be qualified at the fully indexed rate with a fully amortizing payoff.

The result is intended to be the avoidence of unaffordable exploding ARMS. The initial tertiary result is credit contraction in the sense that the borrower can’t qualify for as much $$ in the fully-indexed fully amortizing scenario.

Of course, the guidance has no specific requirements for critical aspects such as debt-to-income ratios and stated income – leaving loopholes large enough to drive a truck through.

Nevertheless, I think we are and will continue to see credit contraction as the lending/real estate market evolves and reacts to the toxic waste loans that were made the last few years.

[DaCounselor]

Is it just me or is the linked “article” somewhat rambling and incoherent?

As far as what happened, yes Fannie & Freddie have offically stated that they will follow the Interagency Guidance on Nontraditional Mortgage Product Risk prescription. And it is mostly that – a general prescription. The only real bright-line requirement is that borrowers utilizing “non-traditional” mortgages (aka products where either principal or interest are deferred) must be qualified at the fully indexed rate with a fully amortizing payoff.

The result is intended to be the avoidence of unaffordable exploding ARMS. The initial tertiary result is credit contraction in the sense that the borrower can’t qualify for as much $$ in the fully-indexed fully amortizing scenario.

Of course, the guidance has no specific requirements for critical aspects such as debt-to-income ratios and stated income – leaving loopholes large enough to drive a truck through.

Nevertheless, I think we are and will continue to see credit contraction as the lending/real estate market evolves and reacts to the toxic waste loans that were made the last few years.

[Allan from Fallbrook]

Da Counselor: This follows along with an earlier post we both contributed to regarding a possible credit contraction and its implications for the larger market.

I think the article did hit one point squarely (and I agree that it seemed somewhat incoherent overall) and that was that regulatory and market forces are exerting some level of “push back” in the form of tightening standards for lending.

Given that California was one of the leaders when it came to high percentages of ARM loans, I think the effects of the fallout will be strongly felt here. Consumers who had grown used to refinancing their way out of trouble over the last few years will now find themselves in much more difficult straits. No more double digit appreciation, no more paper equity cushion to play with, and increasingly expensive money that is increasingly difficult to qualify for.

The ride back down the rollercoaster will probably be a lot more hair raising (and painful) than the ride up.

[Allan from Fallbrook]

Da Counselor: This follows along with an earlier post we both contributed to regarding a possible credit contraction and its implications for the larger market.

I think the article did hit one point squarely (and I agree that it seemed somewhat incoherent overall) and that was that regulatory and market forces are exerting some level of “push back” in the form of tightening standards for lending.

Given that California was one of the leaders when it came to high percentages of ARM loans, I think the effects of the fallout will be strongly felt here. Consumers who had grown used to refinancing their way out of trouble over the last few years will now find themselves in much more difficult straits. No more double digit appreciation, no more paper equity cushion to play with, and increasingly expensive money that is increasingly difficult to qualify for.

The ride back down the rollercoaster will probably be a lot more hair raising (and painful) than the ride up.

[Anonymous]

But don’t Fannie Mae and Freddie Mac only deal with mortgages up to like $450k or something like that? Wouldn’t that exclude many of the properties in SD?

One thing is certain: this is one more thing happening that will in some way help to contract credit more.

[Anonymous]

But don’t Fannie Mae and Freddie Mac only deal with mortgages up to like $450k or something like that? Wouldn’t that exclude many of the properties in SD?

One thing is certain: this is one more thing happening that will in some way help to contract credit more.

[DaCounselor]

Good point Andy. I think FM’s conforming 1st mtg limit is $417K. This probably took them out of play to some extent on the 1st mtgs – how much, I don’t know. You could have a $417K conforming 1st (80% ltv) and a $104K 2nd (20%) for a total of $521K and FM would be able to purchase. FM very well may have more exposure on 2nds in Cali as their conforming cap for 2nds is $208K.

The “push-back” continues, Allan. It’s going to be an interesting ride.

[DaCounselor]

Good point Andy. I think FM’s conforming 1st mtg limit is $417K. This probably took them out of play to some extent on the 1st mtgs – how much, I don’t know. You could have a $417K conforming 1st (80% ltv) and a $104K 2nd (20%) for a total of $521K and FM would be able to purchase. FM very well may have more exposure on 2nds in Cali as their conforming cap for 2nds is $208K.

The “push-back” continues, Allan. It’s going to be an interesting ride.

[Author]

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