Declining Market? Not so much

From the WSJ

Fannie Mae is expected to announce Friday (today) that it is scrapping a policy requiring higher down payments on home mortgages in areas where house prices are falling.

In a letter to the Realtors last week, Freddie also said that it is applying the policy flexibly. For instance, if appraisers can demonstrate that home prices in a given neighborhood are stable or rising even though values are falling in the wider metropolitan area, the declining-markets policy doesn’t apply.

I am undecided as to whether this is good or bad in the long run. In the short run, it’s probably good. Short-run thinking is one of the (major) ways in which we got to where we are today – having buyers “buying” houses with 100% loans who didn’t have any “skin in the game.”

But … many buyers now, while having great credit and job histories don’t have the cash to put down.

This lending market makes advising clients almost impossible. Should the sellers accept a 95% loan? Should they not? Should they wait for a 90%? What if they accept a 95% and roll the dice that by the time the appraisal comes back their house won’t be in a declining market?

This market is fluid and dynamic.

More on declining markets here, here, and here.

Thanks to CR for pointing this out.

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  1. BawldGuy Talking May 16, 2008 at 14:30

    Sounds like they’ve made a market oriented decision, which works for me. Investors won’t buy the loans now if there’s any perception of sub par underwriting.

  2. Jim Duncan May 16, 2008 at 16:44

    Thanks for the comment, Jeff.

    Do you think this means that investors will now actually be scrutinizing the loans/CDO/etc now?

  3. Matt Sommer May 16, 2008 at 22:54

    The “market oriented decision” was the moment of sanity when they raised requirements. The politically forced decision is to throw those freshly written requirements in the bin.

    “But… many buyers now, while having great credit and job histories don’t have the cash to put down.”

    Hmmmm, let’s think about these buyers. What kind of buyer is it with great credit and job history that has no cash? Your typical young American with a shiny car, no savings and debt out the wazoo? Their debt has gotten more expensive lately, along with all their other expenses going up, and the most recent numbers show that consumer debt increased at a faster rate in the last couple months. People are not paying down debt, they are still spending beyond means, even in the face of rising interest rates. Credit default is rising too.

    “Average hourly earnings have been falling since October without so much as a single month of advances in real (inflation-adjusted) terms, and this is using the government’s cooked CPI numbers! You can’t have growing consumption and GDP without growing earnings; ALL of the consumption growth in the last six months has been fueled by increases in the debt to equity ratio among American households. This WILL blow up in the economy’s face; it is a mathematical certainty.”

    What exactly is “great credit to FNM/FHA”?

    “You need only a 620 FICO and no more than one missed payment in 12 months, and you can refi virtually anything. Yes, all the way up to and in some cases beyond 100% LTV!

    “The banks are loving these deals as they take absolutely no risk – the government takes it all.

    “620 FICO and one missed payment? This is “good credit”? Oh, the only problem is that it actually is, apparently, hard to find people with only one missed payment!”

    [ ]

    There ya go, no scrutiny needed… the banks eat em up because they are guaranteed by Fannie Mae. Never mind that Institutional Risk Analytics stated recently that Fannie and Freddie both “are clearly going to be insolvent by the end of the year.”


    The public will be forced into more costly bailouts, as evidenced by Congressional Bill H.R.5830, the “FHA Housing Stabilization and Homeownership Retention Act of 2008”, which forces FHA to take on $300B of the worst mortgages the banks can throw at them. How about this off Bloomberg headlines – no story…. yet….



    “Let’s lay it out here, assuming that the FBI investigation proves out:

    * Countrywide (and presumably other lenders) wrote mortgages to people on “stated” income, allegedly with the right to verify income against tax returns, but in fact they never did.

    * These loans were then packaged up and sold to various channels, including the GSEs Fannie and Freddie, contaminating their “prime” credit book with garbage paper that is at high risk of default. These loans were bought by Fannie and Freddie despite both of those firms representing to its investors that they buy only “safe, prime” mortgage paper.

    * This was allegedly hidden from investors (In the stock? In the paper? From Fannie?), thereby inducing those investors to purchase things (stock, bonds, mortgages) they would not have otherwise bought.

    * Either Countrywide’s folks in the corner office were incompetent (unaware) or complicit (worse) – so how is it that Sambol has been given a job by BAC?

    “Oh, and now that the firm has been gutted Countrywide lacks the ability to “buy back” the defaulted paper, so the buyers – including Fannie and Freddie – are going to wind up eating it.”


    Before you write off Karl Denninger (and me) as an internet nutter, note that he called the Washington Mutual debacle way back in April of last year, when their stock was still near its all-time highs…

    “This is the same sort of crap that sunk Lucent and Enron – booking “income” that is not in fact spendable, as it has an impairment associated with it (the LTV is INCREASED by this negative amortization) AND it is not CASH!”

    [ ]

    So what is the point/solution/whatever? The sooner the banks and everyone else eat their losses the sooner we can get back to business. Stop bailing and force honest accounting. Start by opposing HR5830.

    Then, banks have to be forced to bring their Level 3 assets back onto the books. Otherwise the credit crunch stays on from lack of trust, and prices keep falling as a result . When it implodes, another trillion or so dollars gets tossed onto the national debt as Congress bails out everything and everyone, on top of the expected $800B national deficit for this year. And then what? The really bad stuff, as the international bond market gets pissed off…

  4. Larry May 18, 2008 at 19:35

    “For instance, if appraisers can demonstrate that home prices in a given neighborhood are stable or rising even though values are falling in the wider metropolitan area, the declining-markets policy doesn’t apply.”

    So apparently lots of places in C’ville may be declining markets…you see ‘price reduced’ signs everywhere.

    But not in Belmont? Belmont, where the asking price for 702 Belmont, a new listing, is $519,000. That is, $11,000 less than DOUBLE the price for which it sold in 9/2005.

    Really? The property has been improved *this* much?

    Can’t wait to see what clown/New Yorker goes for this!

    & looking forward to seeing the actual selling price….

  5. Jim Duncan May 18, 2008 at 20:35

    Larry –

    This is a comment on cVillain I made last week about some of the properties on the market on Monticello Avenue –

    922 Monticello –

    On the market for 248 Days. Original Listing price of $279,900 now at $239,900

    908 Monticello –

    Originally listed 5/3/2006. Original Listing price of $324,900 now at $249,900

    935 Monticello –

    On the market for 18 Days. Original Listing price of $259,900 now at $259,900

    912 Monticello –

    On the market for 106 Days. Original Listing price of $512,000 now at $484,000

    606 Monticello –

    On the market for 51 Days. Original Listing price of $619,000 now at $599,000

    800 Monticello –
    Under Contract – on the market for 21 Days, asking price was $349,900 (my buyer clients)


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