Some people are now suggesting that Fannie and Freddie need to eliminate the “due on sale” clause in their notes and trust deeds. When I first heard this I didn’t really see how this would make a big difference, After all, interest rates aren’t that far off of their historic lows and my guess is that only a small handful of the properties on the market today are sitting with underlying fixed rate mortgages in the 5% range. We also know that there is no way Fannie and Freddie are going to allow their loans to be assumed by borrowers that cant qualify for a mortgage on their own. So why would assumptions help the marketplace and possibly Fannie and Freddie themselves? Here’s an example. If someone owes $ 200k against a property that is worth $200k and desperately needs to sell. Under current conditions, that person is in a very tough spot and their is a good chance that the home will go into foreclosure. But if the current homeowner in that scenario is able to find a buyer that qualifies for the payment and wants the property; Fannie, Freddie, their investors may be better off allowing that loan to be assumed to such a person rather than allow that loan to go into foreclosure once the original buyer can no longer make payments. It is doubtful that either Fannie or Freddie will do away with “due on sale” clauses all together, but creating a way to evaluate and make case by case decisions like this would be a positive move for the market.    

Over the next couple of years more resources than ever will be invested into loss mitigation efforts. Foreclosures are at historic levels prompting lenders to consider doing many more loan modifications, forbearance’s and short sales. One would think that there would be sophisticated tools available to lenders who want to do this fairly and responsibley or at the very least some industry accepted best practices - but there aren’t. Like many things associated with this mortgage meltdown, many of the assumptions associated with risk never took into account the dynamics that led to the meltdown in the first place such as how these so-called exotic loans would perform in a market where property values were going south. The new housing bill contain a lot of goodies aimed at homeowner retention but in order to get at least a reasonably efficient net result it is imperative that some basic loss mitigation protocols receive industry wide acceptance. The question is what should be standardized and who should establish them. I’ll take a shot at these questions next week but would love to hear some other views. GA     

Why doesn’t anyone understand that affordable lending to LMI and minority homebuyers is the key to the housing recovery? Lenders, GSE’s and mortgage insurance companies are all curtailing their affordable lending goals and initiatives at the worst possible time and in the process are exacerbating an already dire housing market. If there is a “silver lining” in today’s housing meltdown it is that thousands of potential homebuyers that were priced out of the market two years ago have a second chance to fulfill their dream of homeownership, but the mortgage lending industry in response to record default rates have tightened their lending guidelines to the point where most of these credit-worthy families cannot get a home loan. The irony is that these more conservative lending parameters are drastically reducing the pool of potential homebuyers at a time when there is an unprecedented glut of homes on the market. This is causing further downward pressure on home prices, more foreclosures and at the end of the day will cause more bank failures, and more government bail-outs.

There is no question that in recent years lending standards got far to lax, but the pendulum is now swinging too far the other way. The recovery will only come when sensible lending returns to the marketplace. GA

Last week the President signed a historic housing bill that among many other things provides Fannie Mae and Freddie Mac loan commitments with a temporary guarantee from the federal government. But is it really possible for the government to give a temporary GSE guarantee? For years Fannie and Freddie bonds have been priced with a yield only a hair greater than comparable government bonds. Most believed that the this was because most investors felt that if Fannie or Freddie ever had a problem meeting their obligations the government would ultimately cover their bets. Last week this notion was proven true. Now most people believe that the government’s “temporary guarantee” is really a permanent one prompting a number of economists to ponder the long term ramifications of this. I believe that the government had no choice but the long term effects of this situation is yet to be seen. GA