Bernanke, in the recent past, had been urging in a passive way for the two heavy weights to lighten their portfolios. Now, it is more pointed with a strong message to Fannie Mae and Freddie Mac to focus more on affordable housing and less risky loans. The Option ARMs where massive foreclosures are occurring are stressing the portfolio. Many families have sought bankruptcy protection to get a handle on their run away finances. Recently, Freddie Mac indicated they would wean the purchase of specific subprime loans with challenged credit.



There was always a push to cut the umbilical cord with the government so that Fannie Mae and Freddie Mac could operate more independently. However, with the recent elections and Congressional change that looks like a no go and rather, there may be more governmental scrutiny and over sight with the two forever connected at the hip to government control. The two 1,000 pound gorillas have the power to wreck havoc through out the financial markets with their super sensitive “curb feelers” are in full receptor mode of operation. Recently, it was reported by one of the top lenders in the country that some borrowers with high scores are falling behind on their payments indicating further stress in the mortgage arena. This news sent further ripples through the markets.

The original intent of Fannie Mae and Freddie Mac was to create a secondary market where loans could be sold in order to free up capital for the mortgage loan originator to make even more loans. Many Savings and Loans in the 60's would bump into a financial pinch where they had no money to lend. This was called disintermediation as applied to savings and loans. Since that time, the word has taken on several different meanings. Former savers discovered other avenues of investment such as mutual funds and such. In the old days, many mortgage loans were assumable. There were many occasions where savings and loans would suspend any lending until more money came in by way of savings or someone paid their loan off. Creation of the secondary market with quasi-governmental control remedied this situation and then the secondary market became liquid. This newfound liquidity allowed for ready construction and development monies to move forward as well as just regular buy and sell financed real estate transactions. If the money institutions wanted to slow things down with some sort of perceived market risk, they would simply raise the rates and things would tighten all reflecting long-term government bond yields. Thus with this mechanism of the secondary market liquidity and control were brought to the market place.

Now how does this all play out on Main Street USA? Well it looks like with Subprime lending requirements tightening up, and now Fannie Mae and Freddie Mac other avenues will need to be pursued. Any borrower with some credit challenges will need to get their financial house in order to qualify under the tighter loan rules and requirements. Tightened loan underwriting restrictions programs featuring Option ARMs with negative amortization, stated wage earners, No Doc, No Ratio, stated self-employed are all getting a very close look. With accelerating foreclosure rates with many emanating from the subprime and Option ARMs foreclosures, things are a changing. Collections and write-offs may need resolution to qualify for loans. Previously, many subprime loan guidelines would allow those negative credit items could remain open. Until the tide turns the other way, things will be tightening up.

For borrowers who have employment, reasonable credit histories, and within limits debt to income ratios, not much will change. Fully documented loans will still get the best pricing and terms considered by lenders as lower risk. For the other borrowers it will be another story. As work out specialist attack unsold foreclosed homes all “borrower friendly” loans with the cushy terms and conditions will be harder to get. Appraisals will receive even more scrutiny in this market price flux. Anyone who has lived and worked through market cycles this is nothing new. Lenders come and go. Inventory eventually gets sold. Buyers get optimistic and seller's fall in love with their homes again as prices go up to another level. It may take a year or two, baring any local catastrophes, the real estate market will come back once again.

Per Chairman Bernanke's remarks to a recent banking conference where he said there needed to be “Legislation to strengthen the regulation and supervision of Government Sponsored Enterprises (GSE) is highly desirable, both to ensure that these companies pose fewer risks to the financial system and to direct them toward activities that provide important social benefits”. Before a recent Congressional hearing Chairman Bernanke stated regarding Fannie Mae and Freddie Mac that there needed to be “measurable public purpose, such as promotion of affordable housing.”

Any way you read interpret the words, it looks like there will be more regulation of the GSE hulking portfolio meisters with more emphasis on social programs that will boost first time home buyers and at the same time try to make said programs more affordable. Many of the state governments have special bonding programs available that can help first time homebuyers in selected price ranges achieve home ownership.

Most of these programs require courses in family budgeting, proper maintenance and care of a home coupled with programs like the Home Buyers Club to work on credit issues that will position borrowers to qualify for the financing. Tracking, borrowers who have gone through these programs and then buying a home using the special mortgage loans have been found to have a lower rate of foreclosure. It may be that there will more of a proactive effort on part of lenders to condition approvals on working on issues of credit and family budgets.

In the mortgage trade there is a term called “payment shock”. If a family for example has a current housing expense of $1,000.00 and are trying to buy a home where the new housing expense is going to be $1,800.00 and there is zero savings plan of at least $800/month then “payment shock” will ensue. It the debt to income ratio is close to the higher limit, where will the extra money come from to make this higher payment? Mortgage underwriters are faced with this dilemma every day. If the underwriter approves it, the borrower could be getting set up to fail. Some interactive underwriters will turn the borrowers down with a caveat that the borrowers would have a better shot at a loan if there were substantially more savings. This could be bolstered with a strong family budget that has strong emphasis on savings. This will give the borrowers the cushion needed to weather any financial situation the family might face in the future.

In conclusion, in the near term, subprime loans will be tightening up. Subprime lenders are dropping like flies. Others may be “dead men walking” with time running out. The shake out in the subprime marketing segment is underway. Those subprime lenders remaining will be the ones who adhered to strong lending principals and didn't drink the flavor of the month cool aid that has led to many bad loans. Fannie Mae and Freddie Mac will be under closer scrutiny with accounting practices and controls as Congress will be looking over their respective shoulders to keep them veering too far off course. Again, it is apparent, that more is expected from Fannie Mae and Freddie Mac programs for first time homebuyers and such. The “My Community Program” will get a bigger push to assist borrowers. For homebuyers, more emphasis will be placed on getting their personal credit histories in shape where collections and write offs will be required to be paid in full or settled for less than agreed, but none the less PAID. Family budgeting and planning will be a prerequisite to getting an underwriter approval.

As an aside, budgeting is good for everyone. The trade off is this: Borrowers will get low down payments and low rate loans IF they will go through special counseling, budgeting, and home maintenance and housing problem solving. Seems like a fair trade. Lower foreclosures will lead to more solid and stable mortgage markets. For now, things will tighten till inventories are narrowed and the foreclosure rates slow. It's still a great time to buy. Prices are lower. Rates are fantastic and there is plenty of homebuyer help. It is now a buyer's market in many areas.

Dale Rogers

http://www.brokencredit.com

http://www.sellerhelpsbuyer.com