FREDDIE MAC (NYSE: FRE)
4.76 -3.24 (40.56%) 9:49AM ET
FANNIE MAE (NYSE: FNM)
8.69 -4.51 (-34.17%) 9:49am ET
In other news:
From Mortgage Lender Implode-O-Meter:
"Update - 2008-07-11: "The FDIC is in charge" was the verbal announcement ringing through the halls of IndyMac's Pasadena offices. "Everyone show up for work on Monday."
"The above information came from an inside source just minutes ago. A formal announcement will be made later today".
Friday, July 11, 2008
Morning Washout
Posted by Harriet at 9:52 AM
Subscribe to:
Post Comments (Atom)
20 comments:
if they fail will i ever get a 80% loan again?
good luck complying w/ FAS 140 now.
This whole thing is just so stupid.
It is a perfect example of why you don't give a private company a blank check for a bailout. Instead of acting responsibly and making huge amounts of money... they instead decided to see how far they could push things.
Poorly run companies like these deserve to fail and their investors deserve to lose every penny. There is a very good reason banks have always had a reputation for being conservative.
Now, instead of simply allowing another generation of financial wizards learn a lesson, we are going to be looking at some sort of huge bailout and major market disruptions.
Heckuva job, Franklin.
http://en.wikipedia.org/wiki/Franklin_Raines
By the way, there are a lot of employees of Freddie and Fannie in the DC area, some of whom probably earn pretty good salaries. Anyone care to speculate about how many of them may be selling houses soon?
ace - i don't know that we'll see large layoffs at fan and fred. the problem isn't overstaffing, it's overleveraging the balance sheet. that being said, i know that both fan and fred have employee stock ownership plans where they encourage employees to buy stock at slight discounts to market prices.
i'd imagine that a large percentage of fan and fred's employees have suffered huge losses in their personal net worth as a result of their significant holdings.
isn't it ironic that the powers that be loosened the reins on fannie and freddie a few months back, rather than tightening them when things were looking shaky? that will probably turn out to be one of the dumbest mistakes ever.
random question -
on another board i frequent there's a hot topic on whether a lender qualifying a $520K loan on a $110K income is 'over-qualifying'. this family owns current home (don't know the mortgage amount), has no other debt, and will put 20% down ($650K sales price).
some say the lender is wrong and approving this loan would be begging for default. others say it's the individual borrowers responsibility to decide how much debt to take on.
your thoughts?
mm, without knowing the family's other circumstances, it's hard for me to say. I'm assuming they have an excellent credit history. If they have secure jobs, are in good health, have no kids and several hundred thou in savings (including the stock market, bonds, etc.) plus retirement plan savings, they wouldn't strike me as overextended. I know a number of people who take out larger mortgages and keep more $ in savings, rather than put down the largest down payment possible and take out the smallest possible mortgage. On the other hand, if they have no savings, four kids including two in college, etc., they can afford less for a mortgage payment, and it might be a bigger risk to lend to them.
mm,
at 4.72x income? Yeah, I'd say that would be overqualifying them. At an interest rate of 6.5 (exceedingly good for that large a loan amount) the 30 year payment would be around 3,300/month or DTI of 36% of GROSS income. I would call that unrealistic, yes.
mm,
They're putting 20% down. That's a significant amount of "skin in the game." If the family is comfortable making that payment, I see this as a good loan.
Sure it's leveraged on the higher end but individuals can be responsible. Akin to what Tommy Lee Jones once said in Men In Black, individuals can be smart, people are dumb. Or something like that...
My $0.02
John, if they get bailed out the Fed's take over the loans but all the employees go.
Like see ya later, company is bankrupt.
The company is not insured by the government, just the loans.
doug, i can't say i agree. you are basically suggesting that a takeover would mean the elimination of the secondary mortgage market. i don't see that happening. i'd think a takeover would involve a massive restructuring and a subsequent public offering many years down the road as a way of the gov't getting a return of some of its investment. they won't dissolve the GSE's operations.
I second Ace's comment about needing to know more about the families assets. For example, the estate planners in our firm have a number of clients with very small income, but really really big mortgages. They have enough cash to pay for the place in full up front, but borrow from the banks when the money is cheap, and essentially make money on the spread via their investments.
Which by the way this is one of the reasons I keep thinking that if interest rates rise, home prices have to fall. Sarah, Lance & a few others who saw the high interest rates of the 80s say that essentially prices dont drop to compensate. I believe them, but it still is puzzling to me nonetheless.
Also second JF comment about what a fannie/freddie takeover would involve for the DC area. If anything I see the Govt adding jobs as another layer of bureaucracy is put on top of the process.
"that will probably turn out to be one of the dumbest mistakes ever."
Yep...
Just one more in a long long series of stupid decisions.
When private investors were running away these guys were trying to find ways to increase their exposure.
36% is an unrealistic DTI.
As a point of reference, in 2002 I bought a place with 20% down, near perfect (e.g. ~800) credit score, no debt, lots of assets, single, no-kids or dependents, had already owned 2 homes, etc. The lender pushed to get me a loan where the PITI was 29-30% of my income (i.e. I needed a smidgen more than 28% to seal the deal).
I got a big raise a year or two after that, but in hindsight, I would never take on a loan that was that large a chunk of my salary. My wife (married now) and I are shooting for a mortgage (PITI) that is < 20% of our income.
if they fail will i ever get a 80% loan again?
It would not matter as house prices would fall to very affordable levels.
Therefore, they will never let them fail.
Sarah, Lance & a few others who saw the high interest rates of the 80s say that essentially prices dont drop to compensate.
Well, it's hard to say-- California, the only other state where I've bought, had a couple of booms and busts in the 80's (though they look like bumps in the sidewalk compared to today's bubble). Banks traditionally were pretty strict in qualifying people, though, so to the extent home price rose in the face of rising interest rates it was largely a result of the influx of women into marketplace and the use of 'hard money' financing.
The change from one income to two income families, by the way, is something that most people forget in looking at the rise in housing prices. Obviously if family income nearly doubles, families can afford a lot more house and prices are likely to be bid up. That was a big part of what was happening to housing prices starting in the late 70's. I think it was 1977 that the legislation was passed requiring banks to qualify couples on the basis of both salaries instead of only the husband's. It was only as a result of that legislation that we were able to buy our first house. In contrast the current massive run up in prices has come in the teeth of declining real incomes for all put the top 10 or 15% of earners.
mm-- a $520,000 loan on a $110,000 income is way beyond what any bank would have qualified anyone for a few years ago. When we bought in 2000, with no credit card or car loan debt we were qualified for just about exactly 3 times our yearly income. This is pretty much in line with the old rule of thumb that you ought never to spend more than 25% of your take home pay on housing. And in the past no one made any distinction between whether that housing was rented or purchased. That, along with the advice to save at least 10% of income, was just considered basic financial common sense.
Sarah, another possible factor? In the early 80s, many baby boomers were entering first home-buying years, pushing up demand.
Now we have the baby boomers' kids reaching the same stages - what effect will they have?
I don't know, ace, the first of the echo-boomers won't reach 30 until 2010. By contrast, the first of the boomers reached 30 in 1976. It will be interesting to see what the combination of option-arm resets and another large generation coming into maturity produces.
Post a Comment