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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (186413)	2/25/2009 9:09:11 AM
From: Mike M2	Respond to of 306849

It is also worth noting that financial bubbles create over optimism and excess debt sowing the seeds of it's own destruction - many policy makers seem to ignore this fact.

To: Les H who wrote (186413)	2/25/2009 9:37:52 AM
From: Les H	Respond to of 306849

Bernanke laid it on the line today. I heard him say that the Fed and Treasury were going to provide debt and equity capital to many of the Nation's banks. Failure to do so was not an option. He pledged that the Risky Lending Standards of the past would be eliminated. He promised to ‘fix’ the errors that had been made by the misguided bankers. It sure sounded good. The market even liked it. It is bunk. The following is an example of how Lending Standards are set in DC. You decide. Are these good lending standards? Is this good business practice? The following is happening on a very regular basis. The numbers are big. Fannie Mae (FNM) and Freddie Mac (FRE) have always had terms for a Conforming mortgage. A Conforming mortgage requires 20% equity from the buyer. That makes for a good borrower. That is a ‘good’ lending standard. Many years ago the Agencies and the insurance industry created a carve-out to the Conforming mortgage definition. If an 'approved’ insurance company was willing to take a first loss on the loan portion that was in excess of 80% then the Agencies would buy the mortgages. No more 20% down. This practice morphed. It started with 10% equity, 10% mortgage insurance. It ended with –3% equity, 23% insurance. These are terrible lending standards. The borrowers have no risk. Fannie Mae and Freddie Mac bought as much of this “enhanced” paper that they could. The yields were great and how could they lose if the likes of AIG (AIG) were going to guarantee the first loss? This of course ended very badly. The insurers got crushed. It is not clear what their claims-paying abilities are any longer. Fannie and Freddie are big losers on the enhanced book of business as well. The losses on the enhanced mortgages far exceeded the 10–20% that was insured. The only ones who made out were the regional banks that originated and sold the risky loans to the Agencies. FNM recently reported that its default rate on enhanced loans was five times larger than on loans that had the traditional 20% down. Bad lending standards make for bad loans. These questionable standards are 'business as usual' today at Fannie and Freddie. They continue to buy pools of mortgages where the required equity of a borrower has been replaced with an insurance company's promise to pay. The incredible part is that one of those “approved’ insurers continues to be AIG. Twenty-two percent of Fannie's 08 business was enhanced. AIG was one of the biggest providers of the PMI coverage. AIG owes its existence to the taxpayers. Yet they are writing first loss insurance on high risk mortgages. With this questionable promise to pay attached, the loans can be sold to another ward of the state, FNM. These are terrible lending standards and it is bad business practice. The taxpayers are at risk to both sides of this transaction. If history is a guide 'we' will ultimately suffer losses from both AIG and FNM on this business. The PMI/AIG/FNM connection is understood by Geithner. Lockhart and Bernanke. They are aware of the entire PMI time bomb within the Agencies. That they are allowing this to continue today does not evoke much confidence in Bernanke’s claim to end the Reckless Lending Standards of the past. seekingalpha.com