"Fannie and Freddie Offer Relief" is the headline
– but is this relief real, or is it little more than taking an aspirin
while losing a limb? For a coherent answer to that question, don’t go to the
press. The problem there is that journalists (a) think that anything new is
necessarily important, and (b) don’t generally understand the arcana of the
market in mortgage-backed securities.
Instead, go to the blogs. Specifically, go to the incomparable Tanta, over
the details, including, helpfully, a link to the original source: Freddie’s
release.
The main thing to note, as Tanta says, is that the market in subprime loans
was $450 billion last year alone. The injection of $20 billion over a period
of two to five years is not going to make a huge amount of difference. As we
on Monday, there is a pretty liquid market in subprime loans already –
and, crucially, in the subprime loans which have already been originated, rather
than hypothetical subprime loans which may or may not help out borrowers in
future.
The idea behind the F&F announcement is that there are borrowers burdened
with toxic subprime mortgages who will, soon, face nasty resets, driving their
repayment costs through the roof. Fannie and Freddie are saying that they will
buy securities based not on those toxic mortgages, but rather on new, less toxic
mortgages which will be used to refinance the original ones.
Nowhere, however, is any mention made of what will happen with the enormous
prepayment penalites which make such refinancings extremely expensive for borrowers.
And the whole reason why many subprime borrowers are getting into trouble is
that they took out loans with low initial teaser rates because those low initial
rates are all that they could afford. If they’re now being offered loans with
more realistic interest rates, it’s far from clear that will actually help.
To put it another way: the problem is not predatory lending, where banks offer
loans at sky-high interest rates to mugs who don’t know any better. The problem
is that people are buying houses they can’t afford, thanks to mortgages with
ridiculously low interest rates. (At least for the first year or so.)
And a new mortgage can’t solve that problem.
There is some good news in yesterday’s announcements, but it doesn’t have much
to do with the headline $20 billion figure. What Fannie and Freddie announced
yesterday is important rather because it finally creates an official criterion
for what constitutes a good subprime mortgage. Banks love to write loans which
conform to F&F’s standards, and now they can do that in the subprime market.
That will go a long way to reducing the amount of dodgy mortgages being written
– although of course underwriting standards have already tightened up
an enormous amount since last year.
In the meantime, though, individuals facing foreclosure today, or people who
live in a house they can’t afford, should take little comfort from the headlines.
None of this is going to help them in the slightest.