Now that the feds have taken control of Fannie and Freddie, I hope they realize that further tightening of underwriting criteria will only exacerbate our current housing crisis and will likely lead to more bank failures and billions of dollars in taxpayer dollars. There is no question that the availability of mortgage credit got far too liberal in recent years but the pendulum can swing too far the other way and cut off affordable credit to millions of qualified and deserving homebuyers. Until home prices stabilize the market will continue to get worse and reducing the pool of potential homebuyers will cause even greater downward pressure on prices. The feds need to start opening up the flood gates - at least a slowly. Hopefully this weekends action will be a move in the right direction. GA  

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.    

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