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Tuesday, July 15, 2008

Housing/Subprime/Credit Roundup — July 15, 2008

Items of Interest:

Fannie Mae and Freddie Mac kept regulators at a distanceCBS News:
Fannie & Freddie: Friends In High Places? -- Inside How The Influential Loan Backer Kept Regulations At A Distance

It was during the Great Depression that Fannie Mae was founded - in 1938 - with a simple purpose in mind: to give lower and middle income Americans more access to the Great American Dream, owning your own home.

It did it by guaranteeing if a homeowner defaulted on a loan the bank would get paid, CBS News chief investigative correspondent Armen Keteyian reports.

Today Fannie and its smaller sibling, Freddie Mac, hold a pivotal place in the home loan market - one that has grown to include special advantages, such as:

  • guaranteed lines of credits from the U.S. Treasury
  • exemption from state and local taxes
  • limited government oversight
Their privileged status is as government-sponsored Fortune 500 companies powered by a vast political machine.

"Fannie and Freddie have probably had more influence than any set of institutions in modern times," said former Rep. James Leach...
Housing Wire:
Fannie, Freddie Downgraded by Moody’s -- The hits keep on coming for Fannie Mae and Freddie Mac. Tuesday morning, Moody’s Investors Service said it had downgraded key credit ratings at both GSEs over concerns about “diminished financial flexibility.” Fannie saw its preferred stock rating fall to A1 from Aa3, while its bank financial strength rating was knocked to B- from B; Freddie saw similar cuts to its preferred stock rating and financial strength, as well.

Both ratings cuts are one notch, and keep the GSEs firmly in investment-grade territory, the B- financial strength rating is Moody’s lowest in the “strong financial strength” category. A further cut would put either GSE into “adequate” territory under Moody’s rating methodology...
NY Times:
Bernanke Is Pessimistic, but Bush Urges a ‘Deep Breath -- Warning of the risks of a further slowdown and higher inflation, Ben S. Bernanke, chairman of the Federal Reserve, offered a gloomy assessment of the economy on Tuesday as President Bush, speaking a few blocks away, urged Americans to have faith in the country’s financial foundation...

President Bush, speaking at a White House news conference that coincided with the Fed chair’s testimony, urged Americans to “take a deep breath.” ...
Seeking Alpha:
Examining The Fed’s New Mortgage Loan Rules -- Yesterday, the Federal Reserve approved new rules for home mortgage loans to protect consumers from questionable lending practices. While the Fed should be commended for creating these new rules, I doubt they would have acted if we were not in the current credit environment.

I think the new rules should apply to all mortgages. Most of the rules only apply to subprime loans, such as the lender must verify the borrower’s income and assets the borrower is relying on to pay the mortgage.

The new rules don’t take effect until October 1, 2009. The Fed doesn’t explain why such a long lead time is necessary. The rule requiring lenders to escrow property taxes and homeowner’s insurance on subprime loans “will be phased in during 2010 to allow lenders to establish new systems as needed.” Prior to the housing boom it was common practice for lenders to escrow property taxes and insurance.

Another subprime rule is that a borrower’s verified income and assets must be enough to be able to pay “the highest scheduled payment in the first seven years of the loan” in order to ensure the borrower is able to afford the home. This presents potential liabilities. The Fed has not specified whether the liability is borne solely by the mortgage originator or whether the liability will travel with the mortgage through packagers and investors...
SEC Targets Lenders, Investment Banks in Subprime Investigation -- U.S. Securities and Exchange Commission Chairman Christopher Cox said the agency is pursuing more than four dozen cases into the subprime-mortgage crisis, focusing on whether lenders and investment banks misled investors.

``We are investigating whether mortgage lenders properly accounted for the loans in their portfolios and whether they'' set aside enough money for potential losses, Cox said in testimony prepared for the Senate Banking Committee today. The agency is ``investigating the role of various parties involved in the securitization process,'' including investment banks, credit-rating companies and insurers, he said.

The SEC also announced July 13 that it is examining whether securities firms and hedge funds have adequate safeguards to prevent employees from intentionally spreading false rumors. The announcement came after Lehman Brothers Holdings Inc., Fannie Mae and Freddie Mac tumbled last week, stoking concerns that one of the companies may collapse and trigger a market panic...

Calculated Risk

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