California is broke, Home prices have collapsed,but the Government spigot is wide open. Remember when a bank would only lend at 80 pct of your homes appraised value? Of course that was when things were sane,the days of Glass-Stegal,and Banks lent your money wisely.
Fannie Mae and Freddie Mac are now upping their refinance limits to 125 percent of home value. To help subrime borrowers lower their interest costs and keep their homes.
WASHINGTON, July 1 (Reuters) - Fannie Mae (FNM.N) and Freddie Mac (FRE.N) will expand their foreclosure-prevention efforts and refinance homeowners whose loan-to-value ratio is 125 percent, an administration souce said on Wednesday.
Under current rules, the mortgage finance companies may refinance only borrowers whose mortgage loan-to-value ratio is 105 percent. The new policy is intended to aid more struggling borrowers who have seen their property lose value in the recent years of a housing crisis.
But in a new study by the New York Fed this is probably just a stop gap measure.
Reuters
Link to study
New York Fed Research
"The boom in nonprime mortgage lending that occurred in
the United States between 2004 and 2006 was quickly
followed by rapid increases in the rate of delinquencies and
foreclosures on these loans.1 This pronounced deterioration
alarmed investors, the public, and policymakers.2 Significantly,
uncertainty about the source of the decline in loan quality has
played a key role in the credit crunch that began in mid-2007.
Nonprime loan originations rose sharply after 2003 (Chart 1),
and these loans became delinquent far more quickly than had
earlier vintages. Indeed, loans originated in 2004 performed
poorly compared with earlier vintages, and the 2005 and
2006 vintages became seriously delinquent within a year of
origination at rates that the 2003 vintage took twenty and thirty
months to reach, respectively."
"The combination of a falling housing
market and a large number of
homeowners holding little or no equity
at mortgage origination created a perfect
storm for generating negative equity"
"Going forward, further house price declines will lead to
continued increases in the number of nonprime mortgages in
negative equity. If house prices fall an additional 10 percent
from their December 2008 levels, we estimate that approximately
1.5 million new mortgages nationwide will carry
balances that exceed the value of the collateral homes. The
aggregate difference between these balances and house values
could approach $135 billion."
Non-boom and non-bust states
Forty-three-state composite
Equity Debt-to-Income
Status Ratio
(Percent) FICO Score Loan-to-Value
Ratio Fully Documented
(Percent)
Positive equity 91 38 655 83 55
Negative equity 9 42 672 98 44
Boom states
Arizona
Positive equity 57 37 674 75 46
Negative equity 43 40 676 93 40
California
Positive equity 43 37 695 64 37
Negative equity 57 40 685 88 28
Florida
Positive equity 51 38 657 75 46
Negative equity 49 39 666 91 35
Nevada
Positive equity 20 37 687 69 39
Negative equity 80 39 683 89 34
Bust states
Indiana
Positive equity 98 37 640 87 70
Negative equity 2 40 623 98 79
Michigan
Positive equity 47 37 637 77 65
Negative equity 53 40 646 93 65
Ohio
Positive equity 89 38 638 86 67
Negative equity 11 41 645 99 76
_____________________________________________________________________
Studying the data above several items stand out about these subprime loans made.
1.) The loan to value ratios are extremely high. Loans were made to people who placed very little or no money down.
2.) Fico scores are all rated poor and by past experience these loans should have never been made.
3.) Full Documentation was rarely a condition to obtain these loans.
There is a lot of info in this report. It is no wonder that the government is increasing it's percentage in loan to value from 105 pct to the new rate of 125 pct.
But given the poor credit condition of these borrowers and the falling equity percentages is this good money after bad?
California is really troubling and it is no surprise that a state of emergency has been declared today by Gov. Schwarzenegger as revenue collapses.
Negative equity will continue to rise into the end of 2010. With another wave of ARM's to reset through the year 2012 it is difficult to project a housing recovery soon.
My guess is the Government will continue to increase the backstopping to prop up the economy.