Fannie Pushing to Increase Loan Quality

Posted by Jim DeBellis on May 14th, 2011

You can sleep well. Fannie Mae is undertaking a push toward better quality loans! Well, let’s not break out the champagne quite yet, as it might take a while longer to completely restore America’s confidence in the quasi “private” agency that (together with Freddie Mac) buys up about 90% of America’s mortgages on the secondary market. After all, it was just a few months ago that they relaxed their lending standards to included applicants with credit scores as low as 620, which many banks had considered to be borderline “poor” or “risky” credit.

The good news is that they seem to have learned some lessons from the bursting of the housing bubble in 2008 that still has most of the world reeling on the brink of economic doom. Although I wonder whether the agency can ever really “control” the beast they created over the previous decade or two, FNMA President and CEO, Michael Williams, in a recent speech at least acknowledged the “two books” of the current housing market. What he calls the “legacy book” represents the pile of bad paper we’re still carrying from the 2005-2008 peak years of the bubble, with the so-called “high quality, strong credit” second book representing the loans since 2009.  I envision it more as 1953 Volkswagen Beetle (the current market or “book”) pulling a semi-tractor trailer filled with garbage.

Only time will tell if the post-bubble loan standards are really of a higher quality. One thing is certain, though: fewer loans are being given out. Insiders tell us that housing finance, which tallied $1.5 trillion in mortgage loans in 2010, is expected to be off that mark by one-third, ringing up just a paltry $1 trillion in 2011. That could be a sign of a more sensible marketplace. And if it seems that this will leave millions of people without a mortgage, the truth is that most of the lost half-trillion dollars represents refinancing and financial churn that was part of the problem before anyway.

The “legacy book” is still a big drag on housing finance, with Fannie reporting losses of $8.7 billion for the first quarter of 2011. Hardly a cause for celebration, but still an improvement over the $13 billion loss last year. No doubt there will be more tinkering to limit the impending damage from bad loans still on the books and the build-up of negative equity, but the Band-aids of government policy can do little until the real cure of full employment and a robust economy really set things straight.