Using Countrywide as an Example of Housing Excellence. Nothing Down and Banana Republic Loans Make a Comeback back by Government Sponsored Entities!

You are going to need to sit down for this one. If you have any heart conditions you may want to stop reading at this point. Many of you recall that Fannie Mae and Freddie Mac had their caps raised in January during the great Wal-Mart voucher experiment. It was sneaked into the “stimulus” package set forth and most of the attention was diverted to the fact that you now were going to receive enough to fill up your car for one month. At this time, many pundits and bloggers thought this was much to do about nothing. I saw this as a slippery slope that would only allow the government to further push their experiment in ruining the financial balance sheet of America.

Many that first saw the bill thought that there were sufficient guidelines in place and raising caps to $729,750 was simply a way to inject liquidity into the market; plus the ultimate stop would be the verification of incomes and also a down payment. Well now that is out the window and the government sponsored entities are following the fantastic model developed by Countrywide and New Century Financial:

May 18, 2008 – Washington Post

“The gears of the mortgage market are starting to unlock for borrowers needing big loans. In expensive markets such as Washington, that covers most people looking to refinance or move up from an entry-level home.

Just in the past two weeks, interest rates on the new “conforming jumbo” mortgages — for amounts between $417,000 and $729,750 — have come down enough to make a difference to borrowers. And mortgages allowing down payments of just 3 to 5 percent are coming back to the market for borrowers who have good credit.

“The bottom line is rates are lower than they were,” said Kevin Connelly, a vice president at BB&T.

Last week, for example, BB&T was offering 30-year, fixed-rate mortgages for a conforming loan, which is for $417,000 or less, at 6 percent interest with no points, a type of prepaid interest. A conforming jumbo cost only one-quarter of a percentage point more, 6.25 percent. Loans for amounts beyond $729,750, now called “jumbo jumbo” loans, were at 7.25 percent.”

First, could it be that borrowers need super jumbo mortgages because we are still in a housing bubble? You would think that folks would have learned their lesson after being hit in the face with a subprime 2 x 4 but leave it to our government to go ahead and compound the stupidity. The market in California for example is adjusting because that is what happens when markets correct after a gluttonous decade long bubble! Somehow, the market forces are working and the government wants to prop up a bubble through corporate welfare – the same people who wanted the government out of their hair when the bubble was roaring like a caged in tiger. Keep in mind that the new caps were implemented in March yet they weren’t doing a damn thing because folks simply do not have down payments (10% in California can still be $50,000 to $70,000 for a so-called starter home); so now Freddie and Fannie are taking a play out of Countrywide; lower down payments and also take lower credit scores:

Other good news for borrowers: Fannie Mae is removing its demand for higher down payments in areas it considers “declining markets,” which includes most of the Washington area. Beginning June 1, Fannie will again accept mortgages with as little as 3 percent down.

In December, Fannie and Freddie started to require an extra 5 percent down in areas where it had determined that home prices were falling. The policy applied even to neighborhoods where prices have been stable or increasing slightly.”

Bwahahaha! Fannie and Freddie are now going to be subprime or maybe we should call them jumboprime (JP) – not to be confused with Optimus Prime from Transformers. Just wait until you see what they consider to be stellar credit. In what is now becoming a bigger and bigger joke where financially responsible folks are the butt of ridicule, they are going to remove the safe guards of giving money to folks in declining markets without them putting more skin in the game. Forget about the fact that the markets are declining because folks went into the housing game with no skin and lower standards to begin with! We are living in a Twilight Zone episode in which the “solution” to our problem is the problem. This is utterly stupid and virtually guarantees a taxpayer bailout whether we want it or not:

“FHA has really, really been taking off,” said Jim Foley, senior vice president of George Mason Mortgage’s Bethesda branch. “You can have a lower FICO [credit] score; 620 and above is what they’re looking for.”

In December, Fannie and Freddie started to require an extra 5 percent down in areas where it had determined that home prices were falling. The policy applied even to neighborhoods where prices have been stable or increasing slightly.

Officials at Freddie Mac announced that loans with 5 percent down or less can still be made in declining markets if the loan is for a single-family home that is the borrower’s main residence, and the borrower has good credit. It must not be a cash-out refinance.

Fannie and Freddie, government-chartered corporations that purchase mortgages and repackage them for sale to bond investors, cover a huge portion of the mortgage market, and so their standards influence the whole industry.”

I am almost speechless at this utter incompetence. It was a smart move to require higher down payments for distressed areas which was a move in the right direction. This will mitigate what we are now learning to be a cause of people walking away from their homes; negative equity is a major reason for being at risk for foreclosure or being tempted to walkaway. Instead of keeping this good practice in place, Fannie and Freddie took some advice which looks pretty similar to this:

“NEW YORK, Dec 5 (Reuters) – Countrywide Financial Corp’s (CFC.N: Quote, Profile , Research) chief executive called on the U.S. Congress to temporarily raise the maximum size of mortgages that Fannie Mae (FNM.N: Quote, Profile , Research), Freddie Mac (FRE.N: Quote, Profile , Research) and the Federal Housing Administration may buy or insure by 50 percent to $625,000.

In an opinion piece in the Wall Street Journal on Wednesday, Chief Executive Angelo Mozilo, whose company is the largest U.S. mortgage lender, said the increase from $417,000 should be implemented for up to a year.

He said this would go a long way toward alleviating a nationwide housing crunch, which analysts expect to pinch borrowers and lenders throughout 2008 and probably beyond.

“It should be enacted as part of a broader package of reforms to ensure that these linchpins of our mortgage system can aggressively support the housing market in a time of need, and that the appropriate controls and oversight are in place to protect taxpayers,” Mozilo wrote.

Well so much for that oversight. I guess Fannie and Freddie think that Mozilo is a bit too stringent on his lending standards. I’ve received a few e-mails from readers saying that this bailout talk is recent. It is not. Given the utter financial illiteracy of our leaders it wasn’t hard to see where they would want to steer this ship. For some reason back in March of 2007 I feared that there would be a massive bailout where the government instead of taking its medicine would step in to fill the void of the subprime mortgage market:

March 27, 2007

The Chatter Begins

“If anything, I’m glad a few politicians are shedding light on this monstrous train that is barreling down to main street USA. But when the talk shifts to bailing folks out that is where I put my foot down. In addition the connotation of all this chatter is that somehow we’ve seen the worst of the subprime implosion. Need I remind folks that the first week in March 2007 was when we had the subprime meltdown spread into Wall Street? Didn’t hear too much complaining in 2004, 2005, or 2006 when even a 102 year old man was able to get a 25 year mortgage. Maybe he can refinance when he is 120 into a 50 year mortgage. This credit bubble epidemic is global and as such will have far reaching ramifications.”

The frustration of this is California by far is the most egregious offender in terms of mortgage amount of any state in this entire country. The jumbo caps hogwash was a ploy to bailout the state that was the nucleus of the subprime fiasco. Even Mozilo saw this as the only way the state would stop from going into a major correction:

December 8th, 2007

Hope Now Alliance

“You can see that it is much too early to determine how this thing will go. Will people in foreclosure that don’t qualify for this plan call for equality? Why should they be punished because they didn’t fall within the given timeline of the current proposal? What about prime borrowers that are underwater? Why shouldn’t they be able to freeze their rates as well? Again these are philosophical questions more than economic but I assure you they will come up in the coming years. Even though this isn’t a bailout per se, it does open the door slightly for more government meddling. We already know that Paulson said this isn’t a “Federal bailout” but the wording giving tax-exempt status to states should be watched. Another major thing that would be a bailout is what Angelo Mozilo, CEO of Countrywide mortgage is pushing. He is calling for caps to be raised to $625,000 so the FHA, Freddie Mac, and Fannie Mae can purchase larger mortgages. Mozilo had actually called for raises of as much as $850,000. Since Countrywide and WaMu have nearly 45 to 50 percent of their mortgages in California, I wonder why he is pushing this so hard?”

If the Countrywide model was doomed to fail, why is it that Fannie and Freddie are following in the footsteps with advice from Mozilo? And let us not kid ourselves, many of those that consider themselves “prime” are one paycheck away from trouble. That is why even the simplicity of raising caps and requiring folks to have a modest 10 percent did nothing for California. So now, they are going to push it down to 3 percent and we are back at square one. No one has been punished and we have a litany of cases of flat out rampant fraud in the industry; do you think some of these hucksters won’t get back into the game?

So we now have the Federal Reserve accepting crappy loans in exchange for U.S. Treasuries and we will now have Fannie and Freddie ripping loose and pushing the limit with the no money down party just in time for the summer selling season. And make no mistake about this, this is no money down. You can get 3 percent from your credit card and you’ve effectively gone zero down. Welcome to our financially irresponsible government. And you want to trust these yahoos with a $300 billion bailout?

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19 Responses to “Using Countrywide as an Example of Housing Excellence. Nothing Down and Banana Republic Loans Make a Comeback back by Government Sponsored Entities!”

  • I have a good friend that is in Real Estate.
    This a copy of an ad he sent me last week:

    For his sake and protection I took out any links and phone numbers:


    First Time Homebuyer
    Minimum Credit Score of 580
    Loan Amounts $729K
    Up 100% LTV on Purchase loans (even in declining markets)
    Down Payment Assistance is available, so 100% is easy to do
    Alternate credit, such as PG&E & Phone Bills can be used for credit history. Nontraditional credit histories can be considered.
    Low closing costs-all mortgage insurance can be financed.
    No cash reserves required.
    Larger seller contributions – up to 6%
    Construction Loans to 105% of Purchase Price
    Non-owner occupant co-borrowers allowed with a minimum down payment mortgage.

    Refinance is 95% LTV.
    Appraisals are good for six months.
    FHA streamline refinances for investor properties at owner-occupied rates.
    Cash out refinances to 85% with no higher rate.
    Condominiums are acceptable with 51% owner-occupancy within the project.

    Lowest FICO “Deal Saver”

    Minimum Credit Score 525
    Purchase is 90% LTV
    Seller Credit up to 6%

    These programs will allow agents like you to close deals that have been difficult or impossible to do over the last year.

    We do loans that others can’t

    Loan Officers 40% Referral Fee

    If your are an LO whose broker is not HUD approved SEND US YOUR FHA DEALS! We will pay you a 40% referral fee at COE.

    End of the advertisement

    As you can see the dance is about to begin again…
    Although it won’t be long until the band stops playing again.


  • This really is really pretty incredible. “A second bite at the apple” comes to mind. The Fed(s) are really forcing this issue of home debtorship, aren’t they? I’m starting to think that if you can’t beat ’em, join ’em. After all, it’s my tax dollars going to this bailout, too. Let’s see, buy a house with nothing down, knowing full-well that it will devalue, no payments due on the new loan for 45 to 90 days, make a payment, skip a payment for a while, then go NOD, then into foreclosure. Your loan is with the government, so you know that it will be in incompetent hands. You have millions of people in front of you scheduled for the courthouse auction, so no biggie there. Under this dubious scenario, the would-be buyer gets, say 52 months of free rent for 60+ months and, so long as CA stays a non-recourse state, the only consequences are a credit hit, which in 5 years will be +/-70% of the country with no social stigma. Of course I wouldn’t do it, people with families (I don’t think) would do it, but a lot of fraudsters and desperate people would. This is a free government lunch, right? Much better than straight welfare. Can they really be this incompetent with our money as they pay responsible savers 1.9% on their savings accounts? Ok, I answered my own question. There is a national sickness, Doc. Think it can be stopped?

  • I guess this proves 2 things, first that credit scores like the SAT’s scores don’t really matter. Second the people running things in Washington are incompitent when it comes to handling finances. And they wonder why all of the issues with americans finantial problems even exist at all? It is time to take a hard look, bhahahahaha!

  • When I saw that the GSE’s were going to do this I nearly threw up. They are already dangerously undercapitalized yet they are now being asked to take on even more of the home finance of America and provide loans to people with marginal credit and little cash. Consider that a person buying a home with only 3-5% down is upside down from the moment they move in. Transaction costs would eat up what little equity they have were they forced to sell the house. I said a few weeks back that it is my firm belief that the GSE’s are going to buckle and then the real financial crisis will begin. They are more leveraged than even WAMU or CITI and now they cannot even undertake the return to prudent lending standards the banks themselves now require. Not even Countrywide is going to hold for investment a mortgage written on the terms the GSE’s are now offering.

  • (1) ““FHA has really, really been taking off,” said Jim Foley, senior vice president of George Mason Mortgage’s Bethesda branch. “You can have a lower FICO [credit] score; 620 and above is what they’re looking for.”

    ****So what is the big deal? That HAS BEEN the standard for FHA for YEARS!

    (2) As far as Fannie/Freddie raising the amount of the down payment in areas designated as ‘declining markets’ goes, I figured that it wouldn’t last as it would be an administrative nightmare. One street in a zip code could be obviously declining but 2 blocks away it could be holding in value. My village is all of 5 blocks in one direction (unless you count Lake Michigan) and 3/4 of a mile wide. The house prices range from $192,000 to $2,500,000 – and the only difference can be which side of the street the house is on. For example, two houses facing each other across the street: one sold for $199,000 down from the original list of $290,000 which was the same as the adjoining neighbor paid in 2004 and the houe across the street (same size house and land) sold for $525,000 because its backyard ends at an inland lake. There are two completely different markets – permanent residents and summer people. Local market is declining (so far it is around 33-35% off peak) and the uber-expensive 2nd home market is holding (and from my contacts in the real estate/banking world, those buyers are still paying cash.) How on earth would you classify this area? Declining, stable???? With the rule that was in efffect, you would have borrowers/sellers contesting the designation of their particular street and an administrative mess.

  • As Bill the Cat from Bloom County might say, “Aaaack!”

    We’ve got some mixed movie metaphors coming up. Toto may have pulled the curtain back from the Wizard, but suddenly Groundhog Day pops up and we’re right back where we started. With Freddie Kreuger in the Bill Murray role.

    Bigger picture – this is simply to forestall the collapse into the next administration. WIthout these efforts, the market would have ground to a halt this summer. Now, Obama will be left holding the bag, blamed for the depression, making him a one-term democrat, so the Repubs can run a ‘fiscally sensible’ candidate and take back the White House in 2012. Why else have a straw 72 year old man as this year’s candidate? The viable, vibrant, younger republicans recognized that the present occupant has screwed the pooch and stayed out of the race.

    The Ponzi scheme continues.

  • Well it will be interesting how this plays out.

    Who will buy their bonds? That is their financing source, if there is another wave of idiot that they deserve to lose all they have.

    I guess eventually the losses will come back to the government, depending on how much loss these two entities will incur this time. Hey we have a close to bankrupted government already, I wonder what choices it has when the unavoidable finally happens.

  • Dr,

    They still need to verify income right? These are not for stated income loans right?

  • The problem isn’t which zip code is in a ‘declining market’ it is more like which state is not! Maybe North Dakota could be made exempt. Its got oil and wheat so it is prospering and is, no doubt, experiencing a housing boom out in Minot but they maybe the only state that is. Houston has a ‘stable’ market and it has the most robust economy of any major city but even there foreclosures are up as gas, electricity and food price hikes squeeze the consumer. The issue for the GSE’s should be risk and guaranteeing loans made with such small downpayments increases risk. I think Exit is right that this policy change is designed to keep the housing market from collapsing and, hopefully, stop the fall in housing values. It maybe that the GSE’s have to do this because, if they don’t,
    and housing prices continue to fall they are done for anyway.

  • Did anyone else notice that hour-long infomercial, complete with Fox-like scroll and graphics, fake news set, fake “reporters” filing “live remote reports.” Beyond the perfunctory hastily murmured disclaimer at the beginning, it was indistinguishable from your standard cable news program’s “special report.”

    It’s an hour-long commercial about buying houses with no money down. Apparently, you get what little down is required from “a grant.”

  • Reena – your friend is way over-stating the ease of obtaining an FHA loan. I work with those programs pretty regularly. (I’m on the board for housing in my county.) At our meeting last week, our administrator reported that the FHA iand USDA Rural Development are both balking at funding a small apartment complex project that was approved by the state housing agency (HUD basically) as a state agency subsidized rental project. (We are co-ordinaating for the property owner.) FHA and/or Rural Developement want an 80% tenant commitment. Then he reported that FHA trhough a fit and would not approve a borrower for a a townhouse in a project being done by our agency. Their reason? 8 units are planned, 4 are built (just finished) of which 2 aare occupied and FHA is having a panic attack over the occupancy rate and that 4 more are planned but not sold and what happens to the HOA dues if the rest are not sold. For crying out loud – they are OWNED by the county agency which is hardly likely to let the roof fall in or the place disintegate! (Maybe in Chicago but not in a tax-rich rural county with a tax base heavily loaded with multi-million dollar second homes whose owners are not speculators.)

    *****We can only get low credit scores (below 620) through FHA if the reason for a lack of a higher score is that they do not really have a credit record because they do not borrow money or run credit cards. Non-traditional credit histories (utilities etc) have been by FHA and VA for years for people who do not have a credit record because they do not borrow money or use credit cards.
    ****all this ‘oh my god people with low credit scores are borrowing $729,000’ is a lot of over-dramatized hooey. FHA has very strict DTI (debt to income limits.) Want to borrow $729,000 with less than 20% down? Better have an income of $195,700 so that mortgage, taxes, PMI and insurance do not exceed 35% of gross income.
    ****As far as the non-resident co-borrower stuff, yeah, the borrower can have a co-signer. Thats been the rule for years and years.
    **** Y’all can chill on the panic attack about FHA lending standards.
    ****Your ‘friend’ is a slimey puffing salesperson who is oveerstating what can or can not be done and who is mixing up the programs to make it sound far easier than it is.

  • eric in vegas

    AnnScott, thanks for bringing clarity to the situation.

    Doc, relax man, you know this is not going to keep home prices from falling back to pre-bubble levels.

  • ****all this ‘oh my god people with low credit scores are borrowing $729,000′ is a lot of over-dramatized hooey. FHA has very strict DTI (debt to income limits.) Want to borrow $729,000 with less than 20% down? Better have an income of $195,700 so that mortgage, taxes, PMI and insurance do not exceed 35% of gross income.

    Anybody with that kind of income can have a million dollar loan if you ask me. There is a big difference in having DTI 35 with 50000 income, and 200000 income. Thing is, one only consumes so much food, fuel, etc. Your DTI can be much higher with a big income, especially with fixed interest rates.

  • For Fannie and Freddie loans to 97%, who is going to insure these? It is becoming nearly impossible to do 2nds to that CLTV, and the insurance companies will not insure to that LTV in distressed markets.

  • This just makes me puke! Everyone better be wearing seat belts. I see this
    as a short term (6-9 month) fix, then the house of cards comes falling down.
    Taking a trip back to lending like this can only end one way. In a disaster that
    we all are going to pay for one way or another. Not to mention the State of
    CA. is in real trouble and may not be paying its bills by the end of August.
    It’s time the people start voting out the idiots and putting people in charge with
    some scrupples.

  • I just read this in the comments section over on Mish’s site:

    “Southern California housing sales surged 22% from March.”

    Is that true? And if so, who’s buying? And where? Is this because of the Fannie and Freddie stuff? Should we all run out and start to spend spend spend again, hooray the markets up, real estate has healed itself, recession has been averted? It’s all so confusing these days….


  • Seems to me that this is good thing for those that want to reach the bottom faster.

    Dumping good money after bad will get us to end game that much faster.

    If only we could convince Citibank to loan maybe $10 Billion for an 800 square foot crap shack, then immediately default, they would have to admit they are insolvent and set off the chain reaction.

    Doing this one mortgage at a time is taking way too long!

  • AnnScott:

    The “advertisement” was not something my friend created.

    I copied the text but left out all pictures and the name
    of the Lender that sent it to him….


  • if countrywide fails, what becomes of the USA?

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