Thursday, January 7, 2010

Does the Fed Want to Crash the Housing Market a Second Time?

Economic Policy Journal -

There is a curious rule change that was made at government controlled Fannie Mae. And it was announced on one of the top news dump days of the year, December 24, Christmas eve, when you were away visiting relatives.

If you have to relase news and you don't want anyone to see it, December 24 is one of the days you dump news. That alone should cause you to look twice at the news. And in this case, you should look real close. I think it signals that the government may be preparing to take the housing market down one more time.

Specifically, here is what happened when Santa Claus was already in his sleigh, trying to bring good cheer. Fannie Mae changed one of its policies for disposing of foreclosed homes.

Typically when a home is repossessed, the government-sponsored enterprise will put the property on the market and around the same time ask the servicer for the loan files for Fannie to review. If the review finds the mortgage was not underwritten to the GSE's requirements, Fannie can make the lender reimburse it for any losses on the sale of the home.

In a Decmber 24 notice to servicers, Fannie said that from now on it reserves the right to accept offers for repossessed homes without notifying the servicer and regardless of whether the loan review has been completed, American Banker reports.

Previously, if the servicer provided the files within 15 days of Fannie's request, the GSE would hold off on accepting offers for a house. In such cases, if the servicer thought it could get a better price for the house, it had the option of buying the home from Fannie rather than indemnifying the GSE for any losses.

Got that? Fannie can now just dump a house without getting back to the servicer to see if the servicer would be willing to pay more for the house.

This is a license for Fannie to unload its inventory at fire sale prices without the servicer being able to step in and say "Hey, I'll buy back the house if you are going to try and sell it that cheaply."

Is a fire sale coming? Sounds like it to me.

The GSE has estimated that 14% of the Fannie Mae guaranteed mortgages now have mortgages that are bigger than the homes are worth.

Happy New Year.