Jonathan Laing of Barrons says that Fannie may fail

He says so here:
The article came out while I was on my way to India, and I just picked it up. In any event, three aspects of the piece suggest to me that he is a little aggressive in his forecast of Fannie's demise.

First, he says that 40 percent of subprime mortgages in Fannie's book will default. This is an extraordinary number (20 percent seems to be closer to consensus), unless his view is that the good subprime stuff has already refinanced, and what remains in the portfolio is toxic. In any event, it would be nice to see how he came up with the number.

Second, he says that 4 percent of the prime book will default. This would be four times the long-term historical average; moreover, most of the defaults would be covered by mortgage insurance, meaning that for Fannie, they would be prepayment events rather than credit loss events (unless the MI companies fail too--that is another story).

Finally, he says that the company's Low Income Housing Tax Credits have little value, because it will be awhile before it will have taxable income against which to apply them. But so far as I know, tax credits are resellable (word?), and there has always been a hefty demand for them. If Fannie can't use the credits, they should be able to sell them at market value to an entity that does (if I am wrong about this, I would appreciate the correction. I am not a tax attorney).

Change these three assertions in the article, and Fannie's capital position looks fine.

Jonathan Laing is a fine reporter. He is also the reporter who in 1989 wrote an article that gave credence to Mankiw and Weil's forecast of a 47 percent decline in real house prices between 1987 and 2015. In the next year or two, we'll see whether his prediction errors are negatively or positively correlated.

Where's Fannie?

Rhonda Porter writes:

New Conforming Loan Limit Won't Help Refi's w/2nds...FHA May Save the Day

Fannie Mae's underwriting guidelines for the temporary conforming loan limits have been released and it looks like the new loan amounts are not going to be as helpful as many had hoped. The new guidelines for loan amounts between $417,001 - $567,500 in King, Snohomish and Pierce Counties are far more strict.

The biggest whammy is that if you were hoping to combine your first and second mortgage (or heloc) into one new conforming-jumbo mortgage, you're out of luck. Fannie is not allowing any "cash out" refinances. This means that even if you were just paying off the two mortgages and not receiving a nickle back at closing--it's not going to fly.

You must have a minimum of 660 credit scores for a fixed rate purchase for a LTV of 80% or less for a purchase using a fixed or adjustable rate.

Limited cash out refinances are allowed up to 75% loan to value with a minimum 660 credit score. Limited cash-out means that you are allowed to roll in the closing costs to the refinance and receive no more than $2000 cash back at closing (no second mortgages/helocs can be included in the refinance).

BTW, Rhonda's blog is one of the most useful tools I know for understanding what is really going on in the mortgage market. And if all originators were as well informed as Rhonda, we would almost certainly not be in this current mess.

My justification for the GSE subsidy has long been that it allows the institutions to provide liquidity to mortgages when it is drying up in other credit markets. In fact, I have always thought this role has been much more important than any role "encouraging homeowing" or "affordable housing." My interpretation of the evidence to this point is that GSEs have done a good job of liquidity provision, but have had a marginal impact on ownership and a not particularly large impact on affordability.

The underwriting policy that forbids refinancing of second and HELOCs, even when the total LTV is below 80 percent, means that Fannie is backing away from its mission to provide liquidity, just when we need it to embrace that mission most.

Photo: Gordon Smith, Great Northern Railway, New England Tablelands

Back last October I carried an introductory story on the history of New England's railways. I see that Gordon Smith is presently running a series of photos on the Great Northern Railway, the inland line that used to link Sydney and Brisbane.

The series starts here.

Charles Dickens would support the Estate Tax

From Our Mutual Friend, Chapter 1.

'And what if I had been accused of robbing a dead man, Gaffer?'
'You COULDN'T do it.'
'Couldn't you, Gaffer?'
'No. Has a dead man any use for money? Is it possible for a dead man to have money? What world does a dead man belong to? 'Tother world. What world does money belong to? This world. How can money be a corpse's? Can a corpse own it, want it, spend it, claim it, miss it? Don't try to go confounding the rights and wrongs of things in that way. But it's worthy of the sneaking spirit that robs a live man.'