Seattle Bubble

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This is pretty big news (to put it lightly), so I don’t want to ignore it even though I try to focus on Seattle-specific news here usually.

On Friday news came out that Fannie Mae and Freddie Mac will basically be taken over by the US Government this week.  I don’t see any point in rehashing the commentary and news you can find elsewhere, so I’ll just point you to some useful posts on the topic.

Calculated Risk: Original story, follow-up, follow-up, follow-up

Rain City Guide Post by Jillayne, follow-up

Market Ticker: Main story, follow-up, follow-up

I’m sure we’ll be talking about this plenty this week. Yikes.

Oh, one more, be sure to check out the forum thread on this subject that’s been going strong all weekend: Treasury Is Close to Finalizing Plan to Backstop Fannie, Freddie

I thought we could use a thread to discuss the insanity that reigns in the financial world today. You all already know the news. IndyMac taken over by the FDIC in the third-largest bank failure in US history. The bailouts of Fannie & Freddie have begun.

Here’s another take on the weekend news:

Now here’s the problem - while Fannie and Freddie are claimed to be all 80/20 full-doc loans this is in fact a lie.

In fact, a huge percentage of the loans they took on or guaranteed in the last five years were packed with fraud or serious deficiencies in underwriting in some form, whether it be appraisal fraud, claimed income fraud, LTVs as high as 100%, or all three!

So how bad could this get?

Very bad.
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In reality I believe that Fannie and Freddie could suffer as much as $900 billion in losses as this all plays out. This assumes that 10% of their portfolio turns out to be essentially worthless and 20% is impaired by at least 10%, with the rest being 100% “money good.”

Frankly, I think that’s a bit optimistic…
…
See, there are reportedly 75 (or more) banks on the “troubled” list. The FDIC doesn’t publish that list. Gee, I wonder why, especially after Friday, when IndyMac went under.

Not that this should have been a surprise to anyone, given that it was trading at well under a buck for about a week. Do ‘ya think that’s a good stock price?

No, the real 900lb Gorilla is that IndyMac was not on the FDIC’s “troubled bank list”!

So here’s a thread to talk about the banks. Was the IndyMac failure the worst of it, or have we just seen the tip of the iceberg?

P.S. (RE: the title of the post - original comment (#10) / ongoing conversation / Sorry Ardell, I just couldn’t resist.)

I apologize for not making a more timely post on this subject, but it’s taken me a while to wrap my head around everything that’s really going on, and rather than spit out an uninformed piece full of quotes from equally uninformed newspaper reporters, I thought I’d do some actual research first.

So here’s what just happened, as I understand it. Formerly, $417,000 was the maximum loan that you could get and still be considered “conforming” (as in, backed by the government-run Fannie Mae and Freddie Mac). According to yesterday’s release (pdf), retroactively back to July 1 last year, this limit is being raised for a number of specific areas around the country. In King, Pierce, and Snohomish counties, the limit is being increased to $567,500.

However, it’s not as simple as “now you can get a conforming loan for 36% more house.”

The first matter that complicates things is that these new loans made for amounts between $417,000 and $567,500 (known as “temporary jumbo conforming loans,” or TJCs) will apparently not be traded in the same pool as conforming loans on the secondary bond market. After being burned by the sub-prime fiasco, it would appear that traders have wised up a bit, and insisted that the higher-value (and higher-risk) TJCs not be pooled with conforming mortages in mortgage-backed securities. Instead, these TJCs will be packaged for trading in a separate pool all their own. What this means to the person obtaining a TJC is that the interest rate will not necessarily be all that different from jumbo loans. It all depends on what kind of market there ends up being for the mortgage-backed securities full of TJCs.

Secondly, if you think that simply raising the conforming loan limit suddenly makes it a piece of cake to get a loan up to $567,500 in Seattle, you’ve got a surprise coming. The loan guidelines for these TJCs are rather stringent. Here’s a good summary of the new guidelines, and here’s a direct link to the full details (pdf). A few of the more noteworthy details (from CR):

• For principal residences, fixed-rate loans are limited to 90% LTV/CLTV (loan to value/combined loan to value) for a purchase, and 75% LTV/95% CLTV for a no-cash-out refi.
• Minimum FICO for any loan is 660.
• Minimum FICO for LTVs greater than 80% is 700.
• No late mortgage payments in the preceding 12 months.
• Full doc only.

How many people do you suppose can qualify for a TJC with lending standards like that? It’s certainly a far cry from the “anyone that can fog a mirror” guidelines we were seeing in 2005 and 2006.

So are these new TJCs going to be “a big dose of first aid” or the “shot in the arm” that the Seattle Times front page headline is touting? It doesn’t look like it to me.

I’m not an expert in complicated matters like these, and it’s definitely possible that I’ve misunderstood something here. If I’ve gotten something wrong, please point it out so I can correct it.