Freddie and Fannie are Slow Learners
Freddie Mac announced that, come this September, it will no longer back interest-only mortgage loans. This is good news but raises two questions. First, what took Freddie took so long to pull the switch? Second, when is Fannie Mae going to follow suit?
It also seems that the government is slow to learn that pumping more taxpayer money into the real estate bubble is not working out so well. The foreclosure rate in February 2010, although down 2% from January, was still 6% greater than in February 2009. This was the 50th consecutive month of year-over-year increases in foreclosure activity. (Source) What is our real estate economy gaining from all of our taxpayer money being thrown down a rat hole? I’m not seeing a reasonable return on taxpayer investment. The real benefit has been to people who were able to buy homes at declining prices, including short sales and foreclosures. That would have happened all by itself.
This brings me back to Freddie’ interest-only loan announcement. It was apparent to everyone but Freddie and Fannie that a high percentage of interest-only loans were taken out by borrowers who had poor cash flow and over-borrowed to buy something they really couldn’t afford. Not surprising, the delinquency rates for interest-only loans were almost three times higher than for a conventional loan. Freddie said it had actually begun “phasing out” interest-only loans last year, after “big losses” on such loans the three prior years. Wow – it took a mere three years to react!
Now Fannie – they are still thinking about the problem:
Fannie Mae, too, has announced huge losses on interest-only mortgages, but a spokeswoman would not say whether the company might shut off these loans.
Let’s see: “Huge” losses on risky loans, now propped-up with billions in taxpayer money. What other input is Fannie waiting for?
Do you want your taxes used to back high-risk loans having an established track record of huge losses?