Dismal Deja Vu: Fannie & Freddie Lower Lending Standards

Tyler Durden's picture

Submitted by Tho Bishop via The Mises Institute,

Stop me if you’ve heard this one before, but Fannie Mae and Freddie Mac are lowering mortgage standards.  On Monday, the two government-backed housing giants revealed a new program designed to boost mortgage origination among first time buyers and those with low to medium incomes. The new program, which will initially be limited two non-bank lenders, will allow borrowers to include the income of residents that aren’t actually on the mortgage, as well as make it easier for borrowers to include income from second jobs.

While these changes may strike some as sensible, anyone who has seen The Big Short would have valid concerns in the oversight of these looser lending standards – especially when you consider that the companies responsible for mortgage origination will not be the ones holding the mortgages, Fannie Mae and Freddie Mac will. It’s always easier to make loans when you know the taxpayers are the ones that will be holding the risk.

Not only does this program increase taxpayer risk, it does nothing to solve the real issues in the housing market.

While it’s true that America’s home ownership rate is at a 51-year low, this has less to do with current lending standards and has more to do with housing prices rising much faster than household income.

One of the factors contributing to this is interest rate policy, which disincentives traditional savings and has driven would-be savers to look for higher yield investments. With growing concerns about a bubble in stocks, many Americans have turned to housing with investment-home sales increasing 7% in 2015, the first increase in five years.

Given this problem, a sensible solution would be to reverse the Fed’s low interest rate policy and to eliminate various levels of government regulation that make it difficult to build additional housing. But we are not living in sensible times. So government instead for this new lending program that will simply make it easier for some families to borrow money for a house whose price may be artificially high.

Of course while there is reason to worry about history repeating itself in the case of Fannie and Freddie, it’s still not quite as crazy as the FHA’s decision earlier this year to make it cheaper for first-time home buyers with sub-680 credit scores to get into the housing market.

Because the only thing government is worse at than pricing risk, is learning from past mistakes.

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Philo Beddoe's picture

Once somebody lends money to my mother-in-law it is game over. 

Million Dollar Bonehead's picture

All according to plan. Soon, the ruling class will own all the land and serfs will once again serve, as you were meant to. Work diligently and you will be allowed to live peaceably. The lazy, the useless eater, the rabble rouser - shall be torn and burned alive on the Altar of Kothar Wa-Kassis. Long live Dear Leader Hillary! May she feast forever upon the livers of the ungodly.

American Psycho's picture

Paging Dr. Burry, paging Mr. Eisman that is a short position that needs attention. 

Automatic Choke's picture

of COURSE, because if gasoline won't put the fire out, you need to pour on more gasoline.

NoDebt's picture

Access to a no-money-down government-subsidized low interest mortgage is a basic human right.  Just like having an Obamaphone.


JRobby's picture

Way too late. It would not have been so obvious 2 to 3 years ago.





11b40's picture

FED has been pushing on a string since 2009.

NoVa's picture

The sad irony to the G$Es return to higher risk profile loans is that the G-Fee they charge the loan originators is ultimately paid for by the borrowers through a higher note rate and loan-level price adjustments.  The G-Fee is still at an elevated level for a few years now so that the G$Es can replenish their equity capital base to prepare for future turmoil. 

Oh, but wait, The Treasury sweeps all earnings out of the G$Es and returns cash earnings to the Treasury which then spends on programs as directed by Congress. 

Poor get poorer while the receipients of federal funds get richer.




The_Dude's picture

Can't let those kids living in the basement escape debt servitude.   Now MA & Pa can borrow even more based on their high paying,  upwardly mobile barrista gig.

E.Shackle.Ton's picture

"Dog shit, wrapped in cat shit"

Seasmoke's picture

Fannie and Freddie stealing from Americans. One house at a time.

BSHJ's picture

Mortgage amounts (or any loan amount) do not matter.....all that matters is how low the monthly payment. When the payment is low enough, anyone can afford.....anything.

GunnerySgtHartman's picture

Exactly right - just look at these idiots buying vehicles on 6, 7, even 8-year loans!

JRobby's picture

What they are saying is they have to raise the % housing payment of total monthly income or nothing moves.

The credit scores are increased behind the scenes in stealth to meet the requirements.

Eireann go Brach's picture

Obogonomics at work!

hooligan2009's picture

that would be "Fraudie" and "Funny" - not Fannie and Freddie

The Duke of New York A No.1's picture

Home Buyers & Construction Workers are Voters too ya know.

GunnerySgtHartman's picture

We just don't learn, do we?!  Fannie and Freddie should have been LIQUIDATED!!

bada boom's picture

Amazing, they are keeping up home prices with declines like that in ownership.  Municipalities are grateful for the Fed.

What about 'economics'?  Less demand = Lower prices.  Oh, that's right.

Ownership doesn't line up with existing home sales.  What are people doing, moving every year? Or Flipping?


ali-ali-al-qomfri's picture

new mortgage program; LTASB (lower than a snakes belly)

slither on in to your nearest Wells Forgone an get yours today,

and yours, and yours, and yours...

Risky's picture

What could go wrong?

Angry White Guy's picture

Quite a bit.  But I guarentee there are vampires out there that are planning on that, betting on that, COUNTING on that.

buzzkillb's picture

"While these changes may strike some as sensible". Just like thinking you may get brain cancer and removing the brain as a precaution.

I was wondering what would be the sign for the beginning of the housing bubble. Cannot wait to see what else they add to this list over the next year. We have not seen the housing highs yet. Dog income, cat income, fruit trees with the possibility of what you can sell the fruit for, how much you can charge to store a car in the garage; wrap it all into insanity.

JBPeebles's picture

I'm not on board with the waiters-blew-up-the-housing-market meme. Both sides of the contract have a legal and moral responsibility to do what's right. Bankers can't bundle loans that are overrated by the ratings agencies, then sell them off like they did. According to William Black, the banks committed fraud on a massive scale. Regulatory capture occurred. Bets on the likelihood of default called collateral defaults swaps (CDSs) incentivized the deception, with high commission encouraging sale, spreading vast amounts of unknown counterparty risk into the system.
That said, growth in housing requires income, too much income for first-time buyers. Credit score can be perfect. If income requirements are too high no one can buy with the housing market the way it is. Is this just another Boomer legacy, pricing out future generations of the affordability they enjoyed at that life stage? That on top of the debt--college ad federal--the young are supposed to pay off, in this job-drained Obama economy? Please.
Want real recovery? Let all the loose money flow down to offer low- or no-interest loans. The money's free for the banks, and if they regulated properly they can't go to the casino and play with derivatives but go back to their raison d'etre--loaning to Main Street.

E.Shackle.Ton's picture

If you believe that you need recage your gyro.

11b40's picture

Once upon a time, a 20% down payment was a standard requirement.  That kept everyone honest, but didn't make the realtors or the banks happy.  It did, however, keep prices pretty much in line, as people had to actually save or borrow from family to scrap together the down payment.  Oh, what a cruel world it once was!

But let's do talk about affordability.

My first house had two litle bedrooms, and no central air.  Gravel driveway, vinyl floors, and formica countertops, with a 1 car carport.  No dishwasher.

Houses now are like cars, loaded with way too many expensive accessories that drive up the cost, both short term and long term.  I am surprised that we don't have 50-60 year mortgages already, but they may be coming.

Osmium's picture

The banks need to unload their over priced shit boxes to someone.

corporatewhore's picture

i'm waiting until they eliminate college loans from the dti calculation.  that's when it's time to sit back and watch the shtf.

We Are The Priests's picture

In the profound words of Maynard James Keenan, "Learn to swim"

the grateful unemployed's picture

get yourself an interest only loan, right now real rates are running well ahead of nominal, the fed steps on the hyperinflation land mine and youre goddam filthy rich in a hurry. fed is not encouraging speculation, dont want to get libeled here

Tiwin's picture

The Big Short 2. Coming to theatres fall 2019

scubapro's picture



the irony is amazing....after prices have soared/recovered, help those least able to homeownership (maintenance, ins, taxes),  buy a home using ez-ier standards.

they couldnt afford it in 2011, so now when much more expensive, help them sign a mortgage that they are MORE likely now to default upon.   ezier standards increase likelihood of default.  paying a high price INCREASEs the likelihood of foreclosure as no equtiy can be built.  

IF they really wanted to help people andor smooth out real estate cycles, they would make it MORE difficult to borrow against collateral that has risen 'too fast'....while after crashes THEN help everyone with a pulse 'qualify'.   But the banks dont work for you or I now do they.

trip kitchen's picture

Hey I recently quit smoking.  It was a lot of work, but I increased my monthly cash flow by about $200.  I wanna claim that as income on my mortgage app.  

samsara's picture

Fannie and Freddie...

mmm  arenn't they the ones where the Banks dumped all their bad mortages into, thus cleaning their books,  so that the American Citizens would have to pay for ALLL those bad mortages during the subprime blow up?

tarabel's picture



This is the pilot speaking:

Everybody calm down. 

We have plenty of gas to reach the crash site.

Mr. Bones's picture

When you've lost control and you're pretty sure you're about to crash, hit the accelerator - not the brakes.  It probably won't help, but at least it will be over faster.

joego1's picture

The art of setting policy in a vacuum- There is no external "noise" to screw up a bad decision.

Mr. Bones's picture

Would you say that these are the lowest lending standards since Lehman?

NEOSERF's picture

Basically I look at this as a giant FU from these two nationalized entities that aren't being released to be free companies again so if that is the case and all profits are going to be forever stolen by the Treasury then not sure the management whose bonuses no doubt are tied to loan volume increases has anything to lose by lower the standards to NINJA again.

BabaLooey's picture

Cue Maxine "The Baboon Straight Outta Compton" Waters

"There is no finer man than Franklin Raines. Honest and full of integrity"

On December 21, 2004, Raines accepted what he called "early retirement"[4] from his position as CEO while U.S. Securities and Exchange Commission investigators continued to investigate alleged accounting irregularities. He was accused by The Office of Federal Housing Enterprise Oversight (OFHEO), the regulating body of Fannie Mae, of abetting widespread accounting errors, which included the shifting of losses so senior executives, such as himself, could earn large bonuses.


moonmac's picture

Remember when Slick Willie was pounding Fannie and Barney Frank was blowing Freddie while funding a Male Prostitute business in his basement? Oh the good old days.

Uranium Mountain's picture

Good, cause I want to sell my house.  I just need that precious buyer to accept top dollar.  Any Chinese readers out there??? Now if they would start 40 or 50 year loans, (you know cause we will be working and living longer > 100 years) that would be great.  Homes for everyone and keeping the shit show steaming on.

Stan Smith's picture

I can tell you first hand that anyone who doesnt think Fannie, Freddie, and the FHA arent the largest drivers of the previous collapse -- and the one coming -- is naive.

Most mortgage brokers (and im quite sure banks as well), especially prior to the meltdown, got constant documentation that FHA was going to investigate them if they didnt expand their guidelines to achieve a certain level of "non-conforming" loans. Translation -- those who wouldnt normally qualify. And its different for different areas as well. It's not a blanket number. I promise you each zip code in the country has a percentage that the FHA wants to hit. Of course, getting there is what caused this in the first place.

We dont have to venture a guess as to why really... do we? And does it even matter? The irony is, of all the avenues of finance in this country -- stocks, bonds, mutual funds, commodities, and so on and so on... the one with the worst level of regulation is by far the mortgage industry. Prior to the collapse, it was literally the Wild West. It's far, far better now. But its still pretty loosey goosey compared to most other lines in the financial industry.

Any one with a phone and an investor can get an NMLS number and be on their way. The idea that THIS group of folks needs to be more lenient that they've been is insane. No malice here either. Just pointing it out as someone who's been in multiple fields of finance.

woody3405's picture

As long as you move in 5 to 7 years it doesn't matter how low the rates are - you are only paying interest on the balance.   Unless they can get you to refi - then you start all over with another 5 to 7 years of pure interest.

Brilliantly rigged game, isn't it?