Mortgage Mayhem

The housing market in Colorado is starting to see the light at the end of the tunnel in the home lending market, but nationally, the problems are front and center. Those problems could rebound and send Colorado lenders into a new wave of difficulties.

The good news is that the Fed is about to present a new raft of regulations for the mortgage lending industry:

The plan, which will be voted on at a Fed board meeting on Monday, would apply to new loans made by thousands of lenders of all types, including banks and brokers.

Under the proposal unveiled in December, the rules would restrict lenders from penalizing risky borrowers who pay loans off early, would require lenders to make sure these borrowers set aside money to pay for taxes and insurance and would bar lenders from making loans without proof of a borrower's income.

It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

Ending pre-payment penalties and requiring escrows for taxes and insurance are moderate provisions that simply parallel normal commercial practice.

Eliminating stating income loans and "hard money" loans (i.e. loans made without information about ability to pay because there is an adequate equity cushion in the property) is a more troubling development although the details may provide exceptions. These loans do carry great potential for abuse. But, if there is an adequate cushion of equity in the property, the lender isn't economically harmed even if the loan does go bad. While lenders are being exploitive when they put people into homes that they can't afford who don't really understand what they are doing, there are times when a "hard money" loan may make sense, such as a loan to take legal and/or development work necessary to make an investment property with a cash poor owner marketable.

Right now, however, these types of loans are being misused more than used property, and these kinds of loans aren't critical to the economy's health.

This may be too little, too late, however, because the two biggest providers of funds used to make mortgages with, are in trouble and may have to be bailed out by the federal government.

Freddie Mac shares fell $3.30, or 41.3 percent, to $4.70 in morning trading, while Fannie Mae fell $4.90, or 37.1 percent, to $8.30. Both are at 17-year lows.

Under a 1992 law, if either company fell into financial trouble, the government could take over their operations by placing it in a conservatorship. . . .

The New York Times reported today the government was considering taking over the operations of one or both of the companies, adding to fears that have mounted this week. . . .

Fannie and Freddie play a crucial role in providing funding for home loans by buying up mortgages and packaging them as investments. If they are unable to operate, the implications could be dire.

"Without them, our economy would collapse," Piper Jaffray analyst Robert P. Napoli said in a note to clients. . . .

Today, the Office of Federal Housing Enterprise Oversight — the companies' chief regulator — said both Fannie and Freddie remain "adequately capitalized," after Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke sought to calm investors jitters in testimony on Capitol Hill. . . . .

Congress created Fannie in 1938 and Freddie in 1970 to keep money flowing into the home-loan market by buying up mortgages and bundling them into securities for sale to investors worldwide — thereby making home ownership affordable for low- and middle-income Americans.

Today the companies hold or guarantee around $5.3 trillion in home-loan debt, though under a 1992 law they are required to hold only a fraction of what is mandated for commercial banks as a financial cushion against risk.

Even if Fannie and Freddie do stay in business, with or without a government bailout, a decline in the amount of funds those firms have available to lend would greatly cramp the housing market.