everyloan.com

Interesting commentary from one of my Cohorts.

I heard an analyst yesterday saying that this period in time for the economy is much like the 1987-1995 time period…the birth of the 125% loan. I am not sure however. I keep reflecting on the fact that inflation is much higher (or will be much higher) than it was then, which could keep interest rates abnormally high (more like the 1980-1987 period). This is not necessarily bad for home prices but it could adversely affect the value of 125% loans that are made at a high interest rate, but their value keeps declining as market rates move higher. But, if the 125%s are adjustable, then problem solved…their rates move higher with the market.

Regarding the 125%s:

The economic stimulus package signed into law by the President last Wednesday allows Fannie Mae and Freddie Mac to purchase loans at 125% LTV. At least this is what I read in a snippet. Do not quote me as I have not heard anything since. It makes sense however. Everything that Congress, the President, and the Fed are doing is designed to put a floor under housing prices. Their actions will shore up the collateral behind the mortgage backed securities (as home prices stabilize) and thereby stop the bleeding at the banks that hold these securities. It will also result in the market coming back for mortgage backed securities, thereby easing the credit crunch.

As home prices end their decline and start to ascend again, the 125% loans (that appear on their face to be so risky) will become better loans (as the collateral value rises and the LTV declines). The 125%s are needed right now in order to help those home owners that are under water, and purge the bad loans from the system. Their very existence will have an immediate effect on home values, as many people will stop walking away from their homes that are worth less than they owe on them today, but maybe not tomorrow (psychology will change).

Also, the media will start talking about the turn in housing which will have the affect of a self-fulfilling prophecy (again, a change in psychology). The 125% loan is a huge part of the plan to turn home prices around.

The fact that government supported agencies are going to be allowed to purchase the 125% loans means that regulations have to loosen up. This is the research that I have to explore. My belief is that they will be allowed only to make up the difference in devalued homes, not to pay off credit cards (not cash out). I believe that their will be tough qualifying guidelines, at least at first…”until the ball gets rolling the other way”.

There will be a shake-out period during which the people that cannot qualify for a new loan lose their home to foreclosure. This should go on for roughly a year after the implementation of the economic stimulus plan. During that time, home purchases will increase, but so will inventory. At some point, maybe a year, inventory will start to decline appreciably. Homeowners that can hold on will hold on and wait for the turn around. Builders will start to build again and buyers will come back because they will notice the turn in the housing market.

This is my “back of the envelope” analysis. I am open to your opinion.

Thanks,

Jeff