Oh No...Not Again!

July 2, 2009

By Paul Muolo

Dan Phillips, former CEO of FirstPlus Financial, give me a call: apparently the 125% LTV market is back! And guess who's driving it? That's right: Fannie Mae and Freddie Mac. Late this past week, the Obama administration loosened eligibility standards on the Making Home Affordable program, which allows "at risk" consumers to refi into GSE-backed loans. When the program was first introduced the LTV cap was 105%. Now it's 125% - based on current appraisals. All kidding aside, I hope the program does, in fact, save some borrowers from foreclosure - especially given Friday's unemployment report, which revealed that U.S. companies shed 467,000 positions in June, driving the jobless rate to a 26-year high of 9.5%. If laid-off workers looking for full-time jobs (but working part time) are factored into the numbers, the unemployment rate is really 16.5%. Mortgage servicers can ponder what might happen to their delinquencies in the months ahead if the White House's "shovel ready" works projects don't start hiring soon. Meanwhile, financial service companies soon will begin reporting second-quarter earnings, which will give us clues (hopefully) as to whether the nation will see an economic turnaround in the second half - or whether that's just wishful thinking on the part of economists who are working under the belief that "this thing has to turn around soon." As for FirstPlus, that publicly traded firm collapsed in the late 1990s. The "private sector" high LTV loan that blossomed last decade was based on two government-backed mortgage programs: Title I and 203(k). The original idea behind the programs was to give borrowers money to fix up their homes in the hope that once the repairs/upgrades were done, the house would be worth, say, 100% of the loan amount or even better. It was a nice little grassroots idea that allowed inner city urban pioneers to buy beat up old row houses and fix them. The problem with the program: investors began to use it. And once the private sector got involved, well, you can read a book or two about it. Question: Which investment banking firm (among others) was backing FirstPlus? Answer: Bear Stearns, which is now the property of JPMorgan Chase...

JMO:

With 125% loan to values coming back (they were big in the mid/late 1990's), we are, once again, banking on unrealistic appreciation in the real estate market. The reason the original "125" market fell apart is because homes weren't appreciating and lenders were stuck with loans that exceeded the value of the property (sound familiar?!). If properties don't appreciate by a sufficient amount (plus commissions and closing costs) homeowners will never be able to sell, unless they can negotiate a short-sale, otherwise, just like they did in the 1990's they will just walk away from the property...wait! isn't that what they're doing right now? Big Question: 125% of what? current loan amount, current fair market value???. Another thing to keep in mind....current tax code only permits you to write off mortgage interest on balances up to the value of the property so a portion of the interest paid on these 125 loans will not be tax deductible.