Market News 3/1/2010 - Fannie Mae will no longer offer Interest Only

Market News: The ongoing bid to reduce or eliminate the mortgage tax credit remains status quo, but the White House wants to cut tax liability savings to 28 cents per $1 of mortgage interest from 35 cents for individuals earning more than $200,000 annually and couples earning more than $250,000 per year. The proposal also would lower deductions for real-estate taxes, and concern that it would hold back the housing market has won it little support in Congress. Lucien Salvant of the National Association of Realtors warns that diluting the tax break would eliminate an incentive for trade-up buyers, but others say the deduction does little to boost homeownership given that low- to moderate-income filers tend not to itemize. Rest assured this topic will come up again. The agencies seem to be have struck on the idea that sellers need guidance on loan quality. Fannie Mae has unveiled a "Loan Quality Initiative" to help ensure that mortgage lenders are adhering to its underwriting guidelines. The action follows an analysis of the leading causes of loan-repurchase requests, which determined that many buybacks stem from loans that fall short of the firm's credit and eligibility requirements. Fannie Mae plans to roll out new quality-control policies in the next few months. SI cannot resist making a comment that the agencies negotiated the relaxation of guidelines with the major loan aggregators over the last 10 years and now take it upon themselves to be the leaders of loan quality. Attached is the lender letter that was sent out. Please note that Freddie and more than likely Fannie will follow with no longer offering interest only products. Freddie Mac said it will stop buying and securitizing interest-only mortgages - a $40 billion a year market - on Sept, 1. Interest-only and alt-A products have been Freddie's downfall: the two loan types accounted for 44% of the mortgage giant's credit losses in 2009. Freddie exited the alt-A market a few years back but the product still accounts for 8% of its portfolio holdings. The GSE currently has $129.9 billion in interest-only mortgages, which comprises 7% of its single-family mortgage portfolio. These loans have an average loan-to-value ratio of 106% and 17.6% are 90 days or more past due. This loan product features interest-only payments for a set period of time before the loan becomes fully amortizing and the borrower has to start making principal and interest payment. Because the initial payments are so low, it is very difficult to modify these loans once the homeowner defaults. Freddie has modified only 0.2% of its interest-only portfolio. Despite these problems, Freddie purchased $800 million in interest-only mortgages in 2009. Look for various cut off dates for deliveries of this product sooner than later.