Coming Soon: ULTRA Sub-Prime

Most of us who have delved into the causes of the global meltdown know that it arises fundamentally out of fractional reserve banking and excess leverage. Those were the underlying causes and exacerbating factors- however what was the trigger?

Sub prime. Sub prime was the practice of giving mortgages on high priced houses to those who had no forseeable means of repayment. It was pioneered by Fannie Mae and Freddie Mac under the Clinton administration in an attempt to get more poor people into owning their own house.

Unfortunately, when the housing market collapsed, many were left in negative equity and simply walked away/ could not afford repayment.

The banks had hidden this risk by packaging sub- prime debt with normal debt and sold the entire thing as a collateralised debt obligation (CDO).

So you would be right in thinking that the last thing the institutions should be doing is delving further into sub-prime.

Fear not, the banks aren't going to be lending any more under sub-prime terms. They are, in fact, going to be lending under ultra sub-prime terms.

Fannie Mae will drop some credit-score requirements, reduce income-documentation standards and waive the need for appraisals in some cases, according to a notice yesterday to lenders posted on the Washington-based company’s Web site. The changes apply to loans that the company owns or guarantees.

The company, which accounts for more than 40 percent of the $12 trillion in U.S. residential mortgage debt, is seeking to break a “logjam” in refinancing and allow more homeowners to take advantage of near-record low interest rates, according to Brian Faith, a Fannie Mae spokesman.

Its absolutely astonishing that they haven't yet learnt the lesson. At this point, they are simply chasing their losses by doubling their bet... a well known compulsive gambler's habit.

Read the full article here

It sounds stupid on the surface but these are loans the GSE's already have on their books and I guess they figure something coming in is better than nothing, and a foreclosure/vacant property costs them a lot more in the long run.

The changes apply to loans that the company owns or guarantees.

reply to post by mythatsabigprobe


As far as I can make out, they are refinancing up to 80% of the new mortgage, based on the previous market valuation.

This means any houseowner who has more than 20% equity in their property will be able to unlock it.

Combine this with the lowered checks for refis and you have a potential problem in the form of people refinancing and then defaulting after refi'ing, which would be an even worse scenario than foreclosure.

S+F

We have a very long way to fall because of this.

In 3 years if we are still alive we will be looking at where we are now as the good ole days.

We have an FHA loan at 6.5 percent. We just got a call from the bank, on the new program where they want us to refinance to a 5 percent.

Well, we looked at the paperwork, and guess what. We figured out why the banks are pushing it.

They want to finance the original loan amount. Not the current balance.

So the money we paid off last year would not matter. The loan amount which now should be 95k, they want to take back to 98 k. You also have to repay the
title fees and tax. So we said we will pass. Not worth the small amount we would save every month.

Originally posted by amatrine
We have an FHA loan at 6.5 percent. We just got a call from the bank, on the new program where they want us to refinance to a 5 percent.

Well, we looked at the paperwork, and guess what. We figured out why the banks are pushing it.

They want to finance the original loan amount. Not the current balance.

So the money we paid off last year would not matter. The loan amount which now should be 95k, they want to take back to 98 k. You also have to repay the
title fees and tax. So we said we will pass. Not worth the small amount we would save every month.

Interesting Information

Thank you for that

We need more first hand posts about this

reply to post by amatrine


Interesting... thanks for confirming my suspicion about them refinancing at previous (defunct) market value.

Now imagine if they had simply allowed you to refinance with a very poor credit rating check... say you were unemployed or desperate- they would capitalise on that to get you to refinance.

Alternatively you could have refi'd and taken the unlocked capital and run away to the Bahamas!