Posted on 05/10/2006 2:02:50 PM PDT by ex-Texan
WASHINGTON, May 10 (Reuters) - Fannie Mae's (FNM.N: Quote, Profile, Research) chief executive said on Wednesday the U.S. housing market will face significant resetting of adjustable rate mortgages over the next two years and he worries about this sparking foreclosures in some locations.
Daniel Mudd, president and chief executive officer of the government-sponsored mortgage giant, told Reuters in an interview that Fannie Mae models suggest a couple of reset "spike periods" in the next two years, based on past originations of mortgages with adjustable rates and other features such as low initial "teaser rate" periods.
It is still unclear what will happen to the housing market when these mortgages reset at higher rates, especially given some of the weakening in certain housing markets, such as vacation areas with a lot of investment buyers.
"If jobs are pretty stable, if home prices have come up underneath the mortgages to support them and if there's not any incidence of appraisal fraud, it could be just fine," Mudd said. "If in certain geographies, some of those factors are different -- there's some appraisal fraud, or there's an economic downturn or home prices have declined -- it could be a very different scenario.
"In that case, what you'd worry about, really on a neighborhood-by-neighborhood basis, is you have a foreclosure here and you have a foreclosure there and soon you've got four foreclosures on the market and you've got plywood on the windows and that could have a very deleterious effect," on the market, Mudd said.
"EXUBERANT" LENDING STANDARDS
He said underwriting standards still vary widely among lenders, with some maintaining their share of a shrinking mortgage market as they tighten standards while others are still applying "exuberance" to credit risk.
Products such as interest-only adjustable rate mortgages, payment-option mortgages and loans that require no property appraisals create multiple layers of risk that are difficult to model and predict, he said.
Nonetheless, Mudd said he remains confident about the relatively straightforward segment of the mortgage market where Fannie Mae buys and securitizes loans.
"We've been pretty stodgy through this part of the cycle from a credit standpoint," Mudd said, adding that in Fannie Mae's guaranteed trusts, loans average a high 720 borrower credit score and a 53 percent loan-to-value ratio.
Mudd added that in recent months, he has witnessed a "statistically significant" shift back towards traditional 30-year fixed-rate loans as rates have risen and housing markets have cooled. He expects this trend to continue in the near term.
He said he worries less about U.S. housing demand, which remains fundamentally strong compared to supply.
"I think you are seeing right now as rates go up, nationally, home (price) appreciation has come down and originations have slowed, but it's still one of the strongest years ever."
Interest rate increases have had little impact on Fannie Mae's portfolios because the shareholder-owned company hedges symmetrically and does not take a position on whether rates are expected to rise or fall, Mudd said.
"[If] you have a foreclosure here and you have a foreclosure there and soon you've got four foreclosures on the market and you've got plywood on the windows and that could have a very deleterious effect . . ." [Foreclosures are up 72%]
But some people make money from foreclosures. Google Oh, well.
Getting an interest only ARMs in an area with a housing bubble is like playing Russian roulette, except you use more bullets.
I worry about what this will do to the economy on the whole. I don't have nearly that much pity for the buyers and bankers who made those deals though.
If a person lives their life on the edge of a knife sometimes they get their feet cut.
When in doubt wear shoes.
Somehow I don't think the head of Fannie Mae is a very credible commentator on any of this.
Better?
More like a grenade with the pin pulled shoved up your backside.
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