Housing Doom Housing Bubble Blog

Earlier this week, there was speculation in the market that the GSEs would be allowed to increase their portfolio caps in response to this request:

U.S. Senator Charles Schumer on Tuesday urged Fannie Mae and Freddie Mac’s regulator to temporarily lift the companies’ mortgage investment holdings to act as a market stabilizer.

"Raising the portfolio cap would allow Fannie Mae and Freddie Mac to provide needed stability to the secondary mortgage market," the New York Democrat said in a statement.

Yesterday evening, OFHEO Director James Lockhart released a statement which reads in part:

The portfolio caps were put in place last year because of their serious safety and soundness issues in response to Fannie Mae’s request to increase the portfolio caps, we issued a letter today to Fannie Mae. We also issued a response to Senator Schumer’s recent letter on this topic, which is attached. The letters indicate that we will keep under active consideration requests for an increase in the portfolio caps, but we are not authorizing any significant changes at this time. We will continue to reassess that position, especially in the affordable housing area.

John has already posted the entire text of the letter to Senator Schumer, [which is all well worth reading] but for those of you who would just like the highlights until you get back from your picnic or washing the car, here are some of the more salient points:

Current Caps on Securitization
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Many thanks to Housing Wire for providing this link to a PDF image of the letter on GSE portfolio cap relief from OFHEO Director Lockhart to Senator Schumer. Housing Doom has taken the liberty of transcribing the entire text of the letter as follows.

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August 10, 2007

DELIVERED BY FACSIMILE
AND FIRST CLASS MAIL

The Honorable Charles E. Schumer
United States Senate
313 Hart Senate Office Building
Washington, DC 20510

Dear Senator Schumer:

I am pleased to report that, in fact, the Enterprises have provided notable support to the markets consistent with their charter mandates by securitizing and purchasing over $120 billion in mortgages in June alone. In discussions with Enterprise customers and other market participants we have confirmed that the Enterprises have been meeting customer needs. At the same time, I must note that both Fannie Mae and Freddie Mac remain "significant supervisory concerns" after more than three years of remediation efforts.

Present Market Activities

The Enterprises are participating in the mortgage market in two key ways:

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Housing Doom welcomes mortgage banker Jon Miller, who was generous enough to contribute his perspective on the present challenging environment in his sector. Jon’s discussion is highly technical, but if we’ve learned nothing else these last few months, complexity is at the heart of many of the problems in the housing market today. So Doomers are encouraged to brew up an extra strong cup of coffee and dig right into this article. The author has certainly put a lot of effort into it.

Summary: Stagnant or falling home prices and rapid changes in the business and financial environments are making it hard for mortgage professionals to properly serve their clients. For a small or medium sized company it is challenging these days just to stay in business.

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Subprime Credit Liquidity Crisis — www.chicagomortgagefinance.com

From Borrower to Mortgage To Secondary Market — The REAL Problem.
By Jon Miller, Senior Mortgage Banker
Chicago Bancorp

The Borrower

Chicago, IL — Consumers interested in purchasing or refinancing a home will pay a given interest rate based on their personal financials, current market conditions and product/debt strategy chosen. Risk assessment is based upon the borrower’s income and debt ratios, credit scoring and history, liquidity and asset base, leverage scenario and level of approval obtained which, criteria for the aforementioned is tightening significantly by the day. If the borrower’s credit will not permit A+ levels of qualification - or if income and assets cannot be sufficiently documented - an alternate course of lending is needed. Unfortunately, this course of subprime and Alt A lending has not been utilized in the way it was intended by the borrower and in some cases, the lender as well. Now we have issues. Starting from scratch, let’s take subprime for example -

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