Can I borrow the full amount and an extra 25% too?
Apparently the answer to this question is yes. CNBC is reporting that home ‘owners’ who refinance their mortgages through loans backed by Fannie and Freddie will be able to borrow up to 125% of their homes’ value (hat tip Marshall Auerback). That’s not a typo: we’re talking no-money down and 25% cash back. Sign me up.
Homeowners refinancing their mortgages through loans backed by government agencies will be able to borrow up to 125 percent of their homes’ value under new regulations enacted Wednesday.
The rule changes, part of the government’s attempts to restore housing affordability and stem the foreclosure crisis, apply to loans backed up by Fannie Mae and Freddie Mac.
Previously, homeowners could borrow up to 105 percent of their home’s value. The new loan-to-value ratio is set up at 125 percent in a further effort to address those mortgage holders who owe more than their homes are worth.
"By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly,” Treasury Secretary Timothy Geithner said in a statement.
Is this sitting well with you? Doesn’t this seem like the reckless lending which got Fannie and Freddie nationalized? Well, if you were wondering whether Obama, Geithner and Summers were trying to reflate the economy by bringing back the bubble, I don’t imagine you will find better proof.
Apropos borrowing 125%, you will recall that over a year ago I was wondering why U.K. mega-lender HBOS wasn’t writing down more assets because they were a recklessly lending – you guessed it – 125% loan-to-value.
Looking through old e-mails, I read an article from the FT in 2006 that surfaced claiming that HBOS (Halifax Bank of Scotland)were poised and ready to go offer loans for 125% of value. That’s right, HBOS thought it a good idea to cover 95% of the house price and loan another 30% over appraised value unsecured as a personal loan.
Now that the UK has joined the housing bust, one must ask where are the massive writedowns that have to be sitting on HBOS’ books? Why aren’t they looking to do another rights issue like RBS? I fully expect some pretty horrific things coming from HBOS as the housing crisis heats up in Britain.
We know what happened there: HBOS would have gone bust after Lehman had Gordon Brown not foisted it upon Lloyds. And Lloyds was a bank that subsequently was almost fully nationalized despite having a relatively clean balance sheet – all because of its merger with HBOS and HBOS’ reckless lending.
Now that the U.S. government is underwriting similar policies on this side of the pond, shouldn’t we expect things to go seriously pear-shaped here too?
Addendum: just in case it isn’t clear, this measure is intended to keep banks from taking writedowns. A homeowner now 20% underwater can borrow the full amount of the original loan even though the house is worth 20% less than that amount. The home ‘owner’ stays in the house. The bank gets its regular payments (and a nice re-financing fee to goose earnings in Q3). And no one defaults. It’s all good, right?
Second addendum: Yves Smith, who also got the same e-mail, notes “in most states, a purchase money mortgage is non-recourse, but a refi is. So some borrowers will put themselves in worse shape it they take up this offer.” Check out her post here.