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Saturday, November 2, 2024

Toxic Exploding Freddie Mortgage Factory To Close

Toxic Exploding Freddie Mortgage Factory To Close

Courtesy of Karl Denninger at The Market Ticker 

Gee, what took you so long?

McLean, VA – Freddie Mac (NYSE: FRE) announced today that on or about September 1, 2010, the company will cease purchasing and securitizing interest only mortgages, including Freddie Mac Initial InterestSM fixed-rate and adjustable-rate mortgages. Additional information will be provided to Freddie Mac Seller/Servicers in an upcoming Single-Family Seller/Servicer Guide bulletin.

Interest only mortgages, including Freddie Mac Initial Interest mortgages, provide for interest-only payments for a specified period of time beginning with the first monthly payment after the note date, and principal and interest payments on a fully amortizing basis for the remainder of the mortgage term.

These "vehicles" are an outright scam for 99% of all borrowers.  Their exclusive proper use is as a bridge loan.

Let me explain.

Let’s say you have a $500,000 house you wish to buy.  An I/O loan for the first two years (for example) at approximately 3.5% (currently) would have an interest-only payment of $1,458.

But when the two years is over assuming the interest rate does not change you now have a 28 year amortizing loan and the payment jumps to $2,329.70 – an increase of about 60%.

This is damn near what you have with an "Option ARM", which is similarly explosive when it has an initial "teaser rate."  For example, the same loan with a 2% "initial teaser" interest-only has an initial payment of $833.33, but jumps to the same $2,329.70 if it resets to 3.5% once the "teaser" is over.

Note that these ARM rates are very cheap too – if rates go up it gets worse – much worse.  Indeed if the rate resets to a fixed 5% then the amortizing P&I on the remaining 28 year term is $2,756.38.

Good luck making that payment if you qualified on the "interest-only" term’s expense.

Freddie (and Fannie) had no business getting involved in these toxic self-immolation devices in the first place as they are intended to do exactly one thing – asset-strip the borrower by forcing him or her to come back after the interest-only period and refinancing.

In an environment where home prices are not advancing, however, such refinancing is of course impossible, which leads immediately to foreclosure.

The not-amusing part of this is that it was the market’s collapse that forced government supported enterprises to stop looting the American citizen.

Say thanks to the government – both past and present administrations – for conspiring with our banks to literally flense the American Citizen for the benefit of Wall Street.

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