Capitialism Redefined, $729k Loans Return-Almost, Japan Economy Shrinks 12.7% Annualized in 4Q2008

Capitalism Defined
In traditional capitalism, you have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

In American capitalism you have two cows. You sell one, and force the other to produce the milk of four cows. You are surprised when the cow drops dead.

In French capitalism you have two cows. You go on strike because you want three cows.

In Italian capitalism you have two cows, but you don’t know where they are. You break for lunch.

In Real capitalism you don’t have any cows. The bank will not lend you money to buy cows, because you don’t have any cows to put up as collateral. (MORE DOWN BELOW!)

Fannie Suspending Foreclosures
Are foreclosures a thing of the past? That is an interesting concept in a capitalist society. But Fannie Mae announced that it is suspending all foreclosure sales and evictions of occupied properties through March 6 in anticipation of the Administration’s national foreclosure prevention and loan modification program. In addition, the company adopted a national Real Estate Owned (REO) Rental Policy that allows renters in Fannie Mae-owned foreclosed properties to remain in their homes or receive transitional financial assistance should they choose to seek new housing. JPMorgan Chase and Bank of America followed Fannie, using the March 6th date. Citi, in a blatant display of one-upmanship, suspended foreclosures until March 12th if Citi owns the 1st mortgage. The White House is considering a plan that would use federal funds to buy at-risk mortgages and refinance them, thereby making them more affordable to the homeowner.

Freddie Mac said it will allow some borrowers to rent out their homes after losing them to foreclosure so as to prevent properties from becoming vacant so they won’t fall into disrepair. Freddie also said it will allow renters to remain in their homes even if their landlord enters foreclosure. It has about 8,500 properties in the foreclosure process, but many are vacant. Fannie has been doing the same thing since January. Tenants and former property owners need to demonstrate they have enough income to pay the rental bill. Freddie Mac also said it would consider reinstating a mortgage for those borrowers who can qualify for a modified loan.

Lenders Adjust Credit Score Requirements
I think that it will be fascinating, with all of the potential millions of folks who are watching their credit scores drop, to see how all the investor FICO changes impact the future of lending. For example, just in the last few days: CitiMortgage now requires the following minimum FICO scores on all FHA and VA loans, including FHA Streamline and VA IRRRL. For loans ≤ $417,000, it is 620, above $417 borrowers need a 660. Well Fargo wholesale will require, for MI in Florida, Arizona, and Nevada, all conforming loans to have a minimum FICO of 720.

Wells Trims Broker Business
Wells Wholesale put additional restrictions on mortgages, for mortgage insurance purposes, primarily in Florida, Arizona, and Nevada. For example, 2nd homes in Florida are to have a maximum LTV of 80%, and non-conforming loans are not allowed on 2nd homes in those three states. In addition, they lowered DTI levels and lowered LTV levels for condos.

Stimulus Update–Loan Limit Caps and Timing
President Obama is expected to sign the $790 billion economic stimulus bill today. It includes an expansion of the first-time homebuyer tax credit ($8k, no pay-back) and restores to $729,750 (in the 2008 Stimulus Act) the upper loan limit in high-cost areas for Fannie Mae, Freddie Mac and FHA loan guarantee programs. For HECM (reverse mortgages) the Act allows for an increase in the current loan limits. The bill has over $50 billion in it for foreclosure mitigation. Remember that, just like last year, a few things MUST happen before any investor will accept applications with higher loan amounts. The first is that the Agencies (Fannie Mae and Freddie Mac) and FHA must determine whether pricing, policy and/or delivery requirements will be changed. Second, they will let investors know what the criteria are. Lastly, given this information, the investors will identify impacts caused by the Agencies’ and FHA’s requirements and implement the changes. I have heard comments on the expected pricing hits that range from “They will be somewhat punitive” to “They will stink.”

GMAC Bank Correspondent came out with “The FHA High Balance loan, defined as loans amounts greater than the GSE conforming loan limits, will be separated from the existing products. New product codes will apply to all FHA High Balance loans. Loans that are registered into these new products must meet both the below minimum loan amounts and the FHA 2009 Maximum Mortgage limits (https://entp.hud.gov/idapp/html/hicostlook.cfm).” Minimum loan amounts for the new products will be the standard $417,001 for one unit ($625,501 for HI and AK).

Japan Demise Takes Markets Down
OK, back to the markets. With four business days left, today our markets will be concerned with some miserable news coming out of Japan. The economy there is doing unexpectedly poorly, leading to our stocks being down, leading to a nice rally in our bond market. Currently the 10-yr is down to 2.72% and mortgage prices are better by about .250 in price. Tomorrow we have Housing Starts and Building Permits, along with Industrial Production and Capacity Utilization. Thursday we have the Producer Price Index, Leading Economic Indicators and Jobless Claims, and then on Friday we have the Consumer Price Index.

Capitalism Defined—continued…
In Enron Capitalism you have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. Sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release.

The public buys your bull.

In Californian Capitalism you have two cows. They are happy.

In Arkansas capitalism you have two cows. That one on the left is kinda cute.