Easy Money No More

Crash Victim: The Mortgage "Honor System"

I thought I knew a lot about go-go mortgages. I had already written several articles about the explosive growth of liar’s loans, no-money-down loans, interest-only loans and other even more exotic mortgages. I had interviewed people with very modest incomes who had taken out big loans. Yet for all that, I was stunned at how much money people were willing to throw at me.

--Edmund L. Andrews, "My Personal Credit Crisis"; The New York Times (5/14/09)

When Times financial reporter Andrews says personal, he means personal: the details are things you wouldn't even expect close friend to divulge.

Leaving aside the stress, aggravation, etc. that has engulfed Andrews and his family, he reports a phenomenon I saw and heard about in spades a couple years ago -- namely, anyone with high credit scores could borrow virtually as much as they wanted.

Which is why I routinely counseled my clients to distinguish between how much mortgage they could qualify for, and how much they felt comfortable borrowing.

Today, of course, that advice is no longer necessary: banks once again are telling customers how much they can borrow, instead of vice versa.

Fannie & Freddie "Add-On Fees"

"Airline Pricing" Spreads to Mortgages

Both Fannie Mae and Freddie Mac say they are tacking on extra fees to counter higher risks and losses associated with certain loan products, buyer equity stakes and credit scores . . . However, real estate agents, mortgage bankers and brokers are incensed at the new round of fee increases, calling them counterproductive in an environment in which housing needs help, not new impediments.

--Kenneth Harney, "From Fannie and Freddie, Here Come the Fee Increases"; The Washington Post (2/14/09)

Call it the spread of the "airline industry model." *

They can't figure out how to make money -- in fact, they lose billions every year -- so they have to recoup it any way they can. So they start tacking on fees -- lots and lots of them. For checking extra bags, in-flight food, headphones, fuel surcharges -- you name it. Each year, the list only grows longer -- and more annoying.

Get ready for the post-housing bust Fannie and Freddie pricing model. In addition to paying mortgage interest, borrowers can now expect to pay two different kinds of add-on fees:

One. Premiums, called "delivery fees," for Buyers who can't meet (newly conservative) downpayment thresholds; and

Two. Surcharges for disfavored housing categories (because they're supposedly higher risk). That includes condominiums and owner-occupied duplexes.

Just one more illustration of the old saying about banks "lending you an umbrella when it's sunny and demanding it back when it's raining."

And that's private lenders.

Add government bureaucracy and inefficiency to the equation, and you get the worst of both worlds (JFK famously remarked that Washington "combined the charm of a northern city with the efficiency of a southern one").

*The other parallel with airlines? Custom pricing (no two borrowers pay the same rate) that literally changes minute-by-minute. I attribute this latter phenomenon to modern computing power as much as anything else.