I ran across this gem on MSN Money today. It explains how Fannie Mae is doing a little creative damage control in order to not get stuck having to buy back bad mortgage loans that were sold off as Mortgage Backed Securities (MBS). Banks are often required to buy back loans that they have sold to Wall St. if the loans go bad within a certain amount of time. If the banks/lenders get the loans back then they are stuck with the losses when the house is foreclosed. Obviously banks don’t want this loss on the books and it looks like Fannie Mae has concocted a method of delaying the inevitable default. I’m sure they are just praying it holds off the default until after the buyback date expires. There solution is to hand out unsecured loans to delinquent borrowers so they can bring their accounts current. They are just giving away money! Unfrikinbeleivable….Do they really expect any of these people to pay this back?
Fannie Mae's new trick (from MSN Money)
Knowing the complete scope of this credit disaster is impossible because of the absurdly pliable accounting treatment accorded to financial institutions.
Case in point: Fannie Mae. Before excerpting one of the relevant passages from the company's latest quarterly financial report, let me cut to the chase with this explanation from a friend: "They take a delinquent mortgage loan and replace the delinquent part with an unsecured loan in order to circumvent the buybacks and mark-to-market consequences." That is the reality.
Here is how Fannie goes at lengths to sugarcoat it:
"We recently introduced a new HomeSaver Advance initiative, which is a loss mitigation tool that we began implementing in the first quarter of 2008. HomeSaver Advance provides qualified borrowers with an unsecured personal loan in an amount equal to all past due payments relating to their mortgage loan, allowing borrowers to cure their payment defaults under mortgage loans without requiring modification of their mortgage loans. By permitting qualified borrowers to cure their payment defaults without requiring that we purchase the loans from the MBS (mortgage-backed security) trusts in order to modify the loans, this loss mitigation tool may reduce the number of delinquent mortgage loans that we purchase from MBS trusts in the future and the fair value losses we record in connection with those purchases."
Obfuscation cannot change the big picture. The housing bubble -- which bailed out the equity bubble -- was in essence the economy. Now that we don't have the housing ATM or the jobs it created, the economy will continue to weaken.