I wrote recently about the problems at Fannie Mae and Freddie Mac that led them from being healthy, economically viable enterprises to becoming wards of the state. They used to have a combined net worth of close to $100 billion and now they are $100 billion underwater, and counting.

The Congressional financial restructuring act did not even attempt to deal with it other than to allocate $30 million or so to hire consultants to "study" how best to privatize them sometime in the future.  I suppose that is because today no one has a clue.

I said that one of the problems was that they forgot that the core mission of any business is to survive.  After that is assured, they can worry about expanding. After that, they can worry about things that are more altruistic, like expanding homeownership opportunities. They were sunk in large part because political forces at work in Washington D.C. thought, incorrectly as it turned out, that they could use Fannie and Freddie to achieve political goals without any attendant risk.

To that end, they inserted political goals into their mission statement, mandating that they should serve under-served markets, particularly loans to low- and middle-income borrowers.  As a result, the agencies bought billions of dollars of toxic loans, mostly to those borrowers, that later went bad. That helped create the meltdown.

You would think they would have learned their lesson.  Wrong!

In a statement this week, the Federal Housing Finance Agency that supervises Fannie and Freddie issued an announcement with the intention to:

"establish a duty for Fannie Mae and Freddie Mac (the Enterprises) to serve very low-, low- and moderate-income families in three specified underserved markets -- manufactured housing, affordable housing preservation, and rural markets."

Note that the politicos forgot the trouble that lax underwriting standards have gotten us into. In the announcement, it specifically says that borrowers will be evaluated on:

the development of loan products, more flexible underwriting guidelines, and other innovative approaches to providing financing;

We got into this mess in part because of exactly those kind of statements and policies.

As to the rural program, it's designed to serve families who may have a credit and income history but who forgot to save money and who thus have no down payment.  Sound familiar?  Maximum loan-to-value is 102% and private mortgage insurance, PMI, is not required because the loans are government guaranteed.

Sounds like another disaster in the wings.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Mark Twain is another wonderful source of great quotes that cut to the heart of issues. He was perhaps the first author to get to the heart of America's belief structure with finely drawn characters that inhabit his two most popular books "The Adventures of Tom Sawyer" and "The Adventures of Huckleberry Finn."  His remarkable insight also led him to give some great quotes. Here's one of my favorites:

"It ain't what you don't know that gets you into trouble.

It's what you know for sure that just ain't so."

This is certainly true in the homebuying process. Out of my more than 4,500 clients I think I can safely say that in a majority of cases, I had to help them "unlearn" something that was not true.  You can't build a structure of good decisions on a foundation of factoids.  For those who don't know that word, it's a word coined by Norman Mailer. The Washington Post described it as:

"something that looks like a fact, could be a fact, but in fact is not a fact"

Some of these factoids were perhaps learned at a prior time when the world was a different place than it is today.  As I look at the cycles of the last 30 years, I can assure you that each five-year period was remarkably different than the one before it. Today the landscape is so totally different that almost anything you learned before is obsolete.

The other thing that is important to understand is that borrowers think that because they got a loan before that they can do it again. In many cases, if not most, that just means they will repeat the mistake they made the first time, perhaps with another new mistake thrown in for good measure.

Of course, the tricky thing in this whole process is that most borrowers do not know that they made a mistake. That falls under another great quote, attributed to Thomas Grey.

"When ignorance if bliss, ‘tis folly to be wise."

Well, my friends, ignorance is certainly not blissful. Even worse, it is expensive.  When you are buying a $400,000 home, one single mistake most people make can easily cost $7,000.  If it's an $800,000 home, you're talking $14,000.

The problem is that our industry does not offer simple coaching like this: "I have alternative A or alternative B.  B saves you $14,000. Which would you prefer?"  It would be easy if it was like that, but it isn't. You need training and help from an expert.

Bottom line, becoming educated about mortgages can pay big dividends. Read a book, maybe two or three.

 

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

The hosts and crew at NPR's Planet Money pooled their money and purchased $1000 worth of toxic assets. Not because they were expecting to make a killing, but because they thought it would be a good way to learn more about toxic assets and what they mean to investors, banks, and mortgage holders. (Here are some frequently asked questions about toxic assets.)

The NPR folks bought a portion of a mortgage bond that had sold for $2.7 million a couple of years ago. NPR's $1000 got them a 1/36th share in the bond. So, in other words, they got a share that was worth $75,000 when the bond was sold for $2.7 million. That's 1.3 cents on the dollar.

Why did the bond's value drop so much? Because many of the mortgages, mainly in California, Arizona, and Florida, are "troubled." The values of the houses are worth less than the money owed on the mortgages. Half people are behind on their mortgage payments. Fifteen percent of the homes are in foreclosure. When those foreclosed homes get sold at a loss, the bond shrinks.

But even so, the investors from NPR have received money each month because many of the mortgage holders are still making payments on time. Their first check was for $141. To date, they've gotten $332. As the NPR co-host notes, "If we keep getting checks [in this amount] till Thanksgiving, we will double our money." They asked their broker what was the worst thing that could happen. His answer: "Next month they sell all the houses and you get stuck with nothing."

On this page, you can track the health of NPR's toxic asset.

Here's the seven-and-a-half-minute audio segment | Here's a transcript of the segment

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.