On Friday, July 13th (of all days), Fannie Mae and Freddie Mac dropped a bomb on weak home and mortgage markets. The new damage will take time to quantify, but may be considerable. The tale behind the act is clear, and just shy of unbelievable. On Friday, Sept. 29, 2006, the Federal Reserve (joined by all other banking regulators) issued a "guidance" on nontraditional mortgage risks. It demanded that any mortgage containing an interest-only feature be underwritten at the highest possible interest rate or subsequent amortizing payment, and that any mortgage containing a negative-amortizing feature be underwritten at the highest possible balance and interest-rate adjustment. No consideration for size of down payment or strength of borrower or for length of fixed-rate interval, one-month adjustable-rate mortgages (ARMs) treated the same as 10-year. No thought given to the "option ARM," offered by the trillion since 1980, the oldest ARM in the industry, and not a shred of e...
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