"Fannie Mae Drops Policy Over Down Payments," says the Wall Street Journal.
"Fannie Mae confirmed it is scrapping a policy that required higher down payments on home mortgages in areas where house prices are falling." Hmmm... I only know a little bit about Fannie Mae's business, but what I know scares me to death. Fannie directly owns around $723 billion worth of mortgages, including many of very dubious value, such as $215 billion of "interest-only" loans, $268 billion of mortgages with loan-to-value ratios in excess of 90%, and another $25.2 billion of subprime residential mortgage-backed securities (RMBS) – better known on Wall Street as "toxic waste." It holds these assets with only $43 billion of core equity – a little more than 16 times leverage. Thus, a 7% decline in the average value of its mortgage assets (a $50 billion loss) would wipe out shareholders. That's about 10% of the risky paper it owns... an amount that's almost certain to be lost.
And that's not the real problem. The real problem is, off-balance sheet, Fannie provides a principal guarantee to another $2.25 trillion (yes, trillion) worth of mortgage securities. These securities make up a large chunk of the reserves of the world's financial institutions. But... damn the torpedoes. Who cares about risk? Americans always pay their mortgages. Real estate prices always go up. Starting today, borrowers will only have to put 3% down to qualify for a Fannie Mae guaranteed loan.