Chasing Mavericks! Fannie Mae And Freddie Mac Are Chasing The Fed’s Asset Bubble (And Other Market Distortions) With Weaker Credit Standards

US home prices have escalated rapidly since The Federal Reserve began their zero-interest rate policies and asset purchases back in 2008.

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In order to serve their US homebuyers, both Fannie Mae and Freddie Mac have had to “soften” their standards for purchasing loans from lenders. Particularly since wage growth is slower than home price growth. And has been since 2012.

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For example, the mean Loan-to-Value ratio for Fannie and Freddie are higher than during the peak of the housing bubble … which blew up.

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In terms of Combined Loan-to-Value Ratio (CLTV),  Fannie Mae purchased loans have a higher CLTV than during the peak of the housing bubble.ffcltv

In terms of average credit score, both Fannie and Freddie tighted their loan purchase standards after the financial crisis, but has been gradually lowering them since 2012.

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In terms of debt-to-income ratios (DTI), both Fannie and Freddie now have average DTI at 2005 levels. We can call that “peak crisis” in terms of the house price bubble peak.

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Like Mavericks at Half Moon Bay in California, Fannie and Freddie are chasing Mavericksv (large waves) to serve the homebuying community.

To be fair, much of the elevated home prices are in coastal California where the tech industry has flourished and buildable sites are constrainted by zoning and other regulations.

*I want to thank my GMU finance students taking my Python for finance class. And downloading the Fannie and Freddie data and analysis in Python. These ambitious students include Fabiola Gonzalez, Fabiola Maldonado, Brandon Wynes, Nathan Handy, Eleri Burnett, Jessica Giron, Lisbeth Figuroa, Ulises Areas, Sarah Madi,
James Pesquera, Belinda Chambika, Alex Dilorenzo, Alexandria White, Steve Bergquist, Dudley Hinote, Amir Sayyad, Claudia Aguilar, Sabrina Hannan, Wael Ronnie Zaineldeen, and Peter Rogers. Thanks to Stuart Sanders and Hakin Azoor!

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