Prime's True Definition

Posted 2008-03-09 15:33
by Karl Denninger

A quickie..... prompted by a discussion in The Forum you can find here.....

The true definition of a prime loan is:

30 year fixed mortgage
36% DTI (back end) ratio, maximum
20% down, hard money (seasoned)
No piggybacks
Six months of hard money (seasoned) reserves in liquid assets

What people believe Fannie and Freddie underwrite is the above.

However, the truth is something else. "Streamline", "Fast and Easy" loans and other garbage has unfortunately contaminated Fannie and Freddie's book. Lenders like Countrywide managed to get Fannie and Freddie to buy that paper and integrate it into their securitizations, essentially making sausage out of all of it.

This can and will blow up. Count on it. The evidence can be found in recent securitizations from WaMu and others where fully 20% of the book - with an average FICO over 700 - has gone delinquent six months after origination.

When it does come unravelled en-masse we will discover that Fannie and Freddie's paper bears as much resemblance to the above standard as does a $5 hooker bear resemblance to a Nun.

They're both women, but that's where the similarity ends.

Hope that you're not one of the people who find out the hard way.

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