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Fannie Mae's Downgrade No Surprise

It's certainly no mystery to me why Fannie Mae was downgraded by Standard and Poor's in August 2011. Here's how badly they just blew a perfectly good real estate transaction:

Fannie Mae owns a foreclosed condominium in Killington, VT. They rejected a full-price offer of $164K for the property, but accepted an offer of $142K by the same purchaser just a couple of weeks later, claiming that this vacation home buyer was an "investor" and therefore ineligible to bid on the property during the first 15 days that the property was on the market - the infamous "First Look Period."

The buyer, a successful residential mortgage specialist in his home state, selected a Fannie Mae loan product to finance the purchase - the perfect opportunity for Fannie Mae to offset a bad debt with a low risk new loan to a highly qualified borrower. Fannie Mae's HomePath loan division, however, rejected the loan application from this well-qualified borrower with exceptionally high credit scores, by classifying the condominium project as a condo-hotel, a type of property not eligible for Fannie Mae financing. Anyone with rudimentary knowledge of the condo-hotel concept, would know intuitively that this condo complex is not a condo-hotel. What's most ironic is that commercial lenders approve conventional loans, which will ultimately be sold to Fannie Mae, for purchases at the very same condominium project all the time. Fannie Mae is clearly committed to bleeding themselves into insolvency - all at the taxpayer's expense.

If anyone is having difficulty obtaining financing for a condominium in a resort community, you can thank Fannie Mae for that too, as their new underwriting requirements are so ridiculous, that virtually any property that could be rented will not qualify for conventional financing.

It's too bad the private capital markets haven't stepped in to take advantage of this exceptional opportunity - they could cherry pick high net worth borrowers with excellent credit scores, able to put 25% down, thereby limiting their risk significantly. Then they could package those high-quality debts into some new marketable derivative, sell them to the big banks who won't lend money to these low risk borrowers and we all know where that ends up.

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