Wednesday, May 14, 2008

Freddie Mac on Walking Away

by Bill McBride on 5/14/2008 01:21:00 PM

More from the conference call:

Analyst: Quick question on your direction in terms of housing price declines and the impact on credit costs. Have you looked at the impact of rising LTV's have on the projected credit cost. In other words, if people get close to and then get under water, does the propensity for them to default, does that go up geometrically, and is that captured in your numbers?

Freddie Mac: Yes, clearly it is. And you know you have identified one of the key attributes of the loans in '06 and '07 that are contributing to the higher defaults. As I said in that remarks it has caused us to look hard at what the maximum LTV we're willing to purchase, and it also results in our raising delivery fees to that portion of the population. So it clearly is contributing to higher default costs. It is captured in our numbers. And we have responded both with tightening of terms and raising prices.

Analysts: What do you see? Is it in line with historical default rates as they get underwater or does it ...

Freddie Mac: No, it is different. The rate of increase in defaults in that part of the population is much steeper. For those borrowers that bought a home based on rapid house price appreciation as a way to grow wealth, if they find themselves quickly underwater - you know we're even seeing it when we try to modify and renegotiate those loans - they are walking away. They're finding it not constructive. I do think the raft in defaults for that portion of the population is steeper than historical observations, and we are reflecting that in our expectations.
emphasis added