Taking Stock of Bonds

December 5, 2007

Another Drip of Morphine, Please?

Angelo Mozilo Wednesday called on legislators to raise the loan limit for mortgages that Freddie and Fannie can guarantee.

The call for help shows up in the editorial pages of the Wall Street Journal, where Mozilo says the current cap -- $417,000 -- is too low "to meet the needs of buyers in many communities across the country." Mozilo also notes that "it’s important to act now ... to stabilize mortgage markets by expanding credit to current homeowners and prospective buyers."

The Countrywide chief executive says the loan limit could be temporary and that "12 months ought to be long enough." Remarkably, Mr. Mozilo -- a fellow I hold in high esteem because he is a Bronx native who built a great business largely from scratch -- appears to have not learned from the experience of the last year.

First off, it is generally accepted that the housing industry will need more than 12 months to heal, so the efficacy of a 12-month hike in loan limits is questionable. The essay also illustrates naive or wishful thinking that should alarm Countrywide shareholders.

The very problem of the current housing crisis is that many buyers were able to get cheap money and this, in turn, propelled prices higher. Absurdly higher. Adjustable rate mortgages -- nearly 40% of loans processed by lenders like Countrywide in some years -- allowed more consumers to qualify for larger home loans that allowed people to engage in bidding wars, speculate in properties and flip real estate.

Raising the GSE loan limit only prolongs the period of cheap credit. A mortgage guaranteed by a GSE offers only a slightly lower cost for consumers in the form of a slightly lower mortgage rate. But, it passes the risk on to broader tax paying public so lenders like Countrywide are not held accountable. Those mortgages guaranteed by the GSEs during the 12 month period allow lenders to foist risk on to taxpayers that will fester for more than a year.

Call it a tincture of morphine for an addict. This time the addicts are lenders and home owners who made the mistake of not taking an honest look at their finances to assess what they really can afford. Many could have chosen a smaller home and borrowed less. The lenders only facilitated this addiction to debt and raising the GSE loan limit only prolongs the problem.