Countrywide Insurance

Countrywide services my mortgage. Don't worry, I'm not going to default or walk away from my mortgage...

The newest solicitation I've received from them is an application to insure my 'major home appliances or systems'. This seems like a desperate grab for high-margin cash. However, does Countrywide really want people to potentially have to choose between paying their mortgage and paying their appliance insurance premiums?

For only $37.95 per month, conveniently collected with your mortgage payment, you can have the security of knowing that your broken appliance will be replaced.* Imagine... a whole new furnace costing no more than your $60 deductible.*

Here are my favorite examples of items for which the policy includes repairs and replacement:

• Garbage Disposal (This is so essential!!!)
  
• Ceiling Fan (These are $100, maybe $200?)
  
• Electrical / Heating / Plumbing Systems (All of it?!?!?)
  

My other favorite are the pictures of people who 'GAMBLED AND LOST'.

• Thought his furnace would last another year. GAMBLED AND LOST $4,208
• Thought he had the perfect oven. GAMBLED AND LOST $1,486
• Thought their freezer would star frosty. GAMBLED AND LOST $1,023

Yes, instead of gambling and losing, you can ensure a $480+ loss each year plus your deductible each time something happens to break. I'll take two! Maybe they just want to suck as much money away from their customers before they walk away or default on their mortgage?

* This represents the best case scenario. You will probably get hosed for much more.

Too Little, Too Late

According to a CNN Money article, the Fed is expected to propose rules to crack down on mortgage lending tomorrow. Some examples of the rules being considered are (emphasis mine):

• barring lenders from penalizing subprime borrowers - those with spotty credit or low incomes - who pay their loans off early.
• forcing lenders to make sure that borrowers, especially subprime borrowers, set aside money to pay for taxes and insurance.
• restricting loans that do not require proof of a borrower's income.
• examining lenders' failure, in some cases, to consider a borrower's ability to repay a home loan.
• improving financial disclosure so people better understand the terms and conditions of their mortgages and get this information when it is most useful.
• curtailing abuses in mortgage advertising.

All of these were obviously needed years ago, especially the point in bold. Probably most stated-income loans made in the past couple years should have never been originated. I say 'most' because these loans are legitimate for some borrowers, e.g. the self-employed.

It is beyond me why the Fed did not address this practice until now. How could they not know these loans were being mis-used, when it's their job to regulate the financial system?

Not only are these rules too little, too late - the market is currently addressing some of them. To ask a rhetorical question, how many lenders are currently originating sub-prime or stated-income loans?

While these rules are necessary, they will do nothing to help the current mortgage-induced liquidity crisis.

Source:
Fed to crack down on shady lenders
WASHINGTON (AP), 12/15/2007 12:08 PM ET

Freddie Mac : 2007Q3

Freddie Mac reported much worse than expected results this morning. Here are the highlights from the press release:

• Third quarter loss of $2.0 billion reflects a higher provision for credit losses and losses on mark-to-market items.
• Provision for credit losses of $1.2 billion reflects the significant deterioration of mortgage credit as a result of continued weakness in the housing market.
• Total GAAP mark-to-market losses of $3.6 billion primarily include $1.5 billion in interest-rate related items and $2.3 billion in credit-related items.
• Fair value, before capital transactions, decreased by approximately $8.1 billion primarily due to widening of net mortgage-to-debt option-adjusted spreads and valuation losses on credit-related items.
• Increase in management and guarantee income reflects continued guarantee portfolio growth.

When this 'liquidity crunch' started in July/August, investors would only buy pools securitized by Fannie and Freddie. Prior to that, it was questioned if those two GSEs were needed. Will investors be as willing to buy from Freddie now that their pools are worse than expected?

UPDATE: Some excellent answers to the above questions in Calculated Risk's comments (excerpts are below; follow the links for entire comment).

Tanta said,
The whole idea of having the GSEs continue to buy loans in this market is that they will actually bid when no one else does. That is, they are supposed to be out there saying that there is, actually, a difference between 51 bps and 450 bps and they will bid accordingly.

gse doom said,
...their [Fannie Mae and Freddie Mac] securities are "understandable" and the payment of both principal and interest is guaranteed. The loans in their securities are underwritten to more conservative and standardized guidelines, and the securities themselves are more easily analyzed and modeled. Fannie Mae and Freddie Mac guarantee to the bond holder the timely payment of both principal and interest.