Mudd Covering His Fannie

Reuters

"Fannie Mae's chief executive said on Wednesday the U.S. housing market will face significant resetting of adjustable rate mortgages over the next two years and he worries about this sparking foreclosures in some locations."

"Daniel Mudd, president and chief executive officer of the government-sponsored mortgage giant, told Reuters in an interview that Fannie Mae models suggest a couple of reset "spike periods" in the next two years, based on past originations of mortgages with adjustable rates and other features such as low initial "teaser rate" periods."

"He said underwriting standards still vary widely among lenders, with some maintaining their share of a shrinking mortgage market as they tighten standards while others are still applying "exuberance" to credit risk."

"Products such as interest-only adjustable rate mortgages, payment-option mortgages and loans that require no property appraisals create multiple layers of risk that are difficult to model and predict, he said."

"It is still unclear what will happen to the housing market when these mortgages reset at higher rates, especially given some of the weakening in certain housing markets, such as vacation areas with a lot of investment buyers."

'"If jobs are pretty stable, if home prices have come up underneath the mortgages to support them and if there's not any incidence of appraisal fraud, it could be just fine," Mudd said. "If in certain geographies, some of those factors are different -- there's some appraisal fraud, or there's an economic downturn or home prices have declined -- it could be a very different scenario."

'"In that case, what you'd worry about, really on a neighborhood-by-neighborhood basis, is you have a foreclosure here and you have a foreclosure there and soon you've got four foreclosures on the market and you've got plywood on the windows and that could have a very deleterious effect," on the market, Mudd said."

"Nonetheless, Mudd said he remains confident about the relatively straightforward segment of the mortgage market where Fannie Mae buys and securitizes loans."

"Interest rate increases have had little impact on Fannie Mae's portfolios because the shareholder-owned company hedges symmetrically and does not take a position on whether rates are expected to rise or fall, Mudd said."