The Idea Of Life Without Freddie And Fannie
Readers suggested a topic on the GSEs. “Is everyone finally realizing this thing is too big to bail?”
Another, “Let’s talk about what would happen if Freddie and Fannie went BK, their stock went to zero, and their bonds traded at about 40% of par value. Would other players be able to step in, raise capital, and start offering traditional 20% down mortgages to 700+ FICO borrowers? How long before that could happen, i.e., how long would it take for a stable mortgage market to rise out of the ashes?”
“What would it do to the house price decline- make it worse? have little impact? extend the length of the decline? Would the ultimate number of foreclosures be affected?”
One posted. “My personal view is that the politicians fall into three categories on the GSEs:”
“1. They don’t understand that there’s a real problem. 2. They understand a problem exists, but don’t understand the magnitude. 3. They understand a problem exists, and are demagoging the public by pretending that the magnitude is manageable. (The kick-the-can-down-the-road strategy.)
One added, “I keep saying that this is too big. Now I’m hearing that Freddie and Fannie are going to bring down Western Civilization if they are allowed to fail, and they might.”
“I’m really worried that the gov’t can only help Fred and Fan so much. I’m pretty sure that it is not enough.”
One asked, “Wait, didn’t this happen because some people finally decided that Fannie and Freddie would need to raise a few tens of billions to become adequately capitalized?”
“FNM and FRE will be around, they may just get a cash infusion from some oil rich country or the US to help recapitalize-existing equity owners will be wiped out, or close to it.”
“The ramifications of this are not insignificant. The cost of borrowing will go up for everyone because FNM and FRE will need to offer higher rates on their bonds to attract capital. Voila, home prices go down some more, further weakening FNM, FRE and all mortgage backed securities. Making borrowing rates go up even more.”
Another suggests, “This is the beginning of the mortgage death spiral, IMO. If the govt attempts to bail the GSEs, it’s possible we see **very high** inflation/hyperinflation as they try to cover all the losses. Maybe we get a new currency out of this?”
“If the govt does not bail the GSEs, we could see debt deflation that takes us back a couple of decades, financial markets could seize up, and we literally run out of money to conduct business in the U.S. GSE debt is held everywhere by almost everyone. Though most of us despise the idea of a bailout, the potential for GSE insolvency is probably the greatest financial event in modern times. We are definitely in a quandry.”
“Anyone have a ‘Plan C’ that could save the financial system, yet avoid a hyperinflationary scenario at the same time?”
One said, “When the word ‘conservatorship’ starting bouncing around in some MSM articles, the marbles is my head went to warbling. Dang, I want my mommy!”
The Asbury Park Press. “Their struggles are reverberating at the Shore, where mortgage brokers say lenders have already tightened their standards so much that only well-paid residents with a clean credit record can obtain loans.”
“‘We could be the greatest thing since sliced bread, but if (Freddie Mac and Fannie Mae) disappear, we’re dead in the water,’ said Drew Anlas, senior VP of Select Mortgage Corp. in Brick.”
“The problem? ‘All loans in the marketplace are pressured by falling home prices,’ said Keith Gumbinger, VP of a Pompton Plains company that tracks mortgage rates.”
“A year ago, lenders might have required a borrower to show proof of income simply by supplying a pay stub and a bank statement. Today, they require at least a month’s worth of pay stubs and tax returns from the past two years, mortgage brokers said.”
“A buyer in Monmouth and Ocean counties wanting a $300,000 home probably needs an income of $72,000 a year, money for a down payment and little debt on his or her credit record, said Jim Brown, VP of Kastle Mortgage in Freehold.”
“‘It got very lenient,’ Brown said. ‘In the last 2 1/2 months, it’s made up for all of that.’”
“Mortgage brokers shuddered at the mere idea of life without Freddie Mac and Fannie Mae. But keeping the companies viable won’t come without a cost, said Gary Stroik, VP of a Little Silver investment firm.”
“The companies’ business model depends on their ability to raise capital cheaply from investors and lend it back out at a higher rate. If investors view the companies as riskier, they will ask for higher interest rates in return, Stroik said.”
“Investors might shy away from anything related to mortgage companies, particularly with home prices falling and potential buyers struggling with rising energy prices and layoffs, he said.”‘
“‘If you’re a lender, how anxious are you to (provide) them a loan?’ Stroik said.”
“But mortgage brokers said the two companies can’t be allowed to fail. ‘If the government doesn’t come in and bail them out, there will be such a limited supply of funding sources it will be impossible to get a loan,’ Anlas said.”
Time Magazine. “All debt issued by mortgage giants Fannie Mae and Freddie Mac comes with a prominent disclaimer: ‘Not guaranteed by the United States.’ But the business model of both companies, not to mention the continued functioning of the U.S. mortgage market, depends on nobody quite believing that disclaimer.”
“Wrap your head around that contradiction, and you’re well on your way to understanding the Fannie-Freddie drama currently gripping U.S. markets.”
“The reason that the stock prices in both companies has plummeted, is that if the government had to step in to keep Fannie and Freddie functioning, shares in the companies would probably become worthless. On Friday morning, Treasury Secretary Hank Paulson issued a cryptic statement that seemed to say there wasn’t any such bailout in the offing, and the stocks recovered slightly.”
“Then word got out that Federal Reserve chairman Ben Bernanke had said the Fed would extend credit to Fannie and Freddie, and the stocks recovered more. But what happens next is anybody�s guess.”
“Here’s why it matters: Fannie and Freddie buy the bulk of the home loans made in this country.If the two companies were unable to keep buying home loans, the current housing crisis would get much, much worse. But if the federal government had to backstop them, the cost could run as high as $1.1 trillion.”
“Bert Ely, a financial consultant and a long-time critic of Fannie and Freddie…thinks that Fannie’s and Freddie’s charmed existence as private enterprises with tacit government backing can’t continue. ‘What all this bailout talk does is blow away the notion that there’s an ‘implicit’ guarantee. There is a guarantee, or there isn’t.’”
‘All debt issued by mortgage giants Fannie Mae and Freddie Mac comes with a prominent disclaimer: ‘Not guaranteed by the United States.’ But the business model of both companies, not to mention the continued functioning of the U.S. mortgage market, depends on nobody quite believing that disclaimer.’
‘Wrap your head around that contradiction, and you’re well on your way to understanding the Fannie-Freddie drama currently gripping U.S. markets’
‘What all this bailout talk does is blow away the notion that there’s an ‘implicit’ guarantee. There is a guarantee, or there isn’t.’
I have long asked how such a huge myth could be allowed to circulate. How in this so-called sophisticated financial world, could an ‘unwritten’ guarantee of this magnitude be tolerated?
One thing about this situation; how long ago was it that congress upped the loan cap by hundreds of thousands of dollars in the most risky markets? And at a time when prices are falling faster than any other in history. The collapse of the housing bubble is steamrolling everything in its path, IMO.
Bailing out Bear Stearns required a lot of nudge nudge, wink winkery…
F & F is like hundreds of times bigger in disaster, than Bear.
Until recently, the financial time bombs that have gone off, have been of the conventional variety of high explosive, but frick & frack’s looks to be of nuclear design~
This is starting to look more and more like a burial than a bailout. Why would a certain retiree go on the Bloomberg and shout fire? Why are we suddenly reading leaked emergency takeunder plans in the NYT?
Weren’t BSC and CFC essentially buried (rather than bailed)? Why would F&F get treated any differently (other than the problematic question of how to find a buyer)?
We are comparing different kinds of nukular bombs here:
BSC was a conventional fission bomb, while F&F would be a thermonukular bomb.
Here’s a better one:
Thera-Nuclear explosion
http://en.wikipedia.org/wiki/Thera_eruption
“There are some that would busy themselves on their last walk-accompanied by the authorities, and inquire as to whether the noose was 600 count or 700 count strands, as they are testing the drop-floor mechanism…”
“One thing about this situation; how long ago was it that congress upped the loan cap by hundreds of thousands of dollars in the most risky markets? And at a time when prices are falling faster than any other in history. The collapse of the housing bubble is steamrolling everything in its path, IMO.”
Don’t get me started on this on Ben, it just gets me all hot and bothered. So, let me get this straight, home prices are falling at the fastest pace EVER on record, and you want to ?increase? the limits on the government backed loans?? The sensible thing to do would be to lower them, or, at the very least, raise the standards for getting the loan.
Instead, the exact opposite is done, in the thoughts that enough money sloshing through the housing market is bound to fix the problem. They just don’t seem to understand the root cause of this problem. Houses are WAY too expensive, even now, for a “normal” American to afford. In my area, median household income is about 50-60K, while the median home price was 400K. That’s the start, and the end, of the whole housing problem. When the median falls to ~200K, the problem will be over.
It just totally burns my a** that the loan limits go up as the market collapses. It REEKS to me of a way to get more loans onto the GSE balance sheets so that the losses can be absorbed by the American Taxpayer.
Why are we subsidizing people with 1/4 of a MILLION dollar incomes (needed to really afford that 700K home)?? Come on, even 400K is a stretch, people buying homes in that ballpark need to make 2-3X the median income in the country. WTF? I’m one of those people, and trust me, I don’t want the subsidy, I don’t need it, and most importantly, I don’t deserve it.
If only the poor-lower middle class would get active politically, we would see these questions asked more. Why should people making 40K a year subsidize those making 250K a year to buy their palaces? It makes NO sense.
Set the GSE limit at 3X median income for each area. That; imho, makes sense.
House prices are relative to interest rates.
This whole crap got started when Alan Greenspan pushed the Fed Funds rate to Depression Levels and signaled Free Money.
If you could get a 30 year fixed loan for 1%, then house prices can stay high.
We all know that’s not possible. Why?
There has to be some real return on money for the economy to function. That’s why the 1% loans were a fraud. They were short -term. They were a way to “get in” to a house at higher prices.
If rates rise, which they inevitably need to do, then PRICES MUST FALL.
That’s why the FED can’t get rates back up to where Pension Funds can find a safe refuge for their money, and you and I can get a positive return from the Bank.
By letting this madness get started, the FED let natural rates for houses become unhinged from the market place. Everyone got free-money (no down, no income, no credit) loans and the prices of houses reflected the “teaser” rates that were called “affordability products”.
If the FED can keep real rates at about 2%, the prices can stay up. They can’t. That’s what started the credit crises. People finally realized the paper they were holding was worthless and they wouldn’t get paid back on their investments. If rates must rise, then prices must fall.
I believe the low rates were a big factor, but even with very low rates, 20% down and income/credit verification would have eliminated most of the current problems. Most of the rest could have been eliminated by qualifying absed on the adjusted amount rather than the teaser. It is here the ALT-A’s are about to start falling apart.
Agree totally; rates could be 1% (to the borrower) and there would never be/have been a collapse like we are seeing today if there was correct qualification. 20% down would have stopped this entire thing in its tracks; income verification would have helped as well, but it is/was really the downpayment that was totally missing during the run-up.
I have said it many times, 20% down (as the ONLY way to buy a house) would spell the end of the bubble forever.
I have said it many times, 20% down (as the ONLY way to buy a house) would spell the end of the bubble forever.
———————-
Totally agree. Still, would like to see income verification and max 33% back-end DTI ratios on **proven** income. There would have been NO housing bubble if these standards were in place, no matter how “excited” the sheeple were.
And it is much of the same in Europe, where the housing bubble is still alive: all thanks to the combination of artificially low (negative real) interest rates a la Greenspan (e.g. in Netherlands, last year rates where the lowest in 300 years, and inflation-corrected home prices are the highest in 400 years - an all time high from the time the record starts), lax lending standards and politicians that do everything they can to pump more taxpayer money into the housing bubble.
The ECB is not much different from the FED, they just have a bit more clever PR strategy. In Europe much of the crazy loans that fueled the US bubble still exist (I/O, 100% loans, 10x income loans etc.). Politicians pretend it doesn’t matter so no regulation is needed. But of course no one here dares to touch the bubble, all too frightened that they will set off the inevitable detonation and as a result fail to be reelected.
I don’t think 20% down in itself will prevent future bubbles, my country had a housing bubble of a few years (although tiny compared to the current one) while 20-25% down was still the norm and rates were a lot higher than they are now.
We also need to get rid of all the ‘clever’ financing that offloads the risks to other parties instead of keeping the homeowner and the lender responsible for the deal. But I’m afraid that in Europe that will never happen again, politically unacceptable. Homeowners (even if only in name) are a majority in most of Europe, just like they were in the US. I think we need to get rid of the current political system as well to prevent reruns of this supersized pyramid game.
“House prices are relative to interest rates.”
Some Fed bank economists claim that interest rates are a “fundamental” underpinning high housing prices (see reference below) but I believe they are endogenous, as evidenced by the Volcker episode, which showed what can happen when runaway inflation forces the central bank to defend the currency. (I cannot get the .pdf link on the referenced site to work; perhaps they took the article down out of embarrassment?)
Economic Policy Review Executive Summary
Are Home Prices the Next “Bubble”?
from the Economic Policy Review
View full article PDF
17 pages / 222 kb
Authors: Jonathan McCarthy and Richard W. Peach
Disclaimer
Index of executive summaries
* Home prices have been rising rapidly since the mid-1990s. Many analysts view the increase as symptomatic of a bubble that will burst, thus erasing a significant portion of household wealth. This decline in wealth could have a negative effect on the broader economy as consumers reduce spending to increase saving and protect their vulnerable financial condition.
* Authors McCarthy and Peach argue that no bubble exists and present evidence that the marked rise in home prices is largely attributable to strong market fundamentals: Home prices have essentially moved in line with increases in family income and declines in nominal mortgage interest rates.
I accidentally omitted a few embarrassing paragraphs from my post:
* The authors begin their analysis by pointing out flaws in the two measures often cited to support the theory that a bubble exists—the rising price-to-income ratio and the declining rent-to-price ratio. Specifically, the measures
o do not account for the effects of declining nominal mortgage interest rates and
o fail to use appropriate home price indexes that control for location and changes in quality.
* McCarthy and Peach contend that a weakening of economic conditions is unlikely to trigger a severe drop in home prices. In fact, aggregate real home prices historically have fallen only moderately in periods of recession and high nominal interest rates.
* Nevertheless, weakening fundamentals could pressure prices along the east and west coasts, where an inelastic housing supply has made prices more volatile than elsewhere in the United States. However, previous home price declines in these regions have not had devastating effects on the national economy.
A gaggle of fools was armed with a fistful of cash.
Mike
RE: Houses are WAY too expensive, even now, for a “normal” American to afford. In my area, median household income is about 50-60K, while the median home price was 400K. That’s the start, and the end, of the whole housing problem. When the median falls to ~200K, the problem will be over.
You got it, Mike.
Unfortunately, the Feds loved the valuation run-up’s because it was able to mask a radically declining standard of living which is why they sat on their hands while the corruption in the loan industry was blowin’ thru the roof.
The great irony will be that before this all unwinds in whatever form, Americans will be poorer than ever.
not just Americans … in my country (Netherlands) the median homeprice is 8.5x median income. And in my area with relatively low income, any home with acceptable quality (not a tiny POS or DIY project) is at least 10-15x average local income. But everyone thinks this is normal, including the lenders. A lot of people feel very rich thanks to the bubble while only a few ARE really rich (those who own multiple homes and purchased early).
Set the GSE limit at 3X median income for each area. That; imho, makes sense.
Median incomes from census and IRS data don’t even reflect reality. That data can be skewed by congregating the wealthy in designated census zones (i.e. gerrymandering), making the data just another political lobbying tool.
I think that “to each according to his needs” is bad public policy…especially when the market does not follow the same rules.
Borrow and spend, that’s the mantra.
Government debt first made it to Joe Sixpack’s consciousness back in 1992, when Ross Perot made it a significant issue during this presidential run.
But politicians have realized they can do away with that pesky “tax” part and just spend anyway. There seems to be no limit to how much the creditworthy US government can borrow.
When will that borrowing limit be reached? Good question.
Hey Mr. Fink,
Prices on average homes has to come down well below $ 200,000
People seem to forget the 20% down payment . That is $ 40,000.
The average household is in debt -$8,500.
I say the average price should be between $100,000-$150,000 in the next 2 years. IMHO
Ben, talking about long term myths,
didn’t the Supremes finally get off the fence after 200+ years as to whether a citizen have a right to bear arms?
Decisions (clarifications) are postponed so that one can have the best of both outcomes. In other words, let others make their own judgments as to the final outcome without committing one’s self to your own decision (Govt, Supremes, and anyone else).
It depends on what the meaning of “is”.
LOL
“One thing about this situation; how long ago was it that congress upped the loan cap by hundreds of thousands of dollars in the most risky markets?”
Remind me of the purpose of that measure? Was it to somehow attempt to keep prices propped up in the riskiest markets, or to allow the GSEs to swallow higher-priced mortgages off private lenders’ books, or something else?
Whatever the objective was, I don’t think it has been realized thus far…
Perhaps the thinking was that the house price appreciation was seizing up not because there was an artificial bubble that was ending, but rather because qualified buyers could not get the loan products they needed because the GSE’s couldn’t buy the paper?
What I find revolting is that “everyone” LOOOOOOOOOOVES house price increases. Yay, we are all rich! But radical increases in house prices is a bad thing, as we’re all learning. It pushes middle income people out of their neighborhoods, it helps convince many to make financially unsound decisions thinking that they’ll strike it rich, it jacks up property taxes, and so on. The only real winners on the way up are realtors, politicians, and those that actually sell, and nobody wins on the way down. (The winners are those that buy at the bottom. Those that buy on the way down are the knife catchers.) It frustrates me to see the “everyday man” get so excited about an event (a housing bubble) which ultimately spells his own doom.
I have long asked how such a huge myth could be allowed to circulate. How in this so-called sophisticated financial world, could an ‘unwritten’ guarantee of this magnitude be tolerated?
Well, Ben, it was started by the FED. Remember back around 1998? The Long-Term Capital Management Fiasco?
The FED bailed out the company. Why?
The first time I heard the expression “Too Big Too Fail”.
It was said if the FED didn’t bail them out, then there was serious financial repercussions for the entire market.
The mexican peso crisis? FED Bailout.
There have been several other instances when the FED, under moron Alan Greenspan, ran to the rescue of Wallstreet by not allowing market forces to act to clean out all the BAD investments.
So, the FED and by extension, the CONgress allowed the “myth” to foster. The belief that Uncle Sam would ride to the rescue with MONEY PRINTING bailouts is well established. Here, again, we get a chance to see if we can find restraint from money printing and the destruction of the $dollar.
I don’t believe we will. Bernanke quickly rushed into lowering rates and printing money at the first sign of a market correction. He is scared of letting the market deflate, and has been trigger-happy with FED funds and new Term Auctions (free money for junk paper) since the downturn started.
The FED actions and CONgress show that no large entity that effects the markets will be allowed to fail.
Even Bear Stearns ended up with $10 per share for an insolvent company. We don’t know how much that will cost us, since JPM was “Guaranteed” the FED would make them whole on any losses.
Why shouldn’t WallStreet believe in a bailout?
Paulson (Goldman-Sachs) is the Treasury Secretary.
Don’t you think he’s going to help out his buddies?
‘Why shouldn’t WallStreet believe in a bailout?’
I don’t care what WS believes or doesn’t believe. Those fools thought RE always goes up, too. I have proven over and over that the experts, MSM, WS, and the government are clueless about the root of all this. It’s a financial mania; a bubble; a popular delusion. And until they accept and come to terms with that, they will fumble around like blind drunks.
I must admit…
It’s fun watching drunks walking around during an earthquake.
diogenes: ‘Why shouldn’t WallStreet believe in a bailout?’
Ben: I don’t care what WS believes or doesn’t believe. [...]I have proven over and over that the experts, MSM, WS, and the government are clueless about the root of all this.
I mostly agree with Ben, but there is one (and only one) reason to care what WS believes: To short the bejezuz outta the banks. If these idiots are going to cause a meltdown, then I might as well make some money in the process. And as long as I keep hearing people talking about a bailout, then I know it’s not time to sell my SKF (goes up as banks go down.)
FYI: WSJ says
Rescue Debate: Paulson Insists Fannie, Freddie Shareholders Lose
Just a little history here, 1979, Chrysler was bailed out by the FED long before LTCM. Chrysler was thought to be too important to go under. So the expectations that the FED will step in goes back to the 70s and I’m sure goes back even further.
Chrysler didn’t get everthing it wanted, however this was still a FED bailout and terms were attached.
Here’s one link http://www.time.com/time/magazine/article/0,9171,947356,00.html
And Chrysler paid back the loan. Think Freddie and Fannie can?
Yes Chrysler paid back the loan. I understand that perfectly. However, this was still a bailout by the FED How many other companies were given the same opportunity? How many other companies are being given the same opportunity now?
Bailouts are nothing new.
diogenes: Why shouldn’t WallStreet believe in a bailout?
Paulson (Goldman-Sachs) is the Treasury Secretary.
Don’t you think he’s going to help out his buddies?
I believe Wall Street has traditionally hated FNM and FRE, because the latter’s low financing costs, coupled with the implicit government guarantee, allowed them to undercut private lenders on loan pricing and terms and conditions. FNM and FRE made home mortgage lending more risky and unprofitable for private lenders, since private lenders had to make do with table scraps. It wouldn’t surprise me if Paulson tried to kill them off.
You’re not with me here. Look at the facts.
Wall Street brokerage houses came up with the ’securitization’ products to sell to suckers.
AAA rated products. Churn, churn, fees, fees.
Loans go bad. Need to unload. NO takers.
In comes CONgress.
Need to stop foreclosures. Need to restore the money markets. Get FNMA to TAKE THE BAD LOANS from Brokerage houses, by providing new loans.
Wall street walks with their money.
Taxpayers take the defaults.
I thought it might take many more months for the public to realize that the US economy is already lurching into a depression, by which I mean a long period of flat or negative growth. The GSE problems could make that realization come much earlier than I expected.
I have no idea what the government will do with the GSEs. I do think mortgages are likely to get even more difficult to get, and mortgage rates are likely to go higher. And I think the rot in financials is only started to be exposed.
The complacency about what the US economy faces is amazing to me. There will be a time to move to take advantage of cheap assets–houses, stocks, etc.–but that time is years away.
Keep the popcorn popping,
Red Baron
Do the following to get through the depression: 1. Get and keep a job 2. Rent a place or live in an RV so you can be mobile for your job 3. Save at least 25% of your after-tax income 4. Eliminate debt unless you could pay it off if you lost your job.
Do the following to get through the depression: 1. Get and keep a job 2. Rent a place or live in an RV so you can be mobile for your job 3. Save at least 25% of your after-tax income 4. Eliminate debt unless you could pay it off if you lost your job.
You are the second person who brought up the idea of living in an RV close to work. While I like to indulge with fitness centers and quick maintenance at large apartment complexes, I know people who would be happy to camp out for a year or more at a time in an RV, and it sounds very inexpensive. Probably could walk to work. Only thing to consider is security issues - thin walls. Better pack heat.
Also don’t forget the cost of moving that RV. Gas is not cheap, and those suckers get, what, 8 miles to the gallon?
My in-laws’ gets 4, unless it is parked for a month in my driveway visiting. Then it is 0. I’d pay for the 4 to get them out of town.
They were raising those GSE limits in the hopes of propping up prices, absolutely desperate to put a floor under them. I can’t imagine how stupid these people must be to think that was even remotely possible, as wages could never afford these prices in the first place. The only way to prop up prices, would be to subsidize the income of the entire country.
“The only way to prop up prices,…”
A complete debauchery of lending standards coupled with negative real interest rates would do the trick. How do you think prices got propped up to begin with?
While the Fed is showing a willingness to keep the FFR below inflation, I don’t foresee a renewed collective will to return to the debaucherous lending standards of the early 2000s, given the level of revulsion to the unfolding saga that is currently underway. Hence one of the pillars of bubble pricing has crumbled into dust, and prices will revert to levels which are in line with local incomes.
it CAN work, although not indefinitely. In Netherlands this trick has been used over and over again, median home prices nicely track the ceiling for the National Mortgage Guarantee (a kind of free put option for homeowners, provided by the Dutch government).
Many recent US housing proposals sounded a lot like what is used in Netherlands to keep the bubble alive. I would not be surprised if US authorities have taken their cues from here (same is happening with some other US government ‘reforms’, like in healthcare). The Dutch bubble is a lot bigger in many ways than the US bubble (27 years of rising prices, price increase for individual homes around 1000%, loan-to-income / debt-to-income / mortgage debt-to-GDP ratios that are the highest in centuries and among the highest in the word, etc.).
Yes you have!
My only comment is that I knew there was another Bear Sterns on the horizon, but i thought it would be Lehman or Merrill. The FMs were a bit of a shock. (though not at the “nobody could have predicted.” level.)
You missed it, Ed.
The Feds took over INDYMAC, yesterday.
Another Huge Lender bits the dust.
I have long asked how such a huge myth could be allowed to circulate. How in this so-called sophisticated financial world, could an ‘unwritten’ guarantee of this magnitude be tolerated?
————————
Last year, I was executor of a trust that contained lots of this debt. I unloaded everything, and was questioned at every turn; they thought I was a certified nut. You have no idea how many times I heard the line, “they are the safest bonds available…triple-A…government-backed…”
It never ceased to amaze me how ingrained this idea was, that buying GSE debt was exactly like buying Treasuries. We shall soon see…
Dutch gov. worker pension funds (huge owners of Fannie and Freddie paper) still claim that their investments are as good as gold. They must be sitting on stellar losses by now, but why worry? They are in it for the long run and if their coffers run out the Dutch government will simply increase taxes to make up for the difference. And I don’t doubt that their officers get compensated big time by their Wall Street buddies for buying all that US crap with other peoples monies.
This Freddie and Fannie thing is huge. Bigger than the Bear Stearns thing, Countrywide thing, and Indymac thing. House prices even in the beach locations on all coasts will eventually drop more than 70% from their peaks.
My new house in 1990 cost $96,600 in California. I can see the liklihood that I could buy another new house in 2010 in California for under $96,600 (the high desert) while 2 bedroom / 2 car garage deals within a mile from the Pacific ocean (and “peekaboo” views of the water) are $250,000.
Like the earlier poster said, it all goes back to how the market values the implicit guarantee of the government. This is where the real worth of a Freddie or Fannie wrap comes from. Stay tuned. I dont think anyone thinks the government would say we will never step in, the market just needs clarity.
The Fannie-Freddie emergency coincides (randomly or not) with a further sudden expansion of the inventory of trashy beach houses for sale in Morro Bay, and a sudden rash of further price reductions in same. There was a downdraft some time last year, I’ve forgotten when, and then the prices seemed to get terribly sticky again. Until July 2008.
Make no mistake about AZ - people on the Central Coast are broke. The amount of covert financial strain and divorce I am seeing is astounding.
We are just now witnessing the results of having turned into the Potemkin States of America…
An economic facade, more or less.
On one of the Faux business shows this morning a young single financial genius says that the RE and credit crise are keeping marriages together! Wonder what he smoked before the show?
One Fox News business analyst just now was talking about Freddie and Fannie and that loans are more restrictive now than before. He ended by predicting the bottom in Real Estate won’t be reached until 2010.
Some of the Faux news guys are waking up. But in 2009 they will probably say 2011 the RE bottom will be reached!
“…people on the Central Coast are broke.”
Got that right! Most of the SLO folks with money brought it in from somewhere else.
But at least the central coast has some good Pinot Noir (see “Sideways”).
some mighty good Syrah too….Fess Parker is one, but there are many others
RE: covert financial strain and divorce
Wheeeeeeedogggggggies…you ain’t seen nothin’ yet!
It’s only July and the grasshoppers are fiddlin’!
Always interesting how women, who initiate 85% of the family break-up’s; figure divorce is the solution to “covert financial strain”. It’s like totally WTF??? inverted thinking.
Hmmm…hard times…dual income world…I WANNA DIVORCE!
But then again, it’s always about them and the path to the BBD*
*bigger better deal
I know I’m not the first to comment on this, but methinks someone burned you bad. It may be hard to comprehend, but not all women are money grubbing, materialistic b!tches. BTW, I would be interested in the source for your 85% statistic. Thanks, never mind, I thought so…
“A buyer in Monmouth and Ocean counties wanting a $300,000 home probably needs an income of $72,000 a year, money for a down payment and little debt on his or her credit record, said Jim Brown, VP of Kastle Mortgage in Freehold.”
Still too much. No way someone with 72K should be looking at a home over ~200K, there’s just way too much uncertainty (job loss, increased taxes, depreciation of asset, etc) to go anywhere near 4X income. 3X is really pushing it in this environment.
Put it this way, with a 72K a year salary, could you financially recover if the home drops 100K? Could you take a 100K loss in the stock market with that salary and not be seriously damaged? My thought is no, and therefore, that’s way too much house for someone with that salary. 300K home, MIN salary of 100K. And even that, in the high cost areas (like mine, S. FL, with insane taxes/insurance) is really pushing it.
“Still too much. No way someone with 72K should be looking at a home over ~200K, there’s just way too much uncertainty (job loss, increased taxes, depreciation of asset, etc) to go anywhere near 4X income. 3X is really pushing it in this environment”.
I agree 100%… My wife and I are planing on 2x income to purchase land and build. I have never been house ‘poor’ and do not intend to be at this stage of my life.
The first home loan I took out in my life was in 1986 for 48,500.00 w/10% down, at the time my income was around $20,000.00. I was never pinched.
It was easy not to be pinched back in 1986, when apparently you could find real estate for just about 2x income.
I doubt that more than 5 percent of all first time buyers these days can find ANY real estate for sale a 3-4x income, much less 2x. Not even foreclosures.
That just means that prices need to fall further.
If buyers ever woke up to the fact that **they** control the market, we would see prices making much more sense again.
Unfortunately, the sheeple have been brainwashed to believe that prices always go up, and each successive generation is mandated to have more expensive housing for ever and ever.
It’s fantastic to finally see housing prices dropping significantly enough that the “prices always go up” mantra is finally being questioned.
Sadly, it won’t be until the sheeple understand that life isn’t about two-income households, with each person working 50 hours a week, that real estate prices drop to where they should be.
Real estate is way too expensive at all levels of the market.
The problem is that in certain areas of the country…prices of homes in a decent community, good schools, and closeness to work command a particular dollar amount..
A house that would cost only $150K in Georgia may command $300K in Florida due to hurricane codes, building material and cost of land…add in the higher taxes and insurance…
Just as Florida is seeing a mass exodus of people so will many other states..people need to live and work in a place that can provide a middle class worker with affordable cost of living…
Sorry, Ann, you are just plain wrong.
I’ve lived in Florida my whole life. I had a Real Estate brokerage firm back when Paul Volker took over the FED and drove interest rates to 17%, basically killing off real estate sales, from a prior frenzy.
I work now as a structural engineer. Building material costs have come down substantially, but are basically reflected nationally. They are no lower in Georgia than Florida. The “costs” of insurance and taxes are directly related to PRICE. While insurance has gone up $1200-$2000 per year for average homes, and taxes have doubled, the CAUSE is higher priced houses.
Land prices quadrupled because speculators were buying up everything. They have dropped to 20 cents on the dollar in many places.
The whole problem is cheap money and low interest rates allowed people to OVERPAY for houses here.
Now they want out at the price they paid. They were never worth what the “sold” for as we are witnessing now from all the WALK-Away loans and Backing out on the Condo Closings that are rampant.
Florida got expensive from Carpet-bagger loan agents and speculators in Florida Land. The same thing happened in 1925. Manias kill markets.
Problem just doesn’t stem from speculators Diogenes…it stems from cost of living..a teacher in NY can get paid up to 100K in NY..what is the starting pay for a teacher in Fl?..yet the cost of living for both places is not that different..consider real estate taxes, cost of insurance, gas, utilities and so on..yet the ability to “live” in each place is totally different…and even with housing prices going down the cost of living is increasing.
Many of the people leaving Florida today are not part of the boom crowd,but are instead people who owned prior to the boom, never took out a HELCO, but yet have found that their wages are not able to keep up with the cost of living in the area. Example..FPL is now increasing its customers 16%, the local utility company is adding a 15% surcharge for water..and the list of fees going up in each county every week goes on..yet what is the average workers pay increase each year? Florida has the highest rate of inflation growth in the country! Above New York!
As far as housing cost..YES it is MORE expensive to build a home in many areas of Florida(due to hurricane building codes). You CANNOT use the same building material that you would use for a home in GA..so the cost of building that home is far more expensive..
The property taxes of housing is not related to price reductions. If you go onto the bcpa.net website.. you will see that the state has told buyers of foreclosed propeties that is DOES NOT matter what you pay for the home..because the state is going to use the comps in your neighborhood to determine your property tax bill..insurance companies are not giving you a break either..they are going by replacement cost for the property not the deal you got from the bank..
.a teacher in NY can get paid up to 100K in NY..what is the starting pay for a teacher in Fl?..yet the cost of living for both places is not that different..
Which means, simply put, that the cost of housing in Florida has to come down, big time. There is no other possible outcome.
“The whole problem is cheap money and low interest rates allowed people to OVERPAY for houses here.”
Cheap money has and still comes from the Fed’s policy of pushing interest rates to negative real levels every time the economy needs a lift. The only missing ingredient to reflate the bubble is a reversion to lax lending standards, but I don’t see us getting there within the foreseeable future (next 20 years, say). Consequently, I expect housing prices to keep correcting downwards until they are in line with local incomes, which means the bubble pricing scenario in which your thoughts are mired is history.
I won’t belabor the point, but I think your perceptions are not correct.
I am well familiar with the Florida Building Code, as I attend the Florida Building Commission meetings on a regular basis. I know the ICC codes, as I worked with the ICC Hurricane Resistant Construction committee in developing that new Code. I have Engineering licenses in every coastal state in the Southeast, except Texas.
The cost for framing a house is about 10% to 15% of the cost construction.
The construction types for hurricane resistance construction and conventional construction are virtually the same. The only truely added expense is putting Hurricane resistant windows and doors, if you so choose. How much do you really think that adds to the cost of the house?
It is LAND costs that drove up the prices and the ability to raise the prices for maximum profitability. Connectors are needed in all areas for wind resistance or earthquakes. A heavier hold-down doesn’t impact the cost of the house any substantial amount. You might add $500 per unit. The roofing needs more nailing. Big deal.
Builder’s will poor-mouth endlessly about all the “added costs”. Most of it is just that they are finally being forced to build to code in the first place….like putting 32 nails into a sheet of plywood, instead of 8-10, just to stick it on the building. Or actually putting all the nails in the connectors.
As for the “inflation”, that is going on everywhere.
Everyone is raising prices for Food and FUEL., not just Florida companies.
This should cause prices to DECLINE even more.
Florida has ALWAYS been a low wage state, which is why I have maintained all-along that prices become uncoupled from wages during this mania.
Taxes went up, but SOS would have kept “residents” from more than 3% per year increases, so long time residents should not really be impacted unless they HELOC’ed or moved to a newer, more expensive house.
Insurance was another matter. Grossly inflated prices led to much higher rates. They will adjust.
You cannot compare NY and Florida salaries. They have always been worlds apart.
Cheap money and lending made Cheap Florida a costly State for housing. That is slowly unwinding.
I believe long-time residents are leaving because the reverse is happening. NYer’s came to Florida because they could sell their NY house at $150-$200,000 more than they could buy the same house here, providing a nice retirement nest egg. The exodus here is people who can sell their house for much more than it costs in NC or SC or Georgia. Otherwise, if they are really “long-term” residents, there is no reason to leave.
Gas costs the same. Food costs the same.
Wages are low there, too. They just have cheaper housing, because it didn’t get quite so out-of-hand there.
Who says you can’t compare salaries in FL versus NY? Using that logic, then you can’t compare cheap money and lending either, which was rampant in every state in the country.
People DO carefully examine how far their money will go in deciding where they will reside. In fact, only an idiot doesn’t. That includes the filthy rich - if he or she doesn’t compare how far their money will go in a particular location, then he or she is an idiot.
Sorry to burst your bubble, but Florida is now an expensive place to live (AND visit) as compared with numerous other places around the country. You have affordability problems that have nothing to do with real estate. Remember…most people in most other places aren’t MediCare recipients, living off government largesse to make ends meet.
If there was no MediCare and property tax freezes in place, Florida would be losing people at a faster rate than Detroit.
I have two arguments on this issue. First, I believe Ann’s argument is that (generally) to build a property to meet code in Florida will be more expensive than to build one in most of Georgia (coastal areas excluded - they would have more similar code requirements). There are additional costs for hurricane-proof windows, hurricane clips, etc. that you wouldn’t see in non-coastal areas.
Second, every cost manual I’ve ever seen includes a local and/or regional multiplier. If the costs aren’t different, why would there be a multiplier?
And while I agree that land prices are unnaturally high in Florida now, land prices are, and have always been different between areas. So land price is always going to be a component of the cost of building a house.
Land prices are determined by the market price of the house, not the other way around.
Land price = market price of house - cost of construction
EXACTLY, Yogurt. No matter how many times you say it people just don’t get that. A+B=C, but which one is the variable? What you can charge for something is ALWAYS determined by what somebody is willing and able to pay. ALWAYS. Since the price that you can get for a newly built house is determined by what a buyer is willing and able to pay THAT isn’t a variable that the builder can change, except by changing how much house he builds (cost of construction) So the price of land is determined by what a builder is willing to pay. If he’s willing to pay less that the land is worth as a farm, no housing gets built. If it’s more, than the price rises to that level.
Since construction costs are likely to come down as the construction industry tanks, the only thing still propping housing prices up are land prices.
Most would agree that nice homes in less desirable areas go for far less than teardowns in desirable neighborhoods.
I’ve said before that the real culprit in the housing mania is the land prices. Since maintaining an empty lot costs relatively little, the only way we will see these costs decrease is to have landowners become financially squeezed enough by their leveraging that they need to increase their liquidity (as is already happening with the giant homebuilders). Cheap land is coming, once the real cost of borrowing factors in the true non-Fed subsidized risk premium.
You are right Yogurt..however..as the cost of housing is getting reduced in Fl the cost of living is being increased by insurance, utilities, county,city and state fees, property taxes and gas. So the reduction in the housing market is doing nothing to make the area affordable..
This is affecting me and causing me to leave the state. I sold (luck rather than brilliance) before the bubble popped, intending to move elsewhere in Florida. Along comes the HBB and the light goes on, so no purchase. But because of that I lost my very low SOH basis.
Would I buy again in Florida? Yes, if the prices fall enough, but they are not likely to before I find a great deal in Georgia. Sellers here, as noted above, cling to what their property used to be worth (to be fair, they’re doing that in Georgia, too, but a buyer who is flexible about location has more leverage there). And most tax assessors here will not value the house for what you pay if they can call it a distressed sale - a nutty term in my mind since whatever a place sells for in a free and open market is exactly what it is worth.
Georgia property taxes are almost exactly half of Florida’s and you currently get a lot more square feet for your money, at least compared to the Orlando area. Further, for only about $30K you get a full-footprint-size poured walk-out basement that can hold all the crap folks often fill their garages with in Florida.
I think that all it will take to crack the standoff between buyers and sellers is a noticeable increase in mortgage rates. That has to be coming and it will drive prices lower everywhere. So I won’t be shocked if the Fed lowers the funds rate further, in order to kelp their banker buddies, at the same time as mortgage rates head toward 8% or more.
Sorry to say but the costs of living in GA and Fl ARE NOT the same. Take it from a transplant diogenes…my auto insurance cut by 33%, my water bill cut by 60%, gas is around 10 cents a gallon less, insurance and taxes lets not even go there, food..yes ours is cheaper here for many everyday products..
Salaries.much better paying…you can compare cities to each other..that is has been going on for years..
As far as the long timers..guess what most people that I have meet here have been Floridians for over 20 years….
They left not only for housing..but again cost of living..
If you are as familiar with hurricane codes as you say are then you know that it does make a HUGE difference in the cost of producing a house..land or no land expense..
My brother is a civil engineer registered in Florida who worked in the Everglades. When hurricane Hugo went through, none of the buildings he designed failed. He said it cost 10% more and all he did was design to code. He said that the reason structures failed was from lax building inspectors since he had a good look at these buildings and could easily see the construction defects. He had also been approached by contractors who got government bids and would pay him to look the other way. He did not do so. He thought the old code was adequate, just not enforced.
The higher taxes and insurance, if left unchanged, will naturually push the price of the homes down further, not up. The issue in most of the country is simply the fact that there is way too much land; some developers bought it at 100K an acre; it’s now selling for 5K an acre. With that kind of oversupply (which is likely to persist for the next few hundred years), there’s simply no driver to push it higher. Only in very select portions of the country is there a land shortage (NYC comes to mind).
As more people leave FL, and the prices for taxes and insurance continue to rise, the price of homes will naturally fall. Yes, there are areas that will always demand a premium, but the supply/demand curve is so dramatic right now that the cost of construction/land hardly matters.
I don’t think the mass exodus will last when heating oil becomes too expensive for millions of Yankees. They will flee here, as usual, oblivious to the fact that their air-conditioning bills, taxes, and property insurance costs will sky-rocket.
It’s cheaper to cool a place 20 degrees than to heat up a place by 50 degrees.
BIM: It’s cheaper to cool a place 20 degrees than to heat up a place by 50 degrees.
Air conditioners are also more efficient that heaters in terms of dollars per degree Fahrenheit.
Don’t forget that if you have two or three a/c/heating units, you can turn the heat down to 50 or less for half the house while the other half is toasty. The inverse in Florida will get you a lot of mold, unless you have an old house designed for breezes.
C: Don’t forget that if you have two or three a/c/heating units, you can turn the heat down to 50 or less for half the house while the other half is toasty. The inverse in Florida will get you a lot of mold, unless you have an old house designed for breezes.
You could equally have the central air cool the entire house to ten degrees below outside temperatures, thereby taking care of humidity issues, while using portable air conditioners to cool specific rooms to comfortable temperatures.
You guys have convinced me. I’ll stay in southern Cal where it’s 80 in the summer and 60 in the winter with minimal humidity.
Ann,
As someone who recently built in FL, I can tell you that it costs $50 sq/ft to build a house. That’s finished, certifate of ocupancy.
A cople of dollars more or less if you want granite and marble baths, etc.
This is true.
Muir was that SFL? Or a area of Florida that require cinder blocks for both first and second floor? Does the city you live in have strict hurricane codes for new housing? There are a few areas in Florida that have not yet caught up to the hurricane code requirements(I am sure this will change once one hits them)..but you can’t build a home at $50 a square foot in most areas of the state.. What type of home did you built for that price? And what city?
Put it this way, with a 72K a year salary, could you financially recover if the home drops 100K?
Recover from what? You could either afford the original purchase price or you couldn’t. Change in market price after purchase does not affect that.
Recover from the loss of 100K.
Not talking about ability to continue paying, what you said is true, you can continue paying as long as you can afford it. My beef is with the idea that people making 50-75K a year can even think about buying a home that could likely lose them 100K in the next few years. IMHO, it’s like going into a casino (with that salary) getting a marker for 100K, and going to play poker.
That’s just not something for the workers making 70-300K to do. It’s just too risky. And until home prices bottom out, almost no matter what your income, you can’t afford the possible losses on investment from buying today. If you can’t afford the loss, you can’t afford the home, imho.
Agree. That’s why in 2006 I sold the little Maine house I had bought for cash and could’ve bought 20 times over. Just didn’t want to be holding it through a downdraft, as I had bought it quite late in the game (2004). Having some difficulty persuading myself that I have to wait yet another year to buy winter place in Calif, tenancy there is a bit of a hassle. Maine is no problem, good landlord, etc.
Exactly, but everyone was told they could just refinance in a couple of years and buy some expensive booze and a vacation with the money they made, at least that is what everyone was thinking. Now REALLY afford a $300K house on a $72K salary? Does not leave any margin for problems at all.
And hence the gas crisis. An increase of 1K a year in fuel expenses for these people, stretched to the brink of disaster is the endgame. If 1K a year is the difference between “affording it” and not, then you can’t afford it.
Let’s say there’s 200 million adults in the USA, right now.
How many of them are a few paychecks missed, away from being homeless?
aladinsane: How many of them are a few paychecks missed, away from being homeless?
I doubt it’s that severe. Most people have siblings, parents or grown children. Or failing that, good friends who will put them up. The real problem is what happens to the investors with empty rental units (due to the unemployed/underemployed doubling or tripling up) who still have to make their mortgage, insurance and property tax payments. And what about the homebuyers who could only afford their mortgage payments by renting out a room, who can’t find tenants?
28 million Americans are receiving food stamps, right now.
aladinsane: 28 million Americans are receiving food stamps, right now.
I know several of those Americans. I know of none that are disabled. The elderly handed off their nest egg to their kids before applying for food stamps. The young and able-bodied just aren’t interested in working. All are in government-run or section 8 housing. All have relatives and friends who would house them if they were pushed out of government housing.
Food stamps are a good deal - a guy I know who spent his life working off-the-books got food stamps from the moment they first came out, but never managed to spend everything he got, and used to trade the excess for cash (this was back before food stamps became debit cards). The ones who do manage to spend everything tend to buy shrimp, salmon and nice cuts of meat on a regular basis.
I wouldn’t worry about the indigent - they’ll do fine. The (ample) programs are on autopilot - we’ll just run a bigger deficit or pay higher taxes to support them. I think the real temptation is for working stiffs on the margin - who are barely covering expenses - to start asking themselves whether they should take it easy and coast on government assistance instead of busting their butts to make a living.
Yes, and it really slows up the grocery line at a store near where I work.
“A year ago, lenders might have required a borrower to show proof of income simply by supplying a pay stub and a bank statement. Today, they require at least a month’s worth of pay stubs and tax returns from the past two years, mortgage brokers said.”
“A buyer in Monmouth and Ocean counties wanting a $300,000 home probably needs an income of $72,000 a year, money for a down payment and little debt on his or her credit record, said Jim Brown, VP of Kastle Mortgage in Freehold.”
The return to stringent lending standards will throttle prices. All of the past gains were due, in large part, to not having to qualify based on the ability to afford the purchase. The irony here is, the banks who have re-instituted such standards, are driving down the prices of the very assets which their books are loaded with. They’re in a no win situation, with failure staring them in the face from both sides.
They’re in a no win situation, with failure staring them in the face from both sides.
———————————————————-
a bird in the hand is worth 2 in the bush. the banks will see to it that they survive in the titanic lifeboat when their customers are drowning.
Add that they own their cars outright and have safe drivers insurance that could save a couple hundred more a month so 4x is doable
——————————-
to go anywhere near 4X income. 3X is really pushing it in this environment.
I think it’s time to go back and reread the report that got Armando Falcon canned back in 2003: http://www.ofheo.gov/media/archive/docs/reports/sysrisk.pdf Back then, in the go-go years, even bringing up the idea that maybe their regulator should have the authority to step in if they went insolvent was enough to get you fired and regarded as some sort of “tin hatter.”
Thanks for that. I hadn’t heard of him before so I had to google him. In case it will save anyone some time:
http://www.washingtonpost.com/wp-dyn/articles/A30436-2004Dec27.html
http://www.forbes.com/services/2005/12/13/fannie-freddie-ofheo-cz_ms_1214beltway.html
Thank you, Jim!
When Condoleezza Rice claimed that no one could have predicted terrorists would fly airplanes into buildings, we were all somewhat compelled to oblige her out of some vague sense of patriotism and rallying around the flag. Now, when the government claims “No one could have seen this financial crisis coming,” yet we have countless electronically-preserved entries on this blog that specifically outlined how this disaster would unfold, as well as provided links to alternative media outlets that described the same, we must hold the Neros of this country accountable. Dubya, Greenspan, Mozilo, Leslie Appleton-Young, etc. They all ignored well presented and intelligent warnings, claiming that in their positions of power, they inherently new what was best for the country–the fuel of greed. They are all complicit in this; before we begin any bailout, we need to lock up the ones who got us into this mess. It’s time to start thinking about street justice…
Peter Schiff was telling people to buy gold before 2003 and continues to say the same thing. He is still being laughed at. I bet he won’t give them even a look as he steps over those same bums on the sidewalks of NYC.
Thank God I was listening… my gold and oil holdings are doing quite well. Thanks Peter!
Paradigm shifts are always ridiculed by those that long for the status quo, until it’s obvious old ways of thinking are hazardous to one’s health & wealth.
And then it becomes conventional wisdom.
“Investors might shy away from anything related to mortgage companies, particularly with home prices falling and potential buyers struggling with rising energy prices and layoffs, he said.”‘
I believe that out of this mess.which I do believe is reaching peak..is that a new financial system will have to be formed, with different guidelines that will allow mortgages to be sold amongst banks ONLY. I believe that the days of “mortgage brokering” will be a thing of the past..right now everyone in the “banking” industry is suffering from a lack of a secondary market to trade the paper back and forth..reality is that the banks only have so much liquidity themselves and were never in the business to only make loans and not sell them. The cycle of using the loan system to raise capital has stopped. The only way to revive it and put the words of “trust” back into the system is to create a new one that does not allow for 3rd party intrusion, and has mortgaging rules that favor the banking industry…
It only makes sense that this situation with Fannie/Freddie was going to happen..you cannot expect them to be the only “dumping” ground for mortgages..it won’t work and it is like putting a finger in a dam that is about to burst..
What’s the last item of easy liquidity in the financial world, presently?
Stocks.
Why shouldn’t they suffer the same liquidity problems that houses are going through, right now?
What makes them “special”?
Well for starters:
1. They generally aren’t bought with borrowed money, and indeed have strict margin requirements.
2. They can be bought and sold in small increments at a known market price in real time.
3. Owners of stocks are much more rational than owners of RE.
4. They have very low transaction costs.
5. They don’t require any physical oversight by the owners.
Where is your source for point number 3. Explain Pets.com and the rest of the insanity permeating the markets in the ’90s. The same irrationality exists today in the stock market. Even though we have all the news in front of us about what is going to happen in the economy, the majority of investors are not able to assimilate the news and put it into action. This is called cognitive economic dissonance.
The news is available to any and all, yet many mopes still put moneys into the market through their 401Ks every month. This is called conformational bias. “Wait and hope”. The human condition.
A person is smart, people are stupid.
At least in the stock market players who think stocks are overvalued can short them or buy put optionis. Thus rational players can bet against overvalued stocks. This cannot be done with housing.
The easiest way to short housing is to short banks, but there are other ways to short housing. There are ETFs to short housing, there are home builders to short, there are bonds to short housing and there are future markets to short housing. A person could have bought a house in 2005 and hedged against going down in value by buying puts in housing on the CME.
Many on this blog shorted (and continue to short) housing simply by selling and renting.
The Financial Mess in the US will give whole new meanings to the term “The Paper Chase” from the 1973 movie of the same name
When in Danger,
or in Doubt,
Run in Circles, Scream and Shout
Everyone, from the legal eagles, investors, mortgage companies to the Fed and more, are all going to screaming at suspect hard drives and praying for a coherent paper trail to sort out who owns or owes what in this Friggin Mess.
And to All…Good LUCK
“Anyone have a ‘Plan C’ that could save the financial system, yet avoid a hyperinflationary scenario at the same time?”
Plan C is the people put a Fascist Dictator in power! That’s the usual scenario.
Or start another war…
In her Great Depression stories, my mil told me housing values shot up and many renters lost their places when WWII broke out. It seems the banks who had been the landlords after all needed to offload their inventory all of a sudden.
She told of her parents being offered their rented home for $5k before the war broke out. They hesitated and soon found that they had to move when it sold to others for $7k. Seems all of a sudden the locals had work and income.
“Plan C is the people put a Fascist Dictator in power! That’s the usual scenario”.
You know people love to point fingers and play the blame game, but a person does not have to dig to deep into history to understand that your comment is true! Of course most people will say that can’t happen here. I wouldn’t bet against it at some point in the future.
Presently, we are at around 1,100 signing statements by ’ssshrubery…
Doesn’t that give you pause for concern?
I wasn’t kidding!
Life in Germany in the 30s weren’t much different from the United States today. Sure, kids gadgets were Leica cameras and Blaupunkt shortwave radios instead of Playstations and iPods, but ordinary daily life had much the same routine as daily life here.
There’s an interesting display in Amsterdam at the Ann Frank house. Positioned next to a window in the attic is a photo of the street in 1940. It looks the same today! Sure the shops are now cell-phone stores, etc, but it looks the same.
Unfortunately, the folks they’ll be rounding up won’t be the 2 Million houseflippers. It’s a minority of Americans who don’t see them as poor victims. Most Americans shared the dream of having a big house, and SUV and a boat, even if they had no right to it, or no real means to pay for it.
They’ll probably start with the illegal immigrants (an issue I just can’t get too worked up about) and work their way up….
I agree, except I would say it has already happened here, or at least something very close to it, starting in year 2000.
Illegal wiretaps of US citizens without court order…
Blustering nationalism…
Corporate power and money protected over rights of citizens…
Cronyism (”heckuva job Brownie”)…
Corruption (secret meetings with energy companies)…
Torture…
Comingling of religion and government…
Disdain for intellectuals…
Election fraud (Florida 2000, Ohio 2004)…
Militarism (unfortunately coupled with incompetent White House leadership and squandering of our military)…
It’s not quite Mussolini’s Italy or Hitler’s Germany, thankfully, but our government and many of our citizens headed dangerously far in that direction between 2000 and today. Hopefully we’re about to turn it around.
“Hopefully we’re about to turn it around”.
Thanks for the chuckle.
“Comingling of religion and government…”
Especially these born again virgins who were former prostitutes.
Both involved in the world’s oldest profession, deceit.
Wow,
All of this happened in the late 1800s through the turn of the century. Looks like history is repeating itself. As some one likes to say “wash, rinse, repeat.”
“starting in year 2000″
This s..t has been in the works for years. You just don’t like the current administration. That is your right, I get it. Instead of making a nice list of inaccuracies from the leftist blogosphere, try calming down and using your head. Our government is made up of corrupt individuals from all points of view. The state department, the pentagon, the CIA and any other department of government you can think of all have individual agendas. They are no longer looking out for the best interest of the country, they are protecting their budgets and propagating rhetoric to support their particular societal or military goal.
We need to clean house. I am just at a loss as to how this can be accomplished with everyone so polarized and bitter.
“I am just at a loss as to how this can be accomplished with everyone so polarized and bitter.”
IMO, the best way is to vote against every incumbent of every political position on your ballot. Re-elect no one. Convince as many others as possible to do likewise. Waaay better to throw out one baby whom you “thought” was not half bad.
Shills will say, “Oh yeah, so you’d vote against Ron Paul?” My answer is yes, I would if it meant that by so doing we could get rid of every incumbent. I can’t speak for him, of course, but my guess is he’d agree with that philosophy.
Reuben,
heck, I have a personal plan A, plan B and plan C. Unfortunately, plan C calls for ammo and beans.
We are in a sorry mess!
NOT lol
we have one now. What’s plan D then?
Plan P is reserved for ’ssshrubery & co.
I’m just making an astute Asunción…
Ben, who are the largest holders of GSE paper? Why China and Japan. It alls makes sense doesn’t it. Let the dollar collapse, let the GSE’s fail, and let those foreigners get left holding the bag on worthless dollars and paper. It’s no secret that the US plan has been to repay the foreign debt ( if they were ever going to repay it in the first place) with depreciated dollars).
IMHO, that is a large part as to why oil and gold are skyrocketing. The leaders of China, Japan, and other countries are not dumb. They know that the dollar and our non-treasury paper are essentially worthless, so they are not buying oil, gold, and other assets that contain value- the new world currency. These countries have been net sellers of US bonds for some time now, as evidenced by the fact that our dollar is worth less than pretty much every other major currency than it was a few years back- even the Canadian dollar was worth more.
Regarding the GSE’s, anyone with half a brain has known they have been a Ponzi scheme for years, going back to Raines and his regime. Name one other publicly traded company that has been allowed to stay on the NYSE without filing 10-k’s for years. How many times have they had to restate financials, and still the amount is well under reported as to their losses- remember, they are not forced to report like other public companies.
The bottom line is that the government is out of control. Look at the CFC deal, the BS deal, the proposed lender bailout, the numerous Fed liquidity dumps and TAFI swaps, and now this GSE bailout.
Ask yourself, who is the ultimate party responsible for paying these trillions of dollars in losses?
Every taxpayer will be, not the foreigners, not the corrupt CEO’s and politicians, not the scum on Wall Street.
It’s time for action. We need to get angry and let the government know we won’t sit still while they bankrupt our country,and ruin the future foru our kids and grandkids. You need to voice your opposition to allowing these scum to passing off the costs of these bailouts on the backs of the taxpayers, and to vote each and every one of these traitors out of office. Vote for each and every new candidate. They cannot be worse than what we have.
“…who are the largest holders of GSE paper?”
I was thinking CalPers, TSP-F, etc., the stewards of Joe Sixpack’s 401k account.
You’ve got it, rms.
**We** (those with money market funds, bond funds, pension plans, insurance policies, etc.) are the bagholders of GSE debt.
It seems to me the govt needs to decide between keeping on hand a high (record) level of vacant, overpriced homes, or letting a more free (housing) market drive prices back to affordable levels. Since the GSE mission is affordable housing, why not let Mr Market serve the affordable housing meal on the table the GSEs have already set?
“If the govt does not bail the GSEs, we could see debt deflation that takes us back a couple of decades, financial markets could seize up, and we literally run out of money to conduct business in the U.S. GSE debt is held everywhere by almost everyone. Though most of us despise the idea of a bailout, the potential for GSE insolvency is probably the greatest financial event in modern times. We are definitely in a quandry.”
Deflation is BB’s worst nightmare. Any serious contemplation of what happens going forward should start with consideration of what the Bernanke Fed might attempt in order to avoid deflation (not that it will necessarily work, as evidenced by the largest YOY national U.S. housing declines on record currently in progress…).
Prof. Bear,
Is it wrong that everyone go back to cash to pay for everything? Void out all personal credit!
The US, in imho, has a growing underground/cash economy. Is this so bad?
Just questions i keep asking myself.
Thanks for your response.
Simple.
The government wants a cashless society. All governments do. Cash is too difficult to trace.
The “underground” economy uses Cash. No questions asked. No taxes paid.
With Credit Cards, the government can track EVERY purchase you make, keep tabs on the taxes you owe, and know what kind of products you buy.
Credit Card receipts make for much easier tracking of you and me.
Not much cash when no one has a job. And what happens when as a nation we dishonor ALL debts govt, corporate and personal? This is the outcome of the deflation senario. Worse IMO than the inflation one. Pick your evil, because if inflation is to boiling, deflation is to freezing. Both will do you in.
“Is it wrong that everyone go back to cash to pay for everything? Void out all personal credit!”
In the olden days, folks spent lots of valuable time and money going to the bank to make deposits and withdrawals of cash. I am perfectly happy to avoid this waste of time and resources, so long as the modern credit system continues to function.
Your proposal to eliminate credit seems unnecessarily draconian to me. My wife and I are credit card “deadbeats” — we benefit from using our credit cards and paying them off each month w/o interest or penalty charges, plus we get frequent flier miles on one card and cash back at the end of the year for another (thank you, banks!). How would it benefit me or any other deadbeat to have to go back to spending cash for all financial transactions?
The only change that I would like to see is for those who deliberately scam the system (i.e., run up a big credit tab then walk away from their debt) to have to use cash for a long time thereafter, rather than being soon requalified to borrow by a banking system which is hungry for plankton.
Prof. Bear,
It would benefit you by means of lower prices on everything you buy. You are competing in the marketplace for goods and services with people who are willing to buy on credit, rather than cash. Kill the credit, and demand drops.
CCC
Credit is not income. Borrowing reduces disposable income and aggregate purchasing power n the long run.
If nobody could borrow money for consumer goods they would have more money to spend and demand would be higher. Money paid in interest cannot be used to buy things.
I understand your argument–that interest takes away from spendable income, but credit is still able to be used to purchase things, so it’s money in my opinion. I hypothesize that it goes through a cycle.
You’re right, of course, that eventually lenders might not lend to a person who spends 100% of his income on debt service, and that then demand would drop and prices would be lower. But up until that point the person can leverage his income stream and borrow far more to spend in the marketplace than his income would have allowed.
So I guess that while credit is being expanded for individuals, prices rise. When credit stops expanding, prices fall as people pay down the debts.
The only difference to me is that I would have to make more trips to the bank and spend more time there, and I would not have the benefit of my card carrier’s float or other perks. Eliminating credit cards would make me worse off for indirect reasons, and the extra transactions costs could actually result in us spending less money, but as you suggest, this might be offset by lower prices on stuff that credit crazed buyers would not be able to purchase.
Consumer price deflation is easily avoidable - just keep printing money - but asset deflation is not.
Asset prices always adjust to fundamentals - earnings and interest rates - but those two variables cannot be controlled at the same time.
It’s interesting how the two things that don’t get factored into the CPI (food and energy prices) are the primary commodities that are undergoing inflation right now.
All the gold bugs and would-be oil barons forget that in an economy where you can make substitutions for ‘needs’ after a period of cheap excess, demand is actually highly elastic.
Once deflation is in full swing, commodities will inevitably follow as liquidity demands increase for new investment: people will buy hamburger instead of steak, telecommute or use the bus instead of drive, and gold will become useless as an inflation hedge when people can barter services instead.
“Consumer price deflation is easily avoidable - just keep printing money - but asset deflation is not.”
Japan learned that one the hard way.
The Axis Of See No Evil (until it’s too late)
Have been busy juggling a dozen live hand grenades, when suddenly they have to juggle a couple 105 howitzers named Fannie & Freddie, as well.
“A year ago, lenders might have required a borrower to show proof of income simply by supplying a pay stub and a bank statement. Today, they require at least a month’s worth of pay stubs and tax returns from the past two years, mortgage brokers said.”
I have to throw out the BullS—t flag on this one. I personally know of a person who just purchased a house on a stated income loan. Do not know the bank. He does not have a lot of money, borrowed 10K from his parents to shore up his FICO score and pay down some credit cards. One lender out of 5 was able to get a loan for him. The other 4 loan offices said “I don’t have any product to sell”. This lender was good. He had to sign a lot of letters and the lender worked overtime. My estimate he was a big shot in some company and now is working out of his house. You can call him and he will call you back; Never in the “office”. My friend called me and asked: If I sign these letters, with “little white lies” in them can they come after me? The lender and realtors put a lot of distance between him and them. It was him signing and no ties to them. He had to put about 15% down payment and fudged a lot of paperwork. Another person, worked overtime with the bank, (short sale) to get the deal done. He has a house with some equity in it and was buying this house (next to his current house) to rent out. The house sold for 525,000 two years ago to a Hispanic family that did drywall. Drywall business dried up and the family(s) was not working much. The house was in good shape when the Hispanic family purchased the house from the original owner of 40 years. Friend has to repaint the interior. Redo the kitchen, walls and bathroom. The house was not in bad shape, no heavy damage, just a lot of wear and tear. He is doing the rework on the cheap and does not have spare money. He is already crying poorer! I have been avoiding him lately. Who wants to hang out with someone who just put themselves deeper into the hole and now wants a free meal or beer from me? He was real motivated to purchase this house and worked the numbers real hard. We talked and he and I both know this deal will either crumble him or make him so money. I told him and others I am not optimistic about his chances for survival.
He purchased the house for $320,000. If I recall correctly here are some items he told me:
Loan: 6.25% 30 yr. fixed
Payment: $2700 including taxes
Rent: $2000 (est.)
Disclaimer: I did not check the numbers (To busy with my own problems.).
He asked me how much lower the house will go down. I estimated (two weeks ago) it will go down about $50,000. He agreed but said in a few years it will appreciate. After all the F & F news and uncertainty this week, who knows where the bottom will be?
So I call BS on proof of income by banks. It, as of last week, was harder but not impossible to get a loan on baloney paperwork.
we refinanced to a fixed rate 2 months ago. I only had to show 2 paystubs.big deal! The worse part is my house is definitely slightly maybe more underwater value-wise. The appraisal was complete horse sh*t but that’s what made the deal. So appraisal fraud is alive and well too.
That was my point yesterday on this blog . The corrupt system still exists . Why should F&F be used as the dumping ground for loans that are still BS . The corrupt system still seeks the greatest fool bag holder to keep the market going . I really don’t care if mortgage brokers and real estate agents can’t make loans because of prudent standards and normal underwriting .
The industry keeps crying for faulty loose low down lending in a declining market that has not stabilized yet . Nobody but a stupid government lending program would be lending without a major down payment in a market like this . Not only do the note holders want F&F to pick up the junk loans they made in the past ,but they want the government to provide a source of funds for the new money on loans being made as private money doesn’t want to take that risk .OK, so you either agree or don’t agree with the government being the pasty that takes that risk .
How do you go from having fake prices and fake lending ,to having a normal market in which risk is such that it’s normal on a mortgage? We have a foreclosure market right now ,so how can anyone say that this is a normal market ? IMHO ,you just let the lenders sell the foreclosures to qualified buyers and that is it . If the bank needs a loan to survive ,or needs to raise capital ,or needs to be bought out ,so be it .
The Fed Chairman and Paulson have underestimated the amount of loss that will take place ,just look at all their predictions . Any bail-out plan should be in sink with the reality of how far the market is going to crash ,otherwise your just wasting money and going down the wrong path .
i am shocked at this!
and with low credit score he still gets a 6.25% rate?
at least he has skin in the game…well his parents skin
To call bull*t because of one personal instance is to ignore the reality of what is happening in the credit markets. A lot fewer loans are being made and it is more likely than not to generally get tougher to get one.
Responsible lending will make a come back as most people want to be paid back.
There are some lending institutions that never dropped their standards for certain types of loans. I was really burned (at least the attempt was made) by the holder of my old mortgage. Four years ago I re-financed but this time asked around for the most reputable local company in the area. And then I went to them.
Their first question was what type of loan do you want? As they only did 15 and 30 yr fixed. Anything else they’d recommend another place they worked with. I finally got a 30 year fixed at 5.5% for a $75k mortgage with them, my house (that I’d lived in for 10 years) was appraised for more than $400k.
The drawback - I went thru the most thorough financial check that I’ve ever gone thru (they asked for and questioned EVERYTHING). Which was fine with me as I’ve never had one late payment on anything in 25 years. You had to pass ALL their check-points else you didn’t get the mortgage. Why did I go thru all this? I was totally fed up with scum like DiTech and all the other trash that use to advertise so heavily on late-night TV. And having had a bad experience with BofA (on savings accounts), I didn’t want anything more to do with long-distance national banks.
Today I don’t even use a bank, instead I’m at a local credit union.
It’s not bullsh*t. I’ve seen the same thing myself in just the last 2 weeks.
Maybe the majority of lenders have been making much more sensible loans, but there are still plenty of bottom feeders who are making crappy loans with OPM, and the only incentive I can see is their huge commissions.
Lesson not learned…
Critic of the Firms Sadly Says ‘Told You’
By JOHN D. MCKINNON
July 12, 2008; Page A8
WASHINGTON — Peter Wallison saw Fannie Mae’s troubles coming 25 years ago.
In the early 1980s, he was a top official in the Reagan Treasury Department. And Fannie Mae, at least by some measures, was insolvent, thanks to the economic storms that were then roaring through the savings-and-loan industry.
But getting anyone to do anything about the congressionally chartered mortgage company and its unusual vulnerabilities proved futile, even after Mr. Wallison began writing books warning that it and sister company Freddie Mac could take advantage of their government ties and relative lack of regulation to grow too large.
Now the two companies’ struggles “in fact threaten not only the stability of the housing sector but the financial markets themselves,” he says.
It would not be “the end of lending” or other such sky-is-falling squeaks like we’re reading right now. There will still be people with savings that would lend for the right terms. But the financial system won’t be able to shovel the risks to foreign CDO buyers and pension funds anymore. The risk stays at home, and we have to deal with it.
Without F&F, only a few very large banks would be willing to offer 30 year mortgages. There is too much churn in borrower’s lives to take that risk on to the books. The rates would be higher, down payments larger, standards tougher.
Nearly all lending would be adjustable-rate too, just as in Britain and Canada. Again, not the end of the world, but establishing a new standard of expectations.
And there will always be local hard money lenders willing to go 65% LTV. But these will be shorter term notes.
But frankly, I don’t see all thiscoming to pass. Congress will not abide by seeing millions of Americans lose access to funding homes via low down payments. They couldn’t resist tinkering in the 1930s. Why wouldn’t they tinker now, especially in today’s “entitlement” society?
People will not abide by the situation of their parents or brothers/sisters having had access to fixed rate 30 year mortgages, yet they cannot. If taken away, they will vote the financing back into existance.
So there *will* be legislation to maintain a national secondary market, and F&F will exist in some new form, under some new guidelines.
How much dollar devaluation it takes to get there though, is anyone’s guess.
“People will not abide by the situation of their parents or brothers/sisters having had access to fixed rate 30 year mortgages, yet they cannot. If taken away, they will vote the financing back into existance.”
Agreed. Which is why we will ultimately collapse per Alexander Tytler’s famous and so true quote below.
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years. “
It wouldn’t be so bad if F&F just stuck to prudent loans that carried low risk that were under 417k .When you put a loan company in a position of being the bag-holder of bad paper and continue to want to cram high risk loans down it’s throat, in denial of a correction after a mania ,your setting that Corporation up to fail ,or the taxpayers to fail .
Maybe the government should just set up a new Company called the
“Secondary Market Dumping Ground Company for Faulty and Fraudulent Loans .” At least that would be more honest .
Like many things the gov does, the result is exactly opposite from the stated goal. The stated goal is to make housing more affordable.
The result is that it’s easier to obtain a mortgage with fewer qualifications, which forces house prices to be higher than they otherwise would be. Which makes houses less affordable.
Without these agencies, loan rates may go up, but house prices will also drop, as fewer people qualify. Lower house prices is what makes housing more affordable. As these agencies disappear, their stated goal will finally be met.
But of course, their stated goal was not their real goal. Their real goal was to provide cheap insurance to banks so that banks could issue loans while reducing their risks. Which allowed the banks to make lots and lots more money.
The panic today in what to do with these doddering ridiculously-managed institutions, it’s how we can make sure banks don’t lose their shirts. Banks come first, because to the US Treasury and to the Fed, “the economy” is synonymous with, first, banks, and only secondly, with wall street. Nothing else counts.
So when they talk about how the economy is doing, substitute the word ‘banks’ for ‘economy.’
How anyone could possibly lose money running an institution whose charter is to create money out of thin air escapes me. To these people I can only say What Ever Major Loser.
and soon affordable healthcare will be yours = death
MA style, compulsory participation (at pain of tax penalty) in privately administered affordable healthcare with all the leg.-mandated fixins’.
With no cost controls.
How’s that working out so far?
Both the state legislature and the Globe say “blue skies.” The ignorant morons they rule over are still sitting in the saucepan with smiles on their faces.
“Loan: 6.25% 30 yr. fixed
Payment: $2700 including taxes
Rent: $2000 (est.)”
1. Who among us has $2,000 for rent?
2. Who among us has $2,700 for a mtg. payment.
3. Who goes into a deal losing $700 per month?
4. What bank can’t see the above 1,2, and 3?
3. Who goes into a deal losing $700 per month?
Just recently, lots of people.
When I first started looking for a new house here in the Tampa area, I wanted to relocate to Pinellas County because I have worked their for 17 years. Commuting was becoming burdensome.
House Prices began climbing at 20-30% per year.
That meant a $120,000 house was now 145,000 to 156,000 in just one year, a GAIN of $25,000 to $36,000 per year.
That was easy to figure. I saved $1000 per month for a down-payment, but LOST $2000-$3000 per month due to inflation of prices. During 2001-2005, buying at a negative cash flow was making money.
Now the cycle is reversed. Buying at a loss is suicide, but people are sometimes slow on the uptake.
RE: The F & F Nuke Blast
Before the days of Howard Raines could buy 10 acres of buildable land in northern New England for roughly $1000 per acre.
Now a 3+ rural lot with no sewer or water in the wilds of Littleton NH runs $120k. WTF?
For 25 years I did ALL my mortgage biz with a small eastern Maine savings bank which kept 95% of its’ lending portfolio in-house. Their requirements were simply prudent debt to income levels and a 20% down equity position. (How did you get the 20% down-BY LIVING IN A FOOKIN MOBILE HOME FOR 5 YEARS-IT”S CALLED SACRIFICE!)
The sooner the system crashes and burns the better off we’ll all be.
HD man, I think you mean Franklin Raines, the black financial genius who ran Fannie Mae and took out $100 million dollars in “performance bonuses”, and then retired.
I’ve posted here numerous times that he was always just a thief who got a free ride while looting the agency.
They took all this crap paper and raked off Millions for the “churn”.
Now, finding the paper is worthless, Mr. Raines is long gone.
Sort of like Mozillo. Financial Raiders ride Free~!!
Isn’t America great?
Where’s the tar and feathers?
“Where’s the tar and feathers?”
Being saved for the critics of middle-east policy.
HD man, I think you mean Franklin Raines, the black financial genius who ran Fannie Mae and took out $100 million dollars in “performance bonuses”, and then retired.
I’ve posted here numerous times that he was always just a thief who got a free ride while looting the agency
________________________________________________________
seems to me that so called “free trade” is only benefiting the pols and their lackeys. If confidence is required for today’s fiat currency and the president inspires leadership then I am not “inspired” by our current president or the 2 wannabee presidents and IMO I think the world of international finance probably feels the same way.
Don’t know if this has been posted yet Diogenes.
Updated 7/11/2008
Raines, Federal Regulators Reach Settlement
By David S. Hilzenrath
Former Fannie Mae chairman and chief executive Franklin D. Raines has agreed to a multimillion settlement with a federal regulator over his alleged responsibility for improper accounting at the mortgage finance giant.
The regulator, the Office of Federal Housing Enterprise Oversight, said Raines had agreed to forgo stock, cash and other benefits worth $24.7 million in exchange for dismissing the charges against him. However, the regulator’s estimate wasn’t the only way of looking at the value of the settlement.
The agreement includes stock options worth $15.6 million at the time they were issued; those options are currently under water. They entitled Raines to buy shares at prices of $77.10 and higher. Fannie Mae’s shares are currently trading at about $29, so the options Raines is surrendering would not produce any benefit to him unless the share price rose dramatically, according to sources familiar with the settlement who spoke on the condition of anonymity because they did not want to be seen as criticizing the regulator.
OFHEO said Raines’s settlement also includes the payment of $2 million to the federal government. That sum would be covered by a Fannie Mae insurance policy, the sources said.
The settlement also includes proceeds from the sale of stock worth $1.8 million, to be donated to programs aimed at assisting financially strapped homeowners. Those are shares Raines had been fighting in court to obtain from Fannie Mae.
He also agreed to part with $5.3 million in other unspecified benefits, OFHEO said.
Raines was one of three former Fannie Mae executives to settle…(cont’d)
http://blog.washingtonpost.com/washbizblog/2008/04/regulator_to_dismiss_charges_a.html
Leigh
RE: I think you mean Franklin Raines, the black financial genius who ran Fannie Mae and took out $100 million dollars in “performance bonuses”, and then retired.
Yes, yes…diogenes.
Thank you for the name correction.
Yup-the system has lost all crediblity.
Congress will bring Roger Clemens and some no name idiot trainer for “he said”/”she said” testimony on the past use of steriods.
And then let a guy like Raines walk with $100 million based on bogus bonus numbers which now threaten the financial solvency of the world and it’s ho-hum,”who gives a jack”.
People really need to stop payin’ taxes. It’s the only way to bring this all to a head.
was it important to mention that he was “black”. Are the fat old white guys doing much better?
The United States cannot avoid deflation because the destruction of money and credit is taking place at a faster pace that the injection of credit into the system. IMHO Bernanke must have studied the books on the Great depression upside down because what he did not realise is that you cannot force a bank to lend even if it has all the money in the world. The banks are the middlemen between the Fed and the financial system and they are either not passing on the lollipops or asking for an arm and a leg in return. The deleveraging will morph into a depression and there is nothing anyone can do about it. Nothing.
What is needed in a big way is wage inflation. Offshoring has ensured that will not happen, so as long as our worth as human beings is tied to our “job” we are in huge trouble, since the fair market rate for a days (12 hour day that is) is about $2.00 on the world market, and I am not really sure why anyone here thinks they are worth a hundred times that simply by virtue of being an American.
GH,
I do not think wages are going up, because the Fed will not allow it-inflation.
“Fed doesn’t want you to get a raise
Lou Crandall, chief economist for Wrightson ICAP and co-winner of MarketWatch’s monthly forecasting honor,
says Fed is watching wages closer than core inflation.”
http://www.marketwatch.com/
If you read some of Bernanke and co.s’ take on the Great Depression, their belief is that Credit tightening is what made an ordinary downturn in the economy fail into the abyss of the Big Fall.
Remember his “helicopter” comments. He doesn’t want to see any Deflation.
Notice the panic with the TAF’s? Get money into the hands of the banks and financial companies.
I believe you are right. Trust is gone. The only thing the FED can do is bring us to Zimbabwe.
But Bernanke, the perennial student of the Big D., thinks the FED can finagle the money system to get us back to borrowing and spending, so that America goes on like it’s 1999. or 1925?
His failing is that he doesn’t recognize that a debt-based system actually requires the debtor to make good on his bets. When everyone starts welching, who’s money’s good? The Depression was caused by leverage unwinding. Lending more money won’t make the bad bets any better, it will just make the debt level higher. Or, we really could just be Zimbabwe. tough call.
Zimbabwe is my prediction.
Why don’t any deflationary scenarios have an individual that understands Inflation?
“the burden of government is not measured by how much it taxes, but by how much it spends.”
Mr. Milton Friedman
“…as long as a government appropriates goods and services to itself in return for pieces of paper that compete as stores of value and means of exchange in the portfolios of investors, you’ll get inflation….”
Mr. John Hussman
It does not matter if banks don’t loan as long as the government is borrowing and giving the money out. 160B for stimulus checks is the same as borrowing 160B from the banks. With current inflation running in excess of 4%, borrowing money from the treasury department at 2.46% for 2 years is free moneys.
“This is the first time in my career that I truly believe U.S. Treasury bonds sold off on credit concern. By this I mean, the credit of the U.S. Government.” July 11, 2008
“This is the first time in my career that I truly believe U.S. Treasury bonds sold off on credit concern. By this I mean, the credit of the U.S. Government.” July 11, 2008
The first time? I sure wonder what drove l-t T-bond yields to 14% or so circa 1980?
Come on PB, that one is easy - look at Fed Fund rates under Mr. Volker. It wasn’t credit concerns that drove the US Treasuries interest rates. Corporate bonds were trading at 16%. Now the US has a captive buyer of its securities , the Social Security system.
In the crash of 1987, to get liquidity, there was a brief period of selling US Treasuries. Yesterday, the US Ts got slammed when every firm was trying to get out of corporate debt and historically buy US Ts.
Treasuries are just another way to offload debt to the younger generation. All the fake equity is going to poison everything it touches, and needs to disappear.
That was what was so ‘great’ about the Great Depression.
Real monetary value will not return to the markets until Wall Street is allowed to fail. I become more convinced of it every day.
Yesterday, the US Ts got slammed when every firm was trying to get out of corporate debt and historically buy US Ts.
——————-
Glad you brought this up, hoz. I had noticed it and wondered why we weren’t hearing more about it.
IMHO, this is a very bad sign.
the banks can make more money “oil speculatin” than they can by loaning it out to the common people.
“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.” There is so much wiggle room in Paulson’s statement I’m breathless with anticipation. So much to work with. We’re gonna get ourselves a real whopper of a euphemism out of this. Does he take the easy way out and just go at “today, “ as in “That was then, this is now”? Does “current form” get an adverb? I’m gonna go with mission creep. Their important mission is going to get a rider.
There is so much wiggle room in Paulson’s statement I’m breathless with anticipation.
—————————————————————
what’s good for goldman-sachs is good for america.
“Their struggles are reverberating at the Shore, where mortgage brokers say lenders have already tightened their standards so much that only well-paid residents with a clean credit record can obtain loans.”
Um, right, so… only people who should be getting loans in the first place.
Did I miss something?
I just read on CNN that the government is going to merged these two into one new organization run directly by the Fed. The tentative title is FCKD MEN.
Houses for one, houses for all. It’s the NWO Dream!
From CNN.com :
Talk about a bailout
The New York Times reported Friday that senior Bush administration officials are considering a plan to have the government take over one or both of the companies if their problems worsen.
But Paulson said Friday that the government’s primary focus is making sure that Fannie and Freddie remain “in their current form.”
I wonder what the would call the new organization though? Perhaps FB, inc?
The New York Times reported Friday………………
Try a more reliable news source. They make up more than they report.
Fannie and Freddie are certainly not Black Swans, more like a couple of Black Cows…
http://www.youtube.com/watch?v=kS9Ll02CNjU
socialist turkeys coming home to roost in the US, home of free-market capitalism
RE: McCain backs F&R bail-out.
http://blogs.wsj.com/washwire/2008/07/10/mccain-open-to-bailouts-for-fannie-and-freddie?mod=sphere_ts&mod=sphere_wd
You’re toast, John.
No lessons learned from the Keating debacle, I guess. Such is the arrogance from 24 years of Congressional office.
So, as a white middle aged male, I’ll be sittin’ on the voting sidelines watchin’ for the coming meltdown as O’Bama Boy kicks your azz.
Geritol Johnny makes Dole’s 96′ run look competitive, in comparison to his.
Even though I don’t vote, I’m begging my elected candidates to support the bailouts. For gold holders, this is absolutely the best route to make sure our money supply ends up being worth even more.
Go, John, go! I don’t like you, I think you’re a waste of flesh, but thank you for supporting the bailout idea. For those who wisely divested of US dollars and stocks and bonds, this is a great idea!
Let’s bail out everyone, crank the money printers into high gear!
Let’s bail out everyone, crank the money printers into high gear!
———————————————————————–
you got that right….crack money.
We just go from one dim wit to another! Nothing more than a large collection of self severing, self important, self centered wastes of time and money in D.C. IMHO.
Takes one to elect one.
Not that I don’t agree with your sentiment, but try not to refer to a black man running for President as “boy”. This is not pc, it is a very real reminder of our country’s racist past, when grown men were called “boy” as a way to say they were not the equal of white men.
Please take the PC over-reaction and stick it where the sun doesn’t shine!
Ah, one would expect no less a response from someone who is sell-named “Cracker”.
That does not make you right and me wrong.
You are just louder and more arrogant with your view!
FYI, “cracker” is a term used for generations to designate a native of Florida; i.e. “Florida Cracker”. It is only your jump-to-PC-conclusions that make it anything else.
well, I dunno but I have been reading where one person, larry sinclaire, says that the democrat wannabe president is a “ho boy,”
in case your wondering what people with IMB mortgages are thinking…here is an example of their plan (from message board)
I talked to “Sue”
She said I can take the risk of not paying my mortgage and when the company transfers its books to the feds maybe it will get lost in the mix and the deed will be free and clear
Americans have a lot of curious Plan B’s, to get them out from under.
And your plan B is to count on a nation outside of America with no legacy freedom to not steal your gold? Seems more risky than burying your metals in a seldom treaded spot in the Southern Sierra
But I’m sure you weighed out the risks and rewards.
Plan B is to get away from this country, if it turns into the mess, I fear it just might.
Why not have your ducks in a row, ahead of time, like i’ve done?
I’d be carrying a toothbrush, a spare pair of tighty whities and not much else, as they go over me with a fine tooth comb making sure i’m not absconding with something of real financial value, as I go through passport/tsa search monkeys @ the airport.
as I go through passport/tsa search monkeys @ the airport. AS IF there will still be any flights leaving that airport or any airport. Been advising you for months to have your own plane ready to go.
Let’s see, typically a used airplane costs $100,000. Better have enough gold in that other country to make it worthwhile paying $100,000 just to get to that gold!
How about this: 50% savings bonds and treasuries and 50% gold and platinum bullion? Keep the paper bonds in a bank safe deposit box and otherwise buy electronic bonds on http://www. treasurydirect.gov. As for bullion, a 300 lb safe in your house or rented apartment will do well. At least with savings bonds and treasuries, the government will always be able to print more money to pay me for what I loaned them and pay me interest.
For the paranoid: If the cops come to your door and order you to empty your safe, you will know well beforehand to be able to shift the metals somewhere else.
I’d rather invest $100,000 in some land in a libertarian-friendly state such as New Hampshire, Wyoming, or Nevada and bury the metal when I feel it’s no longer safe to stash metals in a home safe.
If I had $1,000,000 worth of gold ( at spot price $965 per ounce) then maybe an airplane is worth it. But where to fly? Mexico? Drug cartels run Mexico. The U.S. government is heavy handed but drug cartels are nothing to mess around with. Maybe the Switzerland of Central America - Costa Rica - will alllow you financial privacy.
Yes I look at http://www.escapeartist.com periodically, but I’m not convinced any other nation’s group of thugs (also known as “government”) will turn against me and rob me of my gold.
More likely, you will have to know that government and culture thoroughly because you will have to haul that gold back to the U.S. in 8 years when we get through the extreme period of nanny government, high taxes and anti-business. Ron Paul predicted that the U.S. will be forced economically to reduce the size and scope of the government. He does not mean in 30 years. He thinks it could within ten years. I’m willing to wait that long instead of bail out of the U.S.
“She said I can take the risk of not paying my mortgage and when the company transfers its books to the feds maybe it will get lost in the mix and the deed will be free and clear”
Mmm, I don’t think so. When a loan is closed, it is recorded as a lien in the public records at the relevant county courthouse. That lien stays on that property record until a believable piece of paper arrives, to be recorded, that shows the lien was satisfied - the loan was repaid. Losing loan papers will, IMO, accomplish the opposite of delivering a free and clear deed - it will instead make it very difficult and time-consuming and expensive to get the lien off the books and therefore will make the house unsalable until that can be accomplished.
The idea that we can blame the crazy/stupid lending of the last few years on the GSEs is a perverse misreading of history IMHO. After all the 20% down 30 year ammortizing FRM is a CREATION of Fannie Mae. The very reason that this became the standard of prudent lending is that this was what Fannie Mae would buy. There’s no assurance that this would exist if the GSEs went out of business. But in a world gone mad, being the sanist person in the room is not enough to save one.
Now there has been alot wrong with the GSEs. Their books have been NOTORIOUSLY sloppy. They have been drasticaly undercapitalized IMHO. When lending started to get loose they DID pressure the Congress into allowing them to buy in increasing percentage of ARMs. Perhaps privitazation was a mistake. After all, it was their declining market share in the face of stupid lending by others that was used as a reason to allow them to buy shakier mortgages. Now even at their worst, they were never loading up on the teaser-rate neg-am poo that Countrywide specialized in. But if the justification for their existence was to provide a minimum level of liquidity to the mortgage business, they had no business in stupidville.
As recently as a few weeks ago, some were complaining about their slowness to use their new authority to purchase jumbos to “save” the CA RE market. As if they had a great supply of pixie dust that they could sprinkle on insanely high DTI and LTV loans and make everything “all better.” They can’t make some stupid no down liar loan good by buying it. And their very low capitalization levels make the potential impact of defaults from such poo loans even worse than they would be on the banks that are currently holding them.
Yep, leave F&F alone .Let them stick to prudent underwriting ,they don”t need to provide a secondary market for the still corrupt system . If the government wants to buy fraudulent loans or already foreclosed on loans ,let them get the authority to do such a act ,instead of trying to
take F&F and destroy it by making it into the new GREATEST FOOL SECONDARY MARKET BUYER OF LOANS .
Paulson, BB, Dodds ,Congress and the Senate, are trying to avoid the painful reality that this correction is the aftermath of a fake mania .
You can’t bail out loans that were obtained under these conditions ,and F&F has already taken on to much bad paper from places like Countrywide .
What about the new walk-a-way from mortgages trend that will certainly increase ? Congress/Senate doesn’t seem to be updated on what is taking place . They better change their bail out plan to include already foreclosed on houses where the keys have been mailed in. They don’t get it ,without appreciation the jerks don’t care about the home ownership .
The bad thing is, their low capitiliation levels left the vulnerable to a market downturn not of their making. Sure ,the default rate on their mortgages are still less than 2%. But they have so little cash compared to the amount of loans guaranteed that even small national downturns in the RE market have been enough that they are probably insolvent, or at least will be before the bubble is completely burst. At least now discussiong the possibility of GSE insolvency isn’t the sort of “tinfoil hat” thinking that would get you instantly fired, like it was when Armando Falcon brought up the idea back in 2003 in the “systemic risk” report that he released as head of OFHEO.
The problem is even if common sense was all it would have taken to keep us all out of this mess, it’s insufficient to GET us out of this mess now that we’re in it. Collectivly, the powers that be are STILL spending too much time and effort trying to prop up prices (keep the RE ponzi scheme going) just a little longer and hoping that tomorrow will be a better day. It’s going to get UGLY and few are willing to recognize how ugly. I mean we WILL get through this, we got through the great depression and WWII. But this will be much more painful than most people realize. And those in charge either don’t realize that, or are playing into J6pack beliefs that it won’t.
I wonder what the odds are that the no-comprendo situation could resolve itself much more rapidly after election day.
Agree 100%, jim. You know what you’re talking about, IMHO.
Rumors 1978: Great Fleetwood Mac album
Rumors 2008: Great possibility F & F will bring down the system
The series of financial meltdowns in the US is clearly frightening my (Canadian) government. Since our CMHC, which guarantees Canadian mortgages, has been suddenly restricted (minimum 5% down, 35-year maximum amortization period, which is still ridiculous, but whatever) by the Financial Minister.The speed at which the Canadian government acted makes me wonder if they knew about Indy/Freddie/Fannie problems and are now rushing to put out the fire. Or maybe this has been in the pipes since Black Rock.
It is weird to feel like the people “in charge” are so scared, actually. Especially when you know that it is corporate and governmental policy to put on a happy face to avoid panic. Since October, every day feels like a “to-be-continued” cliffhanger.
Ooh, I wish I had invisibility powers, so I could go eavesdrop in boardrooms and backrooms…the gossip has got to be juicy-fruity.
lol
Does that mean lawmakers won’t be raising the underwriting loan limit from $$417000 to $729,750?
It was gonna allow me to buy a new h-o-o-o-ome.
It might be a blessing if they don’t lend you the money .
I was talking to a retired VP in lending yesterday ,and he said in summary that there is nothing wrong with not having a big real estate market . Who ever said that the real estate market had to have a bunch of sales yearly . So what if we go into a dead market . The market is the market . Why try to make a market that doesn’t exist ? Anybody holding the bag was a risk-taker . So what if they have to convert to a 10 year plan instead of a 2 year plan . The builders need to stop building and stop bitching about not being able to sell homes . There is a over-supply currently . It will takes years to get rid of the foreclosures alone . The commissioned sales people convinced people to “buy now “,so it took away future sales. Nobody can change what happened .Even if prices get affordable ,there is still to much over-supply that will take years to get rid of .
Fidelity US Government Money Market fund, in February 2008, had about 14% of its assets in Freddie and a few percent in Fannie. I plan to close out this money market account on Monday. Where to put it is the next problem. If Freddie and Fannie croak with no bailout, it’s going to affect a lot of people that throught that their savings were safe.
I’m a bit torn on this issue. I’m sure my mother and others close to me would be among those who would get burned. However, I’m sure many people here pulled their funds from anything related to the US housing market, any kind of MBS, including FRE and FNM bonds. While I hate to see people I care about get hurt, financially or otherwise, I think people really need a wake-up call that they need to pay attention to who and what they are invested in. This crap that money managers sell that you just plunk your money in the market somewhere and you’ll get 10% annualized gains needs to go.
People need to be rewarded for sound decisions, rather than being essentially punished while watching those who weren’t as prudent get rescued by the Fed/US Gov’t.
You can’t reward the losers who think the stock market has value when dividend yield is below inflation. When you invest in a stock for the long market that issues no dividend, you’re gambling that another sucker will pay more in the future.
Business investments are done for one purpose: dividends of profits. Preferably annually, preferably with a return on your money that makes sense. If a business has 50% profit margins gross and a 22% overhead, you should receive 28% on your money. Period. Businesses don’t have to grow to the moon forever, eventually they should pay their owners.
The stock market has no profit, anywhere. It’s all blown internally on bonuses and “growth” but the owners/shareholders get nothing. Yes, I understand that some companies expand, and the value of the share goes up because the company is worth more in terms of assets, but these are generally depreciating assets. The only time you’ll get THAT profit is if the company liquidates assets, which they won’t unless they’re bankrupt. Lose, lose.
If you invest long in the market, you get what you deserve for buying sucker companies. Myself? I buy into local companies that I can monitor, maintain, market and promote. 30% returns on investment are not unheard of. In some businesses (restaurants and bars in the correct market) can return 50% to 100%, or more, annually.
You have to do your research. You have to understand the local businesses and have a hand in navigating them in the proper direction. I’d rather be one of 12 investors than one of a million.
For most corporations, the owners are not the shareholders. The owners are the CEO’s, their cronies, the Boards of Directors & other insiders. Those are the ones reaping the rewards. Those owners get paid well no matter what the corporation’s profits are. The shareholders are bagholders.
FDIC accounts and protected retirement accounts should be bailed out, or honored . Nobody ever said that mortgage contracts were protected
from loss . The property is suppose to be the protection from loss (so much for that when you had fake prices ).
michael,
Are you referring to the “Fidelity Money Market Trust Retirement Government Money Market Portfolio” (FGMXX)? I ask b/c I have some of my 401k money with Fidelity in this fund and would like to limit my risk to a FRE/FNM melt-down…
Thanks in advance your your help.
How about PayPal? Since most of these assets are revenues from eBay sales, it makes a lot of sense that eBay would make these account holders whole in the event that some of the money market assets held defaulted. eBay would face nothing less than a business-model-destroying revolution if it failed to do this.
Lex
> Financial services & property
Fannie & Freddie
Published: July 11 2008 14:43 | Last updated: July 11 2008 19:24
Fannie Mae and Freddie Mac are like a sweet old couple who have suddenly become unhinged and taken their neighbours hostage. For decades, they have been the backbone of US housing, using their implicit government backing to raise cheap financing to take on or guarantee millions of mortgages – about 43 per cent of the overall market currently.
In other words, the already dreadful US housing market would implode if the two government- sponsored enterprises went under. That is why fears of outright failure are misplaced – Washington could not let it happen.
http://www.politico.com/news/stories/0708/11704.html
This writer does not understand how bailouts work. They are a form of ‘planned panic.’ This bailout measure was in discussion for months and months before the rather difficult period the financial markets are currently facing, but the moment of peak panic happens to coincide with the point of maximum will to pass measures which might seem imprudent during more normal times.
“Panicked legislators push housing bill
By MATT KIBBE | 7/12/08 12:15 PM EST
It is illegal to yell “Fire!” in a movie theater because people could be hurt in the ensuing stampede. For the same reason, it should be illegal for a politician to yell “Panic!” on the floor of the House or Senate. Taxpayers might get run over as politicians rush to spend billions of taxpayer dollars and then stampede to the nearest microphone to claim credit for solving the problem.
An example of this behavior is the Dodd-Frank mortgage bailout bill being considered in Congress this month.”
Who’s really too big to fail?
Let some troubled financial firms fail, U.S. regulators tell Congress. Fannie Mae and Freddie Mac are exceptions.
By Mark Trumbull | Staff writer of The Christian Science Monitor
from the July 12, 2008 edition
America’s top financial policymakers have a message about the government’s role in times of turbulence: Bailouts not necessarily included.
“Allowed to fail.” That’s the way Treasury Secretary Henry Paulson, in a congressional hearing Thursday, said financial companies should generally be treated.
“Orderly liquidation,” said Federal Reserve Chairman Ben Bernanke at the same hearing, outlining a possible response if a prominent securities firm faced bankruptcy.
Their words don’t mean that the government is withdrawing from its backstop role in financial markets. In fact, the importance of that role was underscored this week as mortgage giants Fannie Mae and Freddie Mac saw their share prices plunge to levels not seen since the early 1990s. The two companies are so central to the home-loan industry that in a crisis regulators would have to step in.
Nouriel Roubini’s Global EconoMonitor
Insolvency of the Fannie and Freddie Predicted Here Two Years Ago. What Happens Next? Or How to Avoid the “Mother of All Bailouts”
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Nouriel Roubini | Jul 11, 2008
Two years ago in July and August of 2006 this author first presented here his analysis of why the U.S. would experience its worst housing recession of the last 50 years, why home prices would fall at least 20%, why the collapse of mortgages would start with the “subprime” ones (a term that at that time was unknown to 99.9% of the public including most investors) and how this housing bust would lead to a severe banking crisis and a credit crunch that would tip the U.S. economy in a recession by 2007. My timing of the recession call was off by six months – as the recession started at the end of 2007 rather than mid-2007 as then predicted – but all the other predictions turned out to be correct.
At that time this author also predicted that this housing bust and mortgage bust would lead to a bust of the two government sponsored enterprises (GSEs) in the mortgage market, Fannie Mae and Freddie Mac. Predicting the insolvency of Fannie & Freddie was the obvious logical implication of the prediction of the worst housing recession in decades. So no wonder that this week headlines are all about Fannie and Freddie being insolvent and the systemic consequences of such insolvency.
Protected by Washington, Fannie and Freddie Grew
By JULIE CRESWELL
Published: July 13, 2008
As the Bush administration scrambles to address the sudden decline of the country’s two largest mortgage finance companies, some of their longtime critics say the crisis has been building for years.
Among them is Jim Leach, a Republican former representative from Iowa, who began arguing two decades ago in Congress that the government-chartered mortgage companies, Fannie Mae and Freddie Mac, were unfairly insulated from the real world.
They were not subject to the same financial standards and tax burdens as their competitors, he warned, and if they ran into trouble, an implicit government guarantee to back them up meant taxpayers would be left with the losses.
“There are times in public policy making that one can feel like Don Quixote,” Mr. Leach said of his repeated legislative battles to rein in the two companies’ growth.
From The Sunday Times
July 13, 2008
US Treasury rescue for Fannie Mae and Freddie Mac
Treasury secretary looks at $15 billion cash injection for crisis-hit mortgage lenders
Iain Dey and Dominic Rushe
US TREASURY secretary Hank Paulson is working on plans to inject up to $15 billion (£7.5 billion) of capital into Fannie Mae and Freddie Mac to stem the crisis at America’s biggest mortgage firms.
The two companies lost almost half their market value last week as rumours of a government bail-out swept the stock markets, hammering share prices around the world.
Together, the two stockholder-owned, government-sponsored companies own or guarantee almost half of America’s $12 trillion home-loan market and are vital to the functioning of the housing market.
The capital-injection plan is said to be high on a list of options being considered by regulators as a means of restoring confidence in the lenders. The move would protect the American housing market, but punish shareholders in both companies.
Under the terms of the proposed move, the US government would receive a new class of shares in exchange for the capital, which would be hugely dilutive to shareholders.
The potential rescue comes as investors are braced for more bad news from the financial sector. Citigroup is expected to reveal further writedowns of at least $8 billion with its second-quarter results, and Merrill Lynch is forecast to reveal writedowns of some $4 billion.
Both banks are expected to post sizeable losses for the second quarter, and reveal plans to sell off billions of pounds worth of assets.
A number of US regulators and politicians have been attempting to restore confidence in the two mortgage agencies.
Am I the only one here who thinks $15 billion is like spitting in the ocean? IMO, this will be wiped out within four weeks.
yes, compared to the $6 trillion in the ocean $15 billion seems a bit futile. But I don’t doubt B-52 Ben is up to the task, he has a printing press that can print out $6 trillion with the push of a button. Too bad that Ben studied the Great Depression instead of the Weimar era, he could have learned something…
“the US government would receive a new class of shares in exchange for the capital”
Will they be printed on Charmin?
Rush to drop Fannie and Freddie
By Jeremy Lemer in New York
Published: July 12 2008 03:00 | Last updated: July 12 2008 03:00
US stocks slumped as investors rushed to sell Fannie Mae and Freddie Mac on speculation that a government bail-out could wipe out shareholders while oil prices spiked above $147, pummelling consumer-facing stocks.
Fannie and Freddie have come under massive selling pressure this week on fears that they are not adequately capitalised to meet the demands of the current housing crisis. Freddie and Fannie shares plummeted as much as 50 per cent before recovering to $6.72 and $10.13, respectively, down 16 per cent and 23.3 per cent.
Another round of stinging earnings estimates and price target cuts for large-cap banks, this time from analysts at Citigroup, did not help the mood. JPMorgan slid 4.4 per cent to $33.01 and Bank of America fell 4.4 per cent to $21.38.
Companies with exposure to the mortgage market were particularly hard hit. Lehman Brothers slumped 15.1 per cent to $14.69 while the S&P 500 homebuilders index dropped 2.7 per cent. The financials sector as a whole fell 3.3 per cent and has now lost over half its value since the peak in February 2007.
Over-inflated, overstretched and over here
Where the US goes, the UK follows - and this time it’s back into the boom and bust cycles that defined previous decades, says Heather Stewart
* Heather Stewart
* The Observer,
* Sunday July 13, 2008
…
Ever since Paulson brokered the bargain basement takeover of investment bank Bear Stearns earlier this year, investors have clung to a faint hope that the worst of the crisis was over. But this fresh drama showed the credit crunch entering a new and more damaging phase. It also provided a worrying omen about the consequences of a long-lasting housing downturn.
Wasn’t Phil Graham wife on the board of directors at ENRON lol
I really can’t see this thing ending well. I took a job at World Savings after years of not having payraises in the manufacturing tech sector while many CEO’s of the company walked away with nice packages as the company’s stock went from one hundred and fifty dollars to one hundred and fifty cents. While at word savings, the company was purchased by Wachovia lol. After a couple of years as a loan closing specialist lol, non whiste blower, (we need you to send over another 1003 with a larger income to get this through underwitting)lol I was laid of. While at Wachovia I enjoyed many ours of quality post on this blog, I thank all of you for the entertainment and honisty. Well I have been on my new job ( removal driver for mortuary’s and the coroners office) and I’m seeng the affects of this finnancial crises every day. Believe me the Bodies are pile up. Last week we took a guy out of a house who had all the goodies, Harley,SUV, Jet boat in the driveway, and a nice mcmansion. He lost his job, and now he’s dead. sad but true