The Housing Bubble

Stucco on the Rebound

http://www.nytimes.com/2008/08/17/realestate/17post.html?_r=1&ref=realestate&oref=slogin

In New York City these days, however, stucco is edging back, according to developers, manufacturers and architects. Apparently there have been improvements in the synthetic formula, which consists of foam, adhesive and paint. But a bigger factor in the change has been the financial climate: stucco’s inexpensiveness makes a big difference to contracting budgets.

Good for a chuckle, the word credibility and FED in the same paragraph.

Bernanke Tries to Define What Institutions Fed Could Let Fail…
The lack of clearly defined limits may put the Fed’s independence at risk as Congress discovers that its $900 billion portfolio can be used for emergency bailouts that might otherwise require politically sensitive appropriations and taxes.

“There is some hard thinking that needs to be done,” Philadelphia Federal Reserve Bank President Charles Plosser said in an interview last week. “The Fed has a terrific reputation as a credible institution. We have to be cautious not to undertake things that put that credibility at risk.”

http://www.bloomberg.com/apps/news?pid=20601103&sid=a0v71H6gketc&refer=us

Dr. Doom

http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html

Roubini believes that future bailouts should focus on mortgage owners, not investors. Accordingly, he sees the choice facing the United States as stark but simple: either the government backs up a trillion-plus dollars’ worth of high-risk mortgages (in exchange for the lenders’ agreement to reduce monthly mortgage payments), or the banks and other institutions holding those mortgages — or the complex securities derived from them — go under. “You either nationalize the banks or you nationalize the mortgages,” he said. “Otherwise, they’re all toast.”

For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd — but something between a trillion and a trillion and a half dollars. But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”

Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. “A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”

The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. “Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.”

HOUSE OF CARDS
When Joe LaCoste’s real estate empire collapsed, a lot of people went down with it

http://www.registerguard.com/rg/Home/story.csp?cid=127244&sid=1&fid=1

Albany real estate mogul Joe LaCoste was a natural-born salesman, business associates say. That’s why he could command deals worth upward of $15 million. It’s also why so many people are hurt now that it has all come tumbling down, leaving behind partially built housing projects and investors who lost their life savings.

Oops. Ralph Cioffi was sending emails..

http://www.northjersey.com/business/news/Cioffis_e-mail_trail_leads_to_new_charges.html

“I’m fearful of these markets,” Cioffi, of Tenafly, told a company economist in an e-mail. “It may not be a meltdown for the general economy but in our world it will be.”

Lehman Said to be Shopping $40B Real Estate Portfolio

“NEW YORK CITY-Wall Street investment bank Lehman Brothers Holdings Inc. is reportedly in talks to sell its entire $40-billion real estate portfolio. Lehman is believed to have begun negotiations with firms such as BlackRock and Blackstone, according to reports, although Lehman’s New York City office was unable to be reached by press time to confirm reports.

Reports say that the firm will sell all of its assets as a whole or broken up to the highest bidder. Only two months ago, the firm revealed a net loss of $2.8 billion for the second quarter, compared to net income of $489 million for the first quarter of 2008 and $1.3 billion for the second quarter of 2007. …”
Globe Street

A little bit of bank nervousness as others see the prices Lehman’s receives or fails to receive.

OT but here is some interesting “tin foil” for those so inclined. It starts initially with 9/11 but quickly moves into some very interesting topics with attendant theories and names involved. (PDF!)

http://www.rense.com/general83/Collateral_Damage_28062008.pdf

A Darwinian Tale in California: Strong Prey on Faltering

“Downey Financial Corp.’s report Friday that depositors pulled funds from its branches this summer amplified an industry shift: Customers are fleeing weakened banks in favor of those viewed as safe havens, particularly in California.

Downey was quick to note that this month it wooed back 45% of the funds it lost in July. However, analysts say that customer perception of weakness in a particular institution — punctuated last month by the IndyMac Bancorp Inc. collapse and the failure of the $250 million-asset First Heritage Bank in Newport Beach, Calif. — will help a handful of stronger companies build share in the nation’s most populous state even before the credit cycle improves.

Of course, no banking company is immune to the credit crunch, and analysts have routinely cautioned that small holes in the balance sheets of relatively healthy firms could break open and cause big problems if the economic slowdown devolves into a prolonged recession….”

American Banker

..

Errr….Ummmm….

It’s lookin’ like Ft. Meyers (or maybe Tampa) is fixin’ to get hammered.

Wonder how that will affect the housing market here in FL.

1926, anyone ?

..

“…Barrons reported over the weekend that the Treasury is poised to recapitalize FNMA and Freddie Mac. In so doing they would throw holders of existing common shares, preferred shares and subordinated debt under the metaphorical bus. The article claims that after for accounting stratagems and machinations each GSE has a net worth of about $50billion…”
Across the Curve

Realtor has a second career while staging homes.

http://blog.sellsiusrealestate.com/marketing-tips/real-estate-porn-home-stager-edition/2008/08/14/

Perhaps this was inevitable.

This would be a better topic for the local market observations, but the evolution of the housing bubble in Anchorage seems to be going the “soft landing” route, despite my fervent hope of California-and-Florida-style price drops.

The foreclosures locally are houses that are too big, too small, too trashed, or too old. The prices requested by the banks are not as much of a steal as I had hoped, and they are still getting snapped up. 10% price drops seem to be attracting more than a few fence sitters. Only the most ridiculous wishing prices have dropped more than that, so far.

Currently, the best deals locally seem to be offerings from people who are relocating or from trustee estate sales. I’m surprised about that. The economy is stagnant but not yet tanking, and everybody seems confident that the oil based economy will save us from the same fate as the lower 48. Sigh…

Now that Musharraf ain’t the sheriff anymore, things could get interesting in Pakislamabad?

A.Q. Khan’s handiwork has already been parceled out to North Korea, amongst other rogue nations, and more to follow, surely.

http://en.wikipedia.org/wiki/Abdul_Qadeer_Khan

US banks scramble to refinance maturing debt

By Francesco Guerrera and Aline van Duyn in New York

“…The rising funding costs are set to put pressure on earnings because, in many of their businesses, banks rely on the difference between borrowing and lending rates to make money…

Mohamed El-Erian, co-chief executive of Pimco, the asset management group, said: “If banks keep borrowing at these levels, you will get a repricing of credit for the whole economy.”

Last week, financial groups including Citigroup, JPMorgan Chase and American International Group borrowed almost $20bn in new long-term debt, paying some of the highest interest rates ever in order to lock in funding. The wave of refinancing is set to continue for several months as billions of dollars in bank debt come due.

For example, Citigroup has more than $5bn of maturing bonds in August, but this climbs to $12.8bn in December, according to Dealogic data. Bank of America, with $7bn maturing in August, also faces higher refunding needs in December, with $9bn of maturing bonds. ..”
FT
Aug 17

The loans of August are here. Last week American Express refinanced its debt at 425bps over treasuries. Junk bond rate. A mighty and powerful old line company has faltered. At least American Express was able to refi, that can’t be said for all the crap that is coming due.

The mow-down on grass cutting
When it is finally time to start cutting, there’s the question of which type of mower to use. If you own a gas-powered machine, you should consider that gas-powered lawn equipment in Canada creates about 80,000 tonnes of emissions annually, and uses about 151 million litres of gas, according to Statistics Canada. They’re also responsible for noise pollution.

The most environmentally friendly way to keep the lawn mowed is probably with a push-reel mower. Cullen is a fan of this low-tech approach, partly because the knife-like cutting action is better for the lawn than a rotary-blade power model. The push-reel mower uses no electricity, gas or oil.

Those lawn mowing options would make sitting in the yard a much quieter and less lung damaging experience. But unfortunately these suggestions are likely to be ignored by the NASCAR lawn jockey crowd that mow three times a week and seem to prefer the loudest, most polluting yard machines.

OPINION
We’ll All Pay
For the Fed’s
Loose Money Follies
By BENN STEIL
August 18, 2008
…
The logic behind central bank discretion is that the economy is like a giant factory churning out 100 widgets a year, all of which are happily bought by consumers without prices rising. A sudden “exogenous shock” cuts demand to 98 widgets. But the central bank can then print money to induce consumers to buy up the two excess widgets, thereby stopping the factory from cutting production capacity and causing a “recession.” It claws back the excess money when “equilibrium” is restored.

But what if this analogy is deeply flawed? What if the economy is much more like two factories than one? One factory produces, say, real-estate widgets, and the other produces everything else. If consumers decide they want fewer real-estate widgets and more of some other widgets, it will take time and resources for capacity to shift from the first factory to the second. “GDP” growth will decline during that time. But the process is normal and desirable. By printing more money, the central bank only makes it longer and more painful, not least by producing significant and prolonged inflation.

This is the serious mistake the Fed has made. And in so doing, it has probably killed the last great hope for a sound, durable global fiat money system — inflation targeting.

Mr. Steil is director of international economics at the Council on Foreign Relations, and a co-author of “Money, Markets and Sovereignty” (Yale University Press, forthcoming).

How Low Interest Rates
Contributed to the Credit Crisis
By ETHAN PENNER

“”What inning are we in?” How many times have we all heard that inane question asked and answered in the credit-driven downturn that we’ve been suffering through for over a year now?

We’ve heard many answers from financial industry and government leaders, such as “the worst is behind us,” or “we’ll not need to raise any further capital” — only to learn in short order that our leaders really did not have the ability to make the market bend to their will….

… Credit availability and cost have moved from one extreme to the other. In time, credit spreads will moderate, as lenders, whoever they will be in the next cycle, motivated by the need to earn revenue, will begin competing for good credits once again. Sadly, the benefits of this reduction in spread will more than likely be offset by an increase in the levels of real rates as the signs of inflation continue to appear.

In the meantime, we are still in the midst of what some analysts have dubbed “The Big Unwind,” during which our system unwinds the excessive leverage of the past half-decade. We will likely see asset levels continue to adjust lower in order to come into alignment with today’s more conservative lending environment and produce yields that would attract investment capital. There is no silver bullet that government or the financial community can shoot to bring this to a quick end.”
WSJ Opinion

From “Pinched: Tales from the Economic Downturn”" on Salon today:

“I had a master’s degree. I had a job. But to feed my three children, I had to swallow my pride and go to a soup kitchen.”

http://www.salon.com/mwt/feature/2008/08/18/heather_ryan/

Merrill facing auction rate suit
“The bank says it is voluntarily doing it and doing it their own way. I want them to do it my way,” Mr Cuomo told reporters yesterday.

Merrill has been given five days to show why Mr Cuomo should not take action. It said yesterday: “We were surprised New York sent us a letter threatening legal action on ARS. We have been discussing this issue with New York and other regulators . . . we thought we were making progress.”

FT

Frank Sinatra would be great in the background, “I did it my way.”

http://www.chicagotribune.com/business/chi-sun-title-insurance-fraud-aug17,0,1998638.story

Ticor Title, one of the largest title insurance firms in the country, is suing Countrywide Home Loans, the nation’s largest home lender, saying it shouldn’t have to pay out on a title policy because of Countrywide’s gross negligence.

The suit, filed last month in Cook County Chancery Court, concerns just one Chicago mortgage made by Countrywide in 2007, but the implications are enormous, say real estate and title insurance experts.

Some of you may remember this from earlier this year. This was the case of a speculator who bought a house from Countrywide at a foreclosure sale, only to discover upon first entry that a man had been sitting in the house, dead, for many many months.

From the original article:
All the longtime neighbors at the south end of Oakenwald Avenue knew Randy Johnson and his mother, Arrellia Johnson.

When Johnson hadn’t appeared outside for weeks in early 2006, neighbors called the city’s non-emergency number asking for well-being checks, fearing he might have had an accident. Firefighters broke down the front door and searched but didn’t locate Johnson. His death remains under investigation.

Mr. Tom Toles has a cartoon in the WaPo this morn comparing the housing market to the elevator.
http://www.washingtonpost.com/wp-srv/opinions/cartoonsandvideos/toles_main.html

Hard-pressed consumers refuse to read from the script

By Aline van Duyn

“…In previous periods of economic strain, there were well-established patterns to the way people handled their debts. “There was a clear hierarchy of payments,” says Mr Rosenberger. “You paid your mortgage first to stay in your house, paid your auto loan second to get to your job, paid your utilities, and then your phone bill, and other obligations later.”

But there is no legal reason for people to follow this pattern. When consumers borrow money, the ranking of different debt – from student loans, to auto loans, to credit cards, to mortgages – is largely up to the individual.

Endebted America chart“Many people with debts now have little experience of living in an environment where they can’t just keep borrowing more,” says Dennis Moroney, research director at TowerGroup. “Now, as they are losing value on their homes, they may be less motivated to repay their mortgages. Instead, they will focus on necessities, such as eating or paying for heating fuel. To pay for those, they need to keep their credit cards open. Credit cards have become an essential item for many people….”

http://www.ft.com/cms/s/0/1dbd20ac-6c7b-11dd-96dc-0000779fd18c.html

‘We can see this behavior and it scares the hell out of us.”

Export Boom Helps Farms, but Not American Factories

“…The historical data tell us clearly: don’t get too used to commodity export booms; as any third world country will tell you, they tend to go away pretty quickly,” said L. Josh Bivens, a trade expert at the labor-oriented Economic Policy Institute. …

Such unevenness, favoring commodities, is unusual, given that manufactured products, even by this definition, account for 40 percent of the nation’s exports, while commodities make up only 26 percent and services 30 percent. Indeed, not since the bureau began compiling detailed trade data in 1977 have commodities outpaced manufactured exports for two consecutive quarters….”

http://www.nytimes.com/2008/08/18/business/economy/18export.html?_r=1&pagewanted=1&ref=business&oref=slogin

Now that commodities’ are priced lower, we achieve full third world status.

Olympic Closing Ceremonies To Feature Launch Of Chinese Nuclear Arsenal, Invasion Of United States

BEIJING—Responding to controversy regarding lip-syncing singers and “simulated” fireworks during the Olympic opening ceremonies, Chinese Olympic officials announced Tuesday that the closing ceremonies would feature a full-scale nuclear ICBM launch followed almost immediately by 2 million amphibious troops marching into California.

“We have pledged to respond to our critics in a fashion that exemplifies the culture and direction of modern China,” a statement from the newly created Chinese Strategic Olympic Committee and Global Strike Force read in part. “The world shall thrill to the spectacle of 1,000 character dancers, 10,000 traditional acrobats, 100,000 commandos storming out of the Pacific surf into Los Angeles and San Francisco, and dozens of cities burning at one million degrees.” The statement also expressed regret that, due to the unique circumstances of this year’s closing ceremonies, handing over the Olympic Games to the heavily targeted city of London would probably not be physically possible.”

Onion

Shortening School days due to hard economic times and high energy costs:

http://news.yahoo.com/s/ap/20080818/ap_on_re_us/schools_hard_times

This is really a shame. How can you approve a 4 day school week? I remember getting up at 6:00 every day to be at my elemenatry school by 7:30 before the start at 8:00. And school ends at 3:30. That was a full day of learning. I don’t know about public schools now but my kids, which attend a”catholic” private elementary/middle school have the same hours. and athletic afterwards.

My parents couldn’t afford private school but at least my public school utilized a very long day to cram as much information in me.

And what’s this about a four day work week for Government Agencies? They barely work anyways. and you giving them a four day work week?

We are one of those people that make over $250,000 a year, and I don’t agree that that makes us rich,” said Melinda Sacks, who runs her husband’s law office in San Clemente,put her in the “wealthy” category.

“Even with that kind of income, we struggle to pay everything we have gotten ourselves into.”

well then this is what is going to happen with our economy, as has been posted here, people of all levels of income are living on the edge.

Another question, how can you be an attorney and a christian all at the same time.There is a joke in here somewhere, or at the bottom of the ocean.

Renewable Power’s Growth in Colorado Presages National Debate…

DENVER — When Colorado voters were deciding whether to require that 10 percent of the state’s electricity come from renewable fuels, the state’s largest utility fought the proposal, warning that any shift from coal and natural gas would be costly, uncertain and unwise.

Then a funny thing happened. The ballot initiative passed, and Xcel Energy met the requirement eight years ahead of schedule. And at the government’s urging, its executives quickly agreed to double the target, to 20 percent.

Funny how you can never get a straight answer or a solution from a corporation until you back them into a corner.

http://www.standardpacifichomes.com/findhome/NeighborhoodFloorPlan.aspx?NID=1190&FPID=445057

It takes everything for me to open bills each month, but this flyer from Venzano, near me, pissed me off.

What happened to my corridor 78 post from cali?

Washington offers no relief for savers

The average rate on a one-year CD these days is around 2.3 percent, according to Bankrate.com. However, inflation has been rising closer to 5 percent over the past year, so savers are seeing their returns wiped out.

“Savings are taking it on the chin,” says Greg McBride, senior financial analyst at Bankrate.com. “The Fed’s rate cuts geared to aiding ailing homeowners with adjustable-rate mortgages have come at the expense of savers and retirees dependent on fixed income,” he said. “For the past 12 months, there has been a double whammy for savers as interest rates have fallen and inflation has increased.”

The average rate on a savings account is a rock bottom 0.37 percent, Bankrate says. That’s even worse than the 0.46 percent rate for the same time last year.

David Middleton and others are so mad about the situation in Washington that they got together and formed the grassroots group, Fed Up USA. The group — whose members number around 40 — have protested in Washington and elsewhere against “federal financial irresponsibility.”

http://biz.yahoo.com/ap/080818/uneasy_economy_where_s_the_outrage.html?.v=2

It appears the the PTB are starting to admit that there is nothing the can do about the housing bust and the economy in general:

http://money.cnn.com/2008/08/15/news/economy/Sloan_washingtons_solution.fortune/index.htm?postversion=2008081810

Don’t believe in miracles. Rely on them.

–
Housing Market Index and Traffic of Prospective Buyers Stays at an All-Time Low

From the survey of homebuilders:

http://www.nahb.org/generic.aspx?genericContentID=529

A reading below 20 means that the conditions are horrible.

Jas

NAHB HMI Index of homebuilder sentiment is stuck at a record low level of 16 for the second month running.

Data and chart are available here.

while going thru my e-mail i ran across this from barbara boxer about the housing rescue plan.

Dear Friend:

Congress recently passed legislation to address the home mortgage crisis. This legislation will impact people across the nation, and I am pleased to send you my summary of the bill.

This legislation is intended to help people across the nation as they struggle to pay their mortgages. Importantly, all of the costs of this legislation are covered by revenue-raising provisions it outlines, meeting Congress’ pay-as-you-go standards. It is intended to keep families in their homes, and help our struggling economy. No speculators, investment properties, second or third homes will be refinanced.

If you would like to read my ABCs summary of the “Housing and Economic Recovery Act of 2008,” please use this link.

Sincerely,

Barbara Boxer
United States Senator

I have to laugh at all the index headlines whenever the market has a bad day.

“Renewed credit fears drag down stocks”

“Wall St slides as credit worries rattle financials”

etc. etc.

Excuse me - it’s not credit fears that are causing the market downturns. It’s credit problems. As in - lack of credit, not fear of lack of credit.

It’s kind of like writing an article about a guy who dies when his parachute doesn’t open, and titling it “Fear of falling causes man’s death”.

–
http://www.dqnews.com/News/California/Southern-CA/RRSCA080818.aspx

Southland home sales post annual gain as prices drop again
August 18, 2008
La Jolla, CA—The number of Southern California homes sold last month edged up to its highest level in more than a year as bargain hunters swept up foreclosure properties in affordable neighborhoods, a real estate information service reported.

A total of 20,329 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 16.7 percent from 17,424 the previous month and up 13.8 percent from 17,867 for July a year ago, according to San Diego-based MDA DataQuick.
Last month’s sales count was the highest since 21,856 homes were sold in March 2007, though it still fell 23 percent short of the average July sales total since 1988, when MDA DataQuick’s statistics begin. From last September through June, sales for each month were at an all-time low for that particular calendar month, with the exception of April which was the next lowest. Last month’s sales total was the first since September 2005 to rise above the year-ago level.

“What we’re looking at is a fire sale of properties in newer affordable neighborhoods that were bought or refinanced near the price peak with lousy mortgages. What we’re still not seeing is this level of distress spreading to more expensive or established neighborhoods,” said John Walsh, MDA DataQuick president.
The median price paid for a Southland home was $348,000 last month, down 2.0 percent from $355,000 in June and down 31.1 percent from $505,000 for July 2007. That peak of $505,000 was reached in March, April, May and July of last year.

The median has fallen because of depreciation, especially in inland markets, and because of the steep drop off in home financing in the so-called jumbo category, which until recently was defined as loans above $417,000.

…

Jas

Blame Television we went from Ozzie and Harriet to Dallas and the example was from wholesome families to disfunctional rich cadres with asssorted hangers on and criminal stuff. Just a small matter of tv setting the stage and the sheeple following it. Or I could be wrong.

http://biz.yahoo.com/rb/080818/usa_housing_homebuilder.html

Home builders stay grim in August

“Builders are anticipating the stimulative effects of this legislation and are optimistic that the tax credit will give those buyers who’ve been sitting on the fence the reason they need to jump back into the market,” NAHB President Sandy Dunn said in a statement.

Delusion springs eternal.

Interesting what a pasting the white precious metals (silver-platinum-palladium) have taken, in comparison to mellow yellow’s downturn…

10 year Treasury at 3.81. That’s a Greater Depression type number. And the stock MARKet (where you are the mark) doesn’t seem to like the potential enema that Hankzooka has lined up for Fannie and Fred. Oh me, oh my.

Savoring The Bear’s Last Leg

http://www.forbes.com/2008/08/18/bear-market-capitulation-superior-pf-ii-in_cc_0818soapbox_inl.html?partner=yahootix

Sheila did a theya culpa on the FED, blaming them for FDIC’s woes, over the weekend…

Passing the buck in this fashion usually means some momentous event is about to happen, financially.

Please fasten your seat belts…

Monday, August 18, 2008

Freddie and Fannie back in the news

One report says Treasury officials are worried the mortgage giants won’t survive without government help. Their true value of assets on their books is questoned too. Steve Henn reports.

From today’s Dallas Morning News:

Jim Greenwood said he never dreamed his HOA would have a problem with his new Ford F-150 pickup. Then he received the first of three notices threatening him with fines.

Stonebriar HOA rules allow several luxury trucks on driveways, including the Cadillac Escalade, Chevy Avalanche, Honda Ridgeline and Lincoln Mark LT. But most Ford, Dodge or Chevy pickups are restricted.

“It’s very frustrating and confusing. It’s hard to imagine how an HOA would try to dictate what type of vehicle you can drive and park in your driveway,” Mr. Greenwood said.

“The high-end vehicles that are allowed are plush with amenities and covers on the back. It doesn’t look like a pickup,” he said. “It’s fancier.”

Mr. Greenwood appealed, claiming his Ford F-150 isn’t much different from the Lincoln Mark LT.

“The response was: ‘It’s our belief that Lincoln markets to a different class of people,’ ” he said. “Furthermore, one board member told my wife that if we don’t like it, we can move.”

Is it really possible the WSJ editors are ignorant of the fact that Alt-A and prime resets don’t peek until after 2009? Or are they just playing the role of porcine beautician?

And what about Barney and Fred, er I mean Chris? Haven’t heard much out of them since they pushed through their housing rescue plan…

REVIEW & OUTLOOK
When Henry Met Fannie
August 19, 2008; Page A16

There’s no rest for a Treasury Secretary in a financial meltdown, as Hank Paulson is discovering. Fannie Mae and Freddie Mac continue to bleed mortgage losses, and so the Treasury chief may soon have no choice but to pull the trigger on his new authority for taxpayers to recapitalize the mortgage giants.

Fan and Fred shares took another header yesterday, in the wake of a Barron’s article predicting that a Treasury recap was “almost inevitable.” When a single story in one day can take nearly 22% off Fannie shares, and nearly 25% off Freddie’s, you know investors are scared to death.

They should be. Two weeks ago the companies added another $3.1 billion in losses to the $11 billion they’d already reported in recent quarters. Both companies slashed their dividends and warned they’d buy fewer mortgages, while being more selective about those they do buy. So much for the assertion — made so confidently this year by Barney Frank, Chris Dodd and Chuck Schumer — that Fan and Fred would rescue the mortgage market from the housing slump.

Instead the companies have dug an even deeper hole than have many subprime lenders. Their current run of losses are based in so-called Alt-A loans, aka “liar loans,” that didn’t require enough proof of borrower net worth. Fan and Fred piled into Alt-A mortgages in recent years as a way to gain market share amid the late, unlamented housing mania. No one knows how many of those loans will go belly-up before the housing market starts to turn, presumably in 2009.