The Housing Bubble

Published in local Salinas paper (Valley Advisor) last weekend: Sold in 1 hour, 16 Oak st. South Salinas, $600,000 3bd/1ba/1461 sq.ft. From the picture it looks like a fifty year old house. People still being sucked in…..

Read the last paragraph of this article regarding condos in DC …

Ben, this would make a good title for your next post - “Developer makes sure that when the housing music stops, he has a chair to sit in…”

http://www.washingtonpost.com/wp-dyn/content/article/2006/06/07/AR2006060701959.html

I found fun game on Craigslist. Pull up a metro area, go to the real estate for sale section. Put in “reduced” or “motivated” in the keywords section and search. Then pick one that looks particularly frothy. Then take the contact information, either the phone or the name and put that back in the keyword box and search again. It will then show you how many properties that seller has for sale and how many times they have posted the ad. It works best for FSBOs. Example. Go to the Miami Craigslist site and put in “(212) 577 - 2270 x 222″. This NYC guy apparently has three properties he is trying to sell or rent. I smell sweat!

OT post — We got Al-Zarqawi!

Housing and stocks. It seems like this economic downturn is gathering momentum. This could lead to panic–any bets on people getting trampled as they head for the exits?

KB Home lays off employees…

http://dailybulletin.com/business/ci_3910933

Just attended a brace of foreclosure sales in Fairfax County this morning. Bidders showed up looking for a deal, but there were no takers on the sales. The properties went back to the lenders. That foreclosing attorney’s experience has been the same as mine: investors aren’t buying, banks are taking properties back.

Sticker Shock in Sarasota.

Gold

Minyan Mailbag: The Bull Gold Thesis
Scott Reamer
Jun 08, 2006 10:08 am
…the case against the USD is not nearly as one sided as consensus believes…

Professors,

One thing has been troubling/puzzling me about the bull gold thesis.

If there is a reduction of global money supply then there is less money available for each asset class. Do you think gold will attract a disproportionately larger amount due to lack of confidence in the dollar? Do you think gold (metals) is going to go up due to a global confidence crisis in the fiat system?

Basically, why would metals go up in a deflationary environment?

Thanks,
Minyan Joe

MJ,

To the degree that there is a global reduction in money supply (read: credit) then it will FIRST come from a decrease in time preferences by consumers and corporations (less demand for credit), THEN will be exacerbated by the various central banks around the world who will curtail supply (they simply follow the trend, they manifestly do not establish it). And indeed if there is this credit contraction then all the assets and business activities that were raised up and levitated artificially on the back of that credit (that risk-seeking time preference increase) will be, as night follows day, hurt by the reversal of that trend – by the removal of that liquidity from the system.

The subsequent action in the dollar is more difficult to parse but a rise in the value of the USD against other currencies would be at least consistent with a deflationary credit contraction in which global players became risk averting and perceived safety and liquidity became primary motivators (read: short term treasuries which, in order to purchase one must purchase the USD first). Make no mistake, EVERY central bank has inflated (think prisoner’s dilemma) and though they don’t have the obvious structural imbalances that the US has, they certainly have macroeconomic structural problems of their own: the PBOC has increased their own balance sheet assets (a proxy for their monetary pumping) by 34% annually in the last quarter. And of course, we are aware of the non performing loans within the Chinese system (which Fitch, Pricewaterhouse, and Ernst & Young recently noted) which are a manifestation of the same type of macroeconomic imbalances that so plague the much hated USD. All-in-all, the case against the USD is not nearly as one sided as consensus believes and within a serious credit contraction, one can easily make the case for a stronger USD over some non-trivial period of time.

Hope that helps…

-Scott

No positions in stocks mentioned.

THIS CONTENT IS FOR EDUCATIONAL PURPOSES AND IS NOT INTENDED AS ADVICE.

Scott welcomes your comments and feedback at scott@minyanville.com.

Scott Reamer runs Union Tree Capital, a Denver-based hedge fund, as well as Scout Research Partners. Previously, he was a sell-side analyst for nine years covering the technology, media, and Internet sectors for Prudential Securities, Bear Stearns, Donaldson Lufkin & Jenrette and SG Cowen.

The Real Story: More Woe at St. Joe
By Marc Lichtenfeld
Senior Columnist

6/8/2006 9:30 AM EDT
URL: http://www.thestreet.com/p/comment/investing/10290401.html

Shares of all homebuilders have been pounded like cheap beer at a fraternity house, but St. Joe (JOE:NYSE) stands out from the group — and not in a good way.

St. Joe operates mainly in northwest Florida, which had seen a boom in development with buyers and visitors drawn to the pristine beaches on the Gulf of Mexico. St. Joe hoped that demand would continue, as it sold homes away from the beach and even in the woods. To put it plainly, it ain’t happening, judging by recent events at a few St. Joe developments.

St. Joe was scheduled to release 12 condo units to the public last week in its Watersound Beach development. However, the sale was postponed, according to a St. Joe sales associate. The sales office does not yet have a date when the release will take place and was not given a reason for the delay.

It was due to a lack of demand, according to a real estate agent in the area, who requested anonymity, as he primarily sells St. Joe properties and is in litigation with the company. There are currently 52 St. Joe condos at Watersound up for resale, providing competition to the 12 new ones the company planned to sell.

According to several sources, the resale condos are in better locations than the 12 planned for release by St. Joe. There are currently 94 lots and 8 homes for resale in Watersound Beach as well.

Curiously, when asked for comment, St. Joe spokesman Jerry Ray said there are no condos in Watersound Beach, despite several listed for sale on St. Joe’s Web site.

Ray did not respond to repeated followup calls seeking clarification.

Meanwhile, prices are plummeting in the development. The real estate agent is currently listing a lot for $465,000 that his client bought for over $800,000. He said he’ll be lucky to get $450,000 for it.

A look at the prices of lots for resale shows either some desperate or unrealistic sellers. For example, one lot is being offered at $1.3 million, while the one next to it (which appears slightly larger) sold for $660,000 in March — and we know prices haven’t doubled in the past three months. Next to that one, a larger lot is being offered at $1.285 million, while an adjacent and similarly sized property is listed at $595,000.

St. Joe, like many developers, has a building timetable for many of its buyers. When a buyer purchases a piece of land, he agrees to build a home within a guaranteed period, typically three to five years, depending on the community and when the sale took place. In certain communities, if the owner reneges on the obligation, St. Joe has the right to buy back the land at the original price. That original price is valid even if the property is flipped several times.

St. Joe is extending the length of time buyers have to build by two years in its Watersound Beach and Watercolor communities, averting a potential public relations disaster.

Another potential PR situation could be developing at Watersound Beach. St. Joe owns and operates the Watersound Beach Club. Membership to the club was supposed to be included in the purchase price of a lot, according to a former Watersound Beach salesperson.

However, owners recently received a letter stating they will need to pay a $20,000 fee and $675 quarterly dues to be able to use the club. Owners have 90 days to exercise their membership decision. Again, Ray was not available for clarification.

In past columns, I have questioned whether demand will match supply for St. Joe’s communities and homes. Building costs range between $300 to $400 per square foot for the high-end homes in St. Joe’s exclusive communities.

At Rivercamps, a 1,500-acre community in Bay County, Fla., with permits for up to 450 homes, sites have ranged from $84,000 to $849,000 and have averaged roughly $200,000. Assuming a 3,000-square-foot house, the cost to own is well over $1 million.

“Rivercamps is a total joke,” according to one hedge fund manager who is short St. Joe. The source, who requested anonymity, questions who is in the market to spend that kind of money and to be stuck in “a buggy pine forest on a bay,” or at other St. Joe developments that are off the beach, when beach property is available in other parts of the country for roughly the same price or less. He believes the company parlayed its success in the Gulf of Mexico to entice previously successful speculators to buy up lots in much less desirable locations.

Demand was certainly high at Rivercamps when the company had its initial release in October 2003. At that time, 314 buyers submitted offers for 23 lots, according to a company press release. The fervor was still there in February of last year when 281 buyers submitted offers for 37 home sites.

However, there are currently only three houses (including one that’s a model home) completed. “Nobody is building,” according to the fund manager, who said he did not see a single new home under construction when he visited Rivercamps last month.

St. Joe’s Ray, however, has said previously that construction has started on several houses and that “everything is on schedule.”

St. Joe has its supporters.

“St. Joe has a balance sheet that can carry for the long run, so I am willing to for wait for the returns that I think will eventually come,” says RealMoney.com contributor David Merkel, a senior investment analyst at Hovde Capital, who is long the stock.

Elsewhere, Third Avenue Management owned over 10 million shares, or 14%, of the company as of March 31. A Third Avenue representative refused to discuss St. Joe, instead pointing me to its recent shareholder letters. Its most recent shareholder letter does not mention St. Joe, other than to state the percentage of various portfolios that the stock comprises. In the fourth-quarter 2005 shareholder letter, St. Joe is grouped with companies that Third Avenue believes has “super good management with proven track records.” Third Avenue also believes St. Joe has insulated itself from competition.

It’s important to note that a critical member of that management team, former president and COO Kevin Twomey, recently retired. His exit is seen as a significant loss by Wall Street.

I don’t disagree with the competition statement: St. Joe owns northwest Florida. However, while you can be the only Porsche dealer in town, if people aren’t in the market for Porsches, it doesn’t matter that there’s no competition.

That’s the situation St. Joe is in. Many properties are very costly and targeted toward the second-home buyer — most of whom are not buying in this environment (in fact, some are bailing out). Although many homebuilders are suffering from fewer orders, St. Joe is exceptionally vulnerable because of the high-end market and region that it serves.

Lastly, in what I believe was a play to increase its asset value, St. Joe reclassified 199,000 acres of what was previously classified as timberland to land that can now be used for resort and recreational purposes.

CEO Peter Rummell pointed to new product lines like “new ruralism” (an example being Rivercamps), as ways the land can be put to better use.

I have argued since my first story on St. Joe that there will be a very select few attracted to this type of living, especially when real estate prices have stopped climbing. The lack of construction at Rivercamps proves that point.

St. Joe shares have been crushed, off 48% since their high in July and 27% since that original bearish article in March. With more ugly surprises likely in store over the next few quarters and sentiment turning increasingly negative, I suspect the stock still has a ways to go on the downside. I am maintaining my $31 price target, roughly 30% below Wednesday’s close of $44.52.

Re: article post JungleJim
“Condo association fees are going up $2,000 a year simply because of the insurance increase,” Kochis said. “It’s hard for them to continue to be able to live here, it’s really hurting them.”
As I said before, condo prices always drop first because SFH’s (become more affordable in a declining market) don’t carry HOA fees. You can’t control the HOA fees.

From a flier I picked up on the way to work this morning:

“features new AC/Central Heat, dual pain windows, and recently scrapped ceilings”

Someone needs to teach these RE agents how to proofread, and not just rely on spellcheck…

Andre

Another red number day on marketwatch.com

http://www.marketwatch.com/tools/marketsummary/default.asp?siteid=mktw

Centex - NOVA

More discounts

http://centexhomes-dcmetro.com/Washington-DC/dcvipevent6-6.asp?divisionID=1072

Some may be interested in this item about the PPT:

http://www.nypost.com/business/67140.htm
PAULSON’S OTHER JOB AS WALL ST. PLUNGE PROTECTOR

Inventory continues to grow in Va. Beach/Norfolk/Chesapeake:

http://www.benengebreth.org/housingtracker/location/Virginia/Norfolk/

Are you out there, bakabeikokujin? Any comments? Is the bulk of this growing inventory condos like I suspect?

Did everybody see that? DOW went sharply 50pts and is now around 10800. What did just happen? It will be interesting to see how it closes. Talks of PPT intensify, but I think it’s mostly hedge funds and program trades.

2006-06-07 22:46:30
Bay Area flippers are everywhere, from Sacramento to Arizona. Perhaps they are trembling with fears; the greater fools are nowhere to be found.

Reply to this comment

Comment by need 2 leave ca
2006-06-08 07:46:31
Where will the champaigne and caviar party be when we hear stories about these idiotic flippers. The more gut renching the story, the better. The more idiotic the flopper was, the more entertaining.

ditto for any floppers from any other part of California too.

Here is a pretty picture for you. :>)

http://stockcharts.com/h-sc/ui?s=%24hgx

One reason that people give for buying into this crazy market that we’ve all heard numerous times is “they’re not making anymore land!”

I thought about this last night while I was watching the History Channel. On their program Modern Marvels, they did a special on dredging and the machines that they use to do this. Well I was amazed at what they’ve done off the coast of Dubai. I’m terrible at linking things, but if you’re interested and want to see pics, just type “Palm Islands Dubai” or “The World Dubai” in your search engine. Basically they’ve created several man-made island projects off the coast. The 300 or so man-made islands that make up “The World” project are going for $7-35MIL a piece!

Dubai is home to several prestigious waterfront resorts and they were “running out of beach”, hence these massive dredging projects to create the man-made islands. The special also mentioned that they’ve used similar dredging techniques to increase the landmass of Japan.

All this has come with a cost though. When I went looking for more pics on the internet today, I came across several articles discussing the damage that is being done to the Dubai’s marine environment.

“The whole creation groaneth…”, I guess. Romans 8:22

Just heard Japan (Nikkei 225) lost 3% of its value today. Wondering if there was any interest in discussing Japan’s red week and how that is tied to our economy. At 1EDT, Dow almost 50% higher from today’s lows (Zarqawi factor?). Also interested in discussing world credit bubble a bit more.

My apoloogies if this has already been posted:

http://www.businessweek.com/bwdaily/dnflash/jun2006/nf2006068_4156_db016.htm

Not just Japan. Thw world’s stock markets are all down the last three weeks! Gold and silver down about 25%, Oil stocks and related down about 10%. The short end of the yield curve has inverted. More and more news on bubblevision (corporate media) about higher inflation and and an economic downturn coming! War with Iran very possible (we may be on the brink of WWIII)! Gas prices up 30% year over year for the last three years!
If people are buying houses and still spending, they are not paying attention! I live near an upscale Mall. It is nearly jam packed every weekend.
For the first time since this blog’s inception, you can start to see all the things talked about over the last two years.

I really don’t get peoples behavior. I guess they don’t call them “sheeples” for nothing.

Just in case the steady stream of uncharacteristically blunt recent messages from the inner circle of the Fed went unnoticed by speculators, Governor Kohn just weighed in today to reiterate the Fed’s inflation concerns. Hint to speculators: Don’t look for the “Greenspan put” policy to continue under Bernanke.

http://tinyurl.com/klbxa

I heard a laughable media exchange last night on NPR’s Marketplace between the NPR journalist/interviewer and James Grant (the journalist/publisher of Grant’s Interest Rate Observer). Grant was suggesting that Bernanke was in over his head, did not know how to steer the monetary policy tanker as well as his predecessor, and the recent market selloff was an expression of uncertainty that BB could fill his predecessor’s boots. The incredulous NPR journalist seemed to eat up Grant’s alternative version of reality hook, line, and sinker, despite the fact that BB and the other FOMC members know exactly what they are doing, and the majority of the Fed governors have clearly stated their inflation concerns, and the markets are responding to the virtual assurance that the Bernanke FED prefers following their mandate of maintaining price stability to spiking the speculator’s punchbowl.

Interesting.
Maybe the odds aren’t updated (opportunity!?)
But the DOW futures wagers on my sportsbook have the following:
For Dec 31, 2006
Below 10,000 5-1
10,001 - 10,500 8-1
10,501 - 11,000 6-1
11,001 - 11,500 5-1
11,501 - 12,000 4-1
Above 12,000 1-1

These odds were the same when we were about to cross the 12K peak a few weeks ago.
That’s an incredible range to pick from. And Imagine the favorite even odds is Above 12K.

Who says you can’t beat the house.

Does anybody know what these signs are all about?

Real Estate Investor seeks apprentice
$20k /Mo. ?

They are all over the Sacramento area.

Aliens made him do it.

http://orangecounty.craigslist.org/rfs/169628216.html

Property prices
Going flat

May 25th 2006 | WASHINGTON, DC
From The Economist print edition
America’s housing market is losing its effervescence

“NEW Price”; “Just Reduced”; “Priced to Sell”. Once unheard of, these tags are cropping up ever more often in the property sections of America’s newspapers. They denote a shift that is becoming clearer in the national statistics, too: the fizz is going out of the once-bubbly housing market. Compared with last year, inventories of unsold houses are up and the pace of sales is down. Prices have slowed and in some areas have even fallen.

The questions now are how deep the slowdown will be and whether it will be gentle or abrupt. Ben Bernanke, the chairman of the Federal Reserve, summarised the conventional view recently when he noted that the cooling seemed “very orderly and moderate at this point.”

Just how moderate depends on the statistics you look at. America’s most reliable measure of house prices, a quarterly index produced by the Office of Federal Housing Enterprise Oversight, is published with a long lag. Its most recent report, which covered the last three months of 2005, showed little sign of a slowdown. The median house price was 13% higher than a year earlier. Figures for the first quarter of 2006 will not come out until June 1st.

Quarterly figures from the National Association of Realtors, American estate agents’ trade body, suggest that prices are slowing, but still rose by 10.3% in the first three months of 2006 compared with a year earlier. Monthly figures on the prices and pace of new and existing home sales have been more volatile, but the market is clearly slower than it was last year. According to figures released this week, the pace of new-home sales has bounced back since February, but is still 6% lower than in April 2005. The median price of new houses is less than 1% higher than a year ago. For the country as a whole, the era of double-digit price increases is over.

Perhaps most telling, builders have recently become a lot glummer. With Wells Fargo, a big bank, the National Association of Homebuilders publishes a monthly index of builders’ perceptions of the housing market. This index fell by six points in May to 45, its lowest since 1995. (A score below 50 suggests that more builders reckon the market is poor than think it good.) Economists at Goldman Sachs estimate, from the fall in the homebuilders’ index, that construction will fall at an annual rate of 10-15% in the next four quarters.

Builders are breaking far less new ground than they were. Housing starts fell at an annual rate of 56% between January and April this year, the sharpest slowdown since the early 1990s. The deceleration may have been exaggerated by the strong figure for January, when the weather was unseasonably warm, but the overall trend is clear.

Less frenetic building will be the most direct way that a weaker housing market affects the economy. Residential construction now makes up more than 6% of GDP. This suggests that a 10% drop would shave some 0.6 percentage points off economic growth. A bigger question, however, is how slower prices might affect consumer spending. Goldman Sachs’s economists expect that America’s house prices will have stopped rising by the end of the year. Mainly because Americans will have no extra equity against which to borrow and because a flat market will put a brake on residential building, this is expected to reduce GDP growth by about 1.5 percentage points. “Just Reduced” might soon be a fitting label for the whole economy.

More bad news for homeowners in Paradise — anyone still looking to invest in condos in the Sunshine State has to deal with the huge increase in property insurance premiums, at least where it is still available.

‘A new report by Fitch, a credit-rating agency, calls Florida’s insurance market “extremely fragile”.’ Where does that leave the condo market, then?
———————————————————————————-
Hurricanes and insurance
The price of sunshine

Jun 8th 2006
From The Economist print edition
Hit hard by last year’s hurricanes, America’s property insurers scale back their coverage in coastal regions

SUMMER’S arrival, so eagerly awaited by many, is an ominous time for millions of people living in America’s hurricane belt. Forecasters say the 2006 storm season could be as bad as last year’s, which was very bad indeed. While thousands of people are still unable to return to their damaged or destroyed homes, those who remain are bracing themselves for the possibility of more rough weather. In fire stations, retirement homes and churches across the region, towns are holding hurricane-preparation “fairs” this weekend.

From Texas to Florida and up the east coast, one of the most difficult problems for property-owners near the sea is insurance. Last year, after an already poor 2004, storms caused a record $54.8 billion of insured losses, according to the Insurance Information Institute, an industry group. Of these, Hurricane Katrina alone accounted for more than $38 billion.

Stung, insurers are cutting back their exposure in coastal areas. Allstate, one of America’s biggest property insurers, has stopped writing homeowners’ policies in Florida, Louisiana and parts of Texas and New York. State Farm, another big insurer, has not renewed some policies. In April Poe Financial, Florida’s fourth-largest personal insurer, collapsed, leaving 316,000 policyholders in need of coverage. A new report by Fitch, a credit-rating agency, calls Florida’s insurance market “extremely fragile”. Further north, this month National Grange began telling customers on Cape Cod, in Massachusetts, that it would not renew their policies.

This is bad luck for property-owners, because the federal government’s National Oceanic and Atmospheric Administration says that up to 16 tropical storms could form over the Atlantic this year. Up to ten, it thinks, could become hurricanes. William Gray, a meteorologist at Colorado State University, predicts 17 named storms, fewer than last year’s 27, but a lot nonetheless. Florida, the Sunshine State, has the highest value of property exposed to hurricanes, followed by New York.

In the face of this threat, homeowners who can get insurance coverage face sharply higher rates. Some premiums have risen by as much as 200%. Primary insurers partly blame increases in the prices charged by reinsurers (which insure them).

Many residents cannot get private coverage at all. As a result, state-backed insurance plans, meant to provide coverage as a last resort, are being inundated. Citizens Property Insurance, a state-run pool in Florida, may end up with over 1m—maybe even 1.5m—policies this year, up from 850,000 at the end of April. Citizens, which had a combined deficit in the past two years of $2.2 billion, is filling its shortfall with rate increases, a tax on residential-property policies with private insurers and other money from the state legislature.

The widespread worry has prompted a debate about who should pay for storm damage in the future. Americans have been migrating towards the coasts for decades, despite the risks. High insurance premiums, or a lack of cover, reflect those risks: in theory, these ought to discourage people from living on the coast. Yet tens of millions of people are still determined to live in such areas, and expect to be covered by the state if private insurers refuse.

Robert Litan, an economist at the Brookings Institution, argues that private insurers are unable to handle losses on the scale inflicted by Katrina. Instead, the federal government bears the burden of disaster relief after great catastrophes. Mr Litan calls for creation of a federal catastrophe-reinsurance programme to provide “backstop insurance” against the biggest losses. He says this would be fairer and more efficient than post-disaster help has been in the past. The trouble is that this would only encourage the migration to the coast.

Hurricanes are not the only reason why the weather is on insurers’ minds. Lloyd’s, London’s big insurance market, issued a sober report on June 5th, arguing that the industry globally must reassess its underwriting, capital and pricing models to reflect climate change or risk “being swept away”. The sorts of catastrophe models Lloyd’s is pushing are increasingly used by private insurers to help them determine which risks to cover, and at what price. Fitch notes that in 1992, before such models were widespread, ten insurers went bust as a result of Hurricane Andrew. Last year, despite the worst-ever catastrophe losses of any type (see chart), only three American insurers went out of business.

Even so, those who build the models admit they had underestimated the damage that would ensue from last year’s storms. RMS, one of the leading firms in catastrophe modelling, unveiled a completely revised model a few weeks ago. The firm says it thinks big hurricanes may hit America more often in the next five years. It has raised its projections of hurricane losses for Florida, the Gulf of Mexico region and the rest of the south-eastern United States by about 40%.

Primary insurers in America, as well as their global reinsurers, are now running their own numbers through the models to update underwriting policies. None of this is likely to bode well for homeowners in the Sunshine State.

The Economist has some rather disparaging things to say about Fannie Mae. At least their stock price still gets great plunge protection!
—————————————————————————-
Finance & Economics
Fannie Mae
A ton of bricks

May 25th 2006 | NEW YORK
From The Economist print edition
Regulators take an American mortgage giant to task

ON MAY 24th, after three years’ work, American regulators published a blistering, 340-page report on Fannie Mae, a giant, government-sponsored mortgage company. Fannie Mae, which had repeatedly overstated its profits, has been fined $400m and has agreed to a list of restrictions and reforms.

The Office of Federal Housing Enterprise Oversight (OFHEO), Fannie Mae’s main regulator, found that the company had bloated its profits between 1998 and 2004 so that its bosses qualified for bigger bonuses. Of the $90m paid to Franklin Raines, the then chief executive, $52m was linked to profit targets. OFHEO also says that Fannie Mae used its huge political influence to thwart efforts to regulate it more tightly and that its internal controls and accounting systems were shoddy. The company’s board and managers, says OFHEO, created an “arrogant and unethical corporate culture” in which “the ends justified the means”. Fannie Mae’s reputation as a well run, low-risk company was a “façade”.

Fannie Mae has agreed to improve its internal controls, accounting and risk management. Until it does—which could take years, says James Lockhart, the acting director of OFHEO—Fannie Mae must limit its mortgage portfolio to $727 billion, its size at the end of 2005.

The company may have further difficulties to face. OFHEO’s report adds fuel to efforts in Congress to contain Fannie Mae and Freddie Mac, its twin mortgage giant. Lawmakers and others fear the pair could pose a risk to the stability of America’s financial system, because of the sheer size of their balance sheets and the market’s belief that they, in effect, enjoy a federal-government guarantee. The Department of Justice, too, is investigating Fannie Mae’s accounts. And the $400m settlement covers only the company, not its former executives, who are not yet out of the woods.

Eileen Fahey of Fitch Ratings, a credit-rating agency, points to a few crumbs of better news. Fannie Mae has already done some of the things that its regulators wish. With the mortgage market slowing and borrowers moving out of the fixed-rate mortgages that are Fannie Mae’s bread and butter to adjustable-rate or other loans, Fannie Mae will be less affected by the cap on its mortgage assets than it could have been.

The cap could benefit Freddie Mac, the smaller of the two. Freddie Mac was also found to have misreported its earnings, but because its scandal came to light earlier, it has done more cleaning up. It also understated its profits, rather than overstating them. Last year Fannie Mae sold a lot of mortgage assets to meet its new regulatory capital requirements. Now the balance sheets of the siblings are almost the same size.