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Posts Tagged ‘socialized housing finance’

Socialized Housing Manifesto

Posted by Larry Doyle on March 26th, 2010 10:36 AM |

Thank you to our friends at 12th Street Capital for sharing a sneak peek of Uncle Sam’s release of his new “Socialized Housing Manifesto.” (Click on the image to access pdf document.)

What is the one word that Uncle Sam is clearly trying to emphasize throughout the 4-page release? Responsible. Who the hell is Uncle Sam to define who and what is responsible or not? (more…)

Barack Really is Going to Pay Her Mortgage

Posted by Larry Doyle on March 26th, 2010 8:24 AM |

My blood is boiling. Why?

The assault on the principles of free market capitalism is escalating with news that banks are poised to start reducing principal balances on certain mortgages.

I empathize with those who are strapped, but I have never felt more strongly on a topic than this principal reduction. Despite any and all bulls*%# put forth by those in Washington, the principal reduction program is an enormous escalation of the violation of moral hazard which our country sadly continues to embrace. I have no doubt it will expedite the development of a socialized housing finance system.

Do not think for a second that banks will take the hit on these principal reductions. Who will take the hit? Me and you. Those who have worked hard, saved, played by the rules, and taught our children to do the same. (more…)

Wells Fargo Calls for More Socialized Housing Finance

Posted by Larry Doyle on September 16th, 2009 9:26 AM |

What does one do when your bank is the largest mortgage originator in the country, has outsized exposure to an array of toxic mortgage loans (pay-option ARMs and the like), and is located in the heart of the weakest real estate market nationwide? Call Ghostbusters . . . that is, call on Washington to further tap the wards of the state known as Freddie and Fannie in an attempt to offload this risk and future risk on the American taxpayer. Of whom do I speak? Wells Fargo, led by CEO John Stumpf, called for just such actions in a recent interview with the Financial Times, Wells Fargo Urges U.S. to Boost Mortgage Market.

The FT writes:

The US government should help revive the moribund market for big mortgages by getting Fannie Mae and Freddie Mac to buy large home loans from banks, the chief executive of the lender Wells Fargo urged on Tuesday.

In an interview with the Financial Times, John Stumpf, whose bank originates a quarter of all US mortgages, called for an increase in the size of loans purchased by Fannie and Freddie, the troubled finance groups controlled by the authorities.

Mr Stumpf said such a move would help reduce the interest rates charged by banks on so-called “jumbo” mortgages and revive a market for higher-end housing that has been devastated by the credit crunch.

Fannie and Freddie can currently buy or guarantee mortgages worth up to $417,000. The stimulus plan approved last year set the companies higher limits of up to $729,750 in certain high-cost areas such as California until the end of 2009. Congress has to approve any extension of those higher limits.

Be mindful that Freddie and Fannie have already been approved to purchase conforming loans with loan-to-value ratios of up to 125% and are also purchasing jumbo mortgage product in certain regions of the country. The simple fact is our domestic mortgage finance market can now be defined as nothing short of socialized finance.

CEO Stumpf’s call for a further extension of this socialized housing finance is nothing more than a veiled attempt to offload risk from Wells Fargo onto the American taxpayer. In the process, risk based pricing for Jumbo mortgages will not be properly aligned and the American taxpayer will eat larger losses now and in the future.

At what point will capitalism actually be given a chance?

LD

Related Sense on Cents Commentary:
Barack and Barney Look to Further Plunder Freddie and Fannie (June 22, 2009)

What’s Next for Freddie and Fannie?

Posted by Larry Doyle on August 6th, 2009 8:51 AM |

When losses get so large something ultimately must be done.

In that vein, I am not surprised to see news developing about Freddie Mac and Fannie Mae’s future. The Washington Post is reporting Administration Considers Splitting Fannie Mae, Freddie Mac:

The Obama administration launched a broad government effort this week to overhaul mortgage giants Fannie Mae and Freddie Mac and is considering splitting the companies and putting their troubled assets in a new federally backed corporation, administration officials said.

Troubled assets is a misnomer. ALL of their assets are troubled. Some are more troubled than others. How so? Freddie Mac and Fannie Mae absorb all of the credit risk on loans which they guarantee. Given the current state of our domestic housing market, the risk or troubled nature of every mortgage in our country, let alone in Freddie and Fannie’s portfolio, has increased. As loans continue to default at ever increasing rates Freddie and Fannie just bleed money. More troubled assets encompass a variety of commercial mortgages, Alt-A, and sub-prime mortgages.

I am very interested to see how a good bank/bad bank model would be structured. The fact is to wipe the slate clean, Uncle Sam would literally have to move ALL of Freddie’s and Fannie’s current assets. At that point, Freddie and Fannie should simply guarantee future mortgages without actually purchasing them (meaning let the mortgage securities be purchased by private entities in the marketplace) with proper risk based pricing applied. Short of that, a restructured Freddie and Fannie will likely only replicate a version of past errors.

Do our regulators have the courage to push for this initiative? We will hear that they will work toward this structure ‘down the road.’ How long is the road? This situation will be very interesting. Will it be transparent?

Such an approach would keep the government on the hook for losses into the indeterminate future but would also clear the way for the revamped companies to play a critical role of financing home loans throughout the country.

This statement is nothing short of an acceptance of a ‘socialized housing program’ to absorb current and future losses but also to underwrite future loans at what will effectively be below market rates. The fact is losses will be perpetuated simply because Freddie and Fannie will continue to subsidize mortgages via lower mortgage rates. In the process, risk is being mispriced under the guise of supporting our housing market. Increased risk will ultimately mean increased losses.   (more…)

Is Barack Becoming a Landlord?

Posted by Larry Doyle on July 15th, 2009 6:36 AM |

Is Barack Obama about to move into the rental market and become the largest single landlord in the process?

Hat tip to AK for pointing out this developing story.  Reuters reports, Obama Mulls Rental Option for Some Homeowners:

U.S. government officials are weighing a plan that would let borrowers who have fallen behind on their mortgage payments avoid eviction by renting their homes instead, sources familiar with the administration’s thinking said on Tuesday.

First things first, I fully empathize with all those whom are struggling at this time. However, from the standpoint of economics and capitalism, would this program actually serve as an incentive for some homeowners to stop making their mortgage payments? Would it cause other perverse, unintended consequences as well? Would it redefine the American dream?

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.

Surrender ownership to whom? The bank holding the mortgage? The mortgage servicer? Uncle Sam? How is a rental payment determined? If based on percentage of income, does this program actually serve as a disincentive for individuals to increase income, if only to lose this benefit?

Officials are also considering whether the government should make mortgage payments on behalf of borrowers who cannot keep up with their home loans, tapping an unused portion of a $50 billion housing aid kitty.

That $50 billion housing aid kitty is money still in the TARP. Not that the rule of law means much anymore, but does anyone want to check if we actually need to write new legislation on the disbursement of funds under the TARP for a program such as this? What happens when the $50 billion is exhausted?

As part of this plan, jobless borrowers might receive a housing stipend along with regular unemployment benefits, the sources said.

How much and for how long? Who would oversee the program? Think there is the potential for massive fraud?

A few other questions and comments.

1. The mere fact that this idea is being floated would seem to me to be an admission that the housing market is a long way from bottoming.

2. How would this program impact the principle of property rights? If Uncle Sam is effectively dictating how an owner of a property, be it a bank or otherwise, can utilize that property, does this become precedent for other assets as well?

3. Would Uncle Sam consider establishing incentives for the banks and the homeowners to develop a program such as this through the private market? A tax incentive of some sort for the bank? Do we care to try to embrace free market principles?

4. Do we even try to determine the long term impact of this program on our economy in general and housing in particular?

Little doubt this type of program would be a sharp turn left on our economic landscape. I guess this woman wasn’t too far off in her prophetic statement last Fall:

Thoughts, comments, questions are all appreciated.

LD

Save GM? OK . . . Save GMAC? What’s Up With That?

Posted by Larry Doyle on May 12th, 2009 1:57 PM |

Does Uncle Sam really need to take a greater equity stake in auto and housing finance? Doesn’t our exposure to Freddie and Fannie along with our soon to be equity stakes in Chrysler and GM provide us enough exposure? Why does Uncle Sam need to own a non-systemic risk housing and auto finance company?

Our economy has been faced with massive systemic risks within certain companies – Fannie Mae, Freddie Mac, AIG, and Citigroup. Similarly, the Obama administration views our domestic automotive industry as critical to a healthy, vibrant, growing industrial base within the United States. While the futures of these aformentioned industries and companies can be hotly debated, an entity such as GMAC (General Motors Acceptance Corporation) does not present systemic risk.

Who wins with Uncle Sam taking ownership of GMAC? Obviously the employees of GMAC, entities that have outstanding exposure to the company, and consumers who will receive below market financing. Who loses? The competition. Regrettably, the tried and true principle of healthy competition has taken a back seat in our Uncle Sam economy.

Ford Motor won the battle of the Big 3. In this case, though, to the victors do not go the spoils. Ford Motor Company deserves huge praise. Ford recognized the changing business model of the domestic automotive industry in advance, addressed its finances and adapted its business model. Today they are expected to issue 3 million new shares of stock. I hope the sale exceeds expectations and they gain huge market share.

The WSJ highlights the fact that in the brave new world of the Uncle Sam economy, Uncle Sam’s money management enterprise will have major equity stakes in Freddie Mac, Fannie Mae, AIG, Citigroup, and soon GMAC. Get Ready:You Will Own GMAC, Too.

GMAC differs from other companies under the government thumb because it isn’t too big to fail. So the government doesn’t need to save GMAC to safeguard the financial system.

Instead, GMAC must be saved, the argument goes, to revive the auto industry and consumer economy. The details of that approach are strikingly scarce. In fact, nearly everything about GMAC — its mission, board, and future ties to government — is unknown. As Winston Churchill might put it, GMAC is a financial black hole stuffed into a governance black box.

These details matter. The Treasury is in the middle of a plan to turn privately held GMAC into a new über auto-lender, financed with taxpayer dollars and likely falling under taxpayer control. This has the potential to spark unintended consequences across the auto and banking markets, similar to the quasigovernmental meddlings of Fannie and Freddie.

Would this government-sanctioned company have an unfair funding advantage against Ford Motor’s Ford Motor Credit, for instance? Would it be willing to do the politically unpalatable work of cutting credit to certain car dealers? What happens if Congress starts mandating low-cost auto loans?

How many diligent, determined, and patriotic individuals are there in our country today questioning how and why their work ethic and competitiveness have been devalued by Uncle Sam’s entrance into an entity such as GMAC? It is naive to think that the playing field can remain anything close to level in auto and housing finance going forward. How does one compete with Uncle Sam’s ability to finance itself? Where’s Congress on this topic?

Oddly, Congress and the rest of the country seem to have grown numb to the bailouts. Not once has GMAC been discussed substantively in a congressional hearing.

The next time President Obama opines that he wants to promote private enterprise and that he does not want to be in the housing and auto finance businesses, let’s ask him about G-M-A-C!!

LD






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