RSS Feed
Twitter
Facebook
Email
HomeWhat’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…)
Tags: Administration Considers Splitting Fannie and freddie, Freddie ands fannie are socialized housing vehicles, Freddie mac and Fannie Mae's future, Freddie's and fannie's assets, housing, how might Freddie and fannie be split, James Lockhart resigns as director of FHFA, No Second act for Freddie and Fannie, socialized housing finance, socialized housing program, Uncle Sam will absorb freddie's and fannie's losses for a long time, Washington Post report on freddie and fannie, who fed at the Freddie and fannie trough, will Freddie and fannie be split, will Freddie and fannie have a good bank bad bank model
Posted in Fannie Mae, Freddie Mac, General | No Comments »
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
Tags: are we redefining the American dream, avoiding eviction from homes, developments in housing crisis, housing, housing stipend and unemployment benefits, housing stipend for delinquent homeowners, how can delinquent homeowners avoid eviction, how will homeowners avoid eviction, is the American dream being redefined, is the housing market bottoming, next move in housing crisis, next stage of housing crisis, Obama Is Going to Pay for My Gas, Obama Mulls Rental OPtion for Some Homeowners, property rights under new housing program, rental program will have unintended consequences, socialized housing finance, socialized housing program, Unemployment, using TARP funds for home loans, will delinquent homeowners stay in homes, will government housing subisdy self-defeating, will government make people's mortgage payments, will government rental program be disincentive, will government subsidize housing payments, will Uncle Sam be my landlord, will Uncle Sam become a landlord
Posted in Housing Crisis | 4 Comments »
Why the Economy Isn’t Improving Anytime Soon
Posted by Larry Doyle on June 26th, 2009 8:30 AM |
What kid doesn’t get frustrated with his father who dictates a line of reasoning with the tried and true, “because I said so.”
In similar fashion, the public at large should be equally frustrated with economists, market analysts, and the media who continually promote ‘unemployment’ as a lagging indicator. The simple fact is in the Brave New World of the Uncle Sam economy, I believe we should question the definitions and impacts of all our economic inputs. Today, let’s dive into the all important unemployment statistics.
Recall that under the most adverse scenario of the Bank Stress Tests, the unemployment rate was assumed to top out at 10.3%. Well, do not be surprised if we reach that rate by Labor Day with a strong chance we see 11% by year end. Last week, Obama himself acceded to likely double digit unemployment. Warren Buffett predicted as much in an interview aired yesterday.
The financial industry and government officials play down these statistics by stating that unemployment lags the economy. I beg to differ!! The Wall Street Journal provides strong evidence why unemployment is the preeminent leading economic indicator in writing, Unemployment Vexes Foreclosure Plan:
Rising unemployment is complicating the Obama administration’s effort to reduce foreclosures and stabilize the housing market.
The first wave of mortgage delinquencies was sparked by borrowers who took out subprime mortgages and other risky loans that became unaffordable, causing them to fall behind on their monthly payments. But the current wave is increasingly driven by unemployment or underemployment, economists and housing counselors say.
The Obama foreclosure-prevention plan was “built around the subprime crisis model, not the unemployment crisis model,” said Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago.
The Obama program provides financial incentives to mortgage-servicing companies and investors to reduce mortgage-related payments to 31% of monthly income.
But many borrowers don’t have sufficient income to qualify for a loan modification under the plan. Mr. van Zalingen said roughly 45% of the more than 900 borrowers who sought help at two recent counseling events would fall into that category even if their interest rate were dropped to 2% and their loan term were extended to 40 years.
I wrote “The Most Critical Economic Statistic” a month ago to highlight the importance of mortgage delinquencies. There is a very strong correlation between unemployment, delinquencies, foreclosures, and subsequent defaults on credit cards and other personal debts.
The Obama administration and all of Washington are increasingly concerned–with good reason–about the impact of increasing unemployment and underemployment, which currently sits at 16.4% and may very well get to 20%!!
What might Washington do? When in doubt, throw more money at it. The WSJ highlights how and where that money may be delivered: (more…)
Tags: Bank Stress Tests and unemployment, borrowers not qualifying for loan modification, data on mortgage delinquencies, forbearance plan for mortgages, housing, how is underemployment measured, how will Obama stem foreclosures, how would forbearance plan work, impact of higher unemployment on economy, incentives for mortgage servicers, increasing mortgage delinquencies, is unemployment a lagging indicator, is unemployment a leading indicator, loan modification programs, Michael van Zalingen, rising mortgage delinquencies, rising unemployment and rising foreclosures, Seth Wheeler, should government pay mortgages, socialized housing program, The Most Critical Economic Statistic, Unemployment, unemployment impact on economy, unemployment rate in Bank Stress tests, unemployment underemployment and rising foreclosures, Unemployment Vexes Foreclosure Plan, Wall Streeet calls unemployment lagging indicator, what is a lagging indicator, what is underemployment, will higher unemployment slow economy
Posted in foreclosures, General, Unemployment | No Comments »
