Housing Doom Housing Bubble Blog

Well what do you know, "Super Fannie," who Jim Cramer said would save housing, isn’t so "super" after all: [Super Fannie is our term, not Cramer’s.  Proper pronunciation is dripping with sarcasm.]

Nov. 9 (Bloomberg) — Fannie Mae, the biggest source of money for U.S. home loans, posted a wider third-quarter loss and said credit costs will increase as the housing slump deepens, sending the shares down as much as 11 percent.

The net loss more than doubled to $1.39 billion, or $1.56 a share, because of $2.24 billion in derivative-related losses, the Washington-based company said in a Securities and Exchange Commission filing today. Fannie Mae released results for the first nine months of the year, bringing the company up-to-date on its earnings reports since an accounting overhaul delayed filings.

Fannie Mae hasn’t been immune to the home-price declines and mortgage defaults that are plunging the housing industry deeper into recession. The government-chartered company is grappling with the same loan delinquencies and foreclosures that led to losses at Citigroup Inc., Washington Mutual Inc. and Countrywide Financial Corp., and it was subpoenaed by New York Attorney General Andrew Cuomo in an investigation into fraudulent home appraisals.

``Fannie Mae is becoming another poster child for the problem you see with Countrywide Financial, Washington Mutual and any of the firms with a good chunk of mortgage business,” said Michael Mullaney, who manages $10 billion at Fiduciary Trust Co. in Boston. “You just don’t know anymore where you’re going to get a negative surprise that comes out of the woodwork.”

I can’t help but think of the warning issued by Doom’s own John back in February of this year:

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When HousingDoom went live in June 2006, our masthead stated, "The housing bubble is about to burst."  On August 10, 2006, John and I noticed that a Google search on the term "housing bubble" went from two or three hits to hits in the hundreds.  All of a sudden, the MSM was thinking there might be something to this whole housing bubble thing.  In honor of the occasion, we changed our masthead to, "The housing bubble has burst- what happens next?"

In the past few months, we have watched a great deal of turmoil in not only the housing market, but in the credit market as well.  Those of us who have been paying attention for awhile know that these events are not without their precedents.  In honor of what we are now seeing, the masthead has been changed to one of my favorite quotes from Winston Churchill:

A nation that forgets its past is doomed to repeat it.

That’s my two cents for today.  We’d love to have yours.  Any links, stories, thoughts or insights would be much appreciated.

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In 2005 the banks lobbied for changes to the bankruptcy laws to make sure people kept paying their credit cards.  People are paying their credit cards- but are now not paying their mortgages:

"In a bit of schadenfreude, it looks like the new rules may have increased the profits of their credit card business at the expense of their mortgage business, and in the case of big mortgage lenders, their balance sheet," Yves Smith writes.

Mr . Smith  highlights a Bloomberg article that quoted Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank. "Be careful what you wish for," he said. "They wanted to make sure that people kept paying their credit cards, and what they’re getting is more foreclosures."

The bankruptcy code was revised to make it harder for debtors to qualify for Chapter 7, the section that erases non-mortgage debt. Instead, they were more likely to qualify for Chapter 13, which gives them up to five years to pay off non-housing creditors. As a result, people are putting their credit card payments ahead of their mortgage payments.

The Bloomberg article points out: "The amount of money owed on U.S. credit cards with payments more than 30 days late fell to $7.04 billion in the second quarter from $8.37 billion two years earlier, according to data compiled by Federal Deposit Insurance Corp. In the same period, the dollar volume of repossessed homes owned by insured banks doubled to $4.2 billion, the federal agency said. New foreclosures rose to a record in the second quarter, led by defaults in subprime adjustable rate mortgages, according to the Mortgage Bankers Association in Washington."

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Apparently Ben Bernanke’s not content with policies that wash our dollars in hot water and then dry them on high- shrinking them a couple of sizes.  He now has a really dumb idea for the mortgage market- government backed jumbos: [Thank you G!]

Federal Reserve Chairman Ben Bernanke floated a new idea to help provide liquidity for large U.S. mortgages that Fannie Mae and Freddie Mac aren’t allowed to securitize now: Allow the companies to securitize jumbo-sized mortgages but have the federal government guarantee them.

Fannie and Freddie currently can only buy mortgages up to $417,000, and Congress — so far — hasn’t acted to lift that limit despite distress in that market that has made jumbo mortgages at "somewhat tighter terms and higher prices," as Mr. Bernanke put it.

Responding to questions on Capitol Hill about lifting that $417,000 cap, Mr. Bernanke offered a surprise answer, suggesting that Congress could consider allowing the companies, known as "government sponsored enterprises," buy mortgages of up to $1 million from banks and mortgage brokers, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investments.

"That would be, I think, of some assistance to the mortgage market," the Fed chairman said. "From the federal government’s point of view, it would be taking on some credit risk, which you may or may not be willing to do." He added, "It would be a good idea to make the GSEs ultimately responsible for some, any excess losses, or some part of excess losses, relative to the premiums that are paid."

Jumbos at the right interest rate should be sellable to investors.  I’m assuming that Bernanke wants these government backed jumbos available at interest rates that are not attractive to private investors. If private industry doesn’t want to risk buying them, why should the GSEs?  If these homes can’t be sold at prices in the stratosphere because cheap financing is unavailable, buyers can always wait for them to fall below the $417,000 cap.  Surely, if any segment of the market shouldn’t need a bailout, it would be the jumbo market.

Fannie Mae states their mission on their website:

We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.

Is making million dollar houses more affordable really what is meant by "expanding affordable housing?"

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