Housing Doom Housing Bubble Blog

It was a bad day for the credit markets today:  [Hat tip John!]

The credit markets came under renewed stress Thursday as investors sought absolute safety and even moved away from debt issued by Fannie Mae and Freddie Mac, the government-sponsored mortgage lending enterprises.

The intensifying credit crisis came as one regulator, Timothy F. Geithner, the president of the Federal Reserve Bank of New York, said that some banks had moved from being too willing to take on risks to being reluctant to take any chance of losing money, a move that was making the crisis worse.

“The rational actions taken by even the strongest financial institutions to reduce exposure to future losses have caused significant collateral damage to market functioning,” Mr. Geithner said in a speech to the Council on Foreign Relations. “This, in turn, has intensified the liquidity problems for a wide range of bank and nonbank financial institutions.”

In Congressional testimony, William B. Shear, an official with the Government Accountability Office, warned that Fannie and Freddie, “with more than $6 trillion in outstanding obligations,” could pose “significant risks to taxpayers” if they ran into difficulty.

Each of the two enterprises has a $2.25 billion line of credit with the Treasury, but that is a small fraction of what they owe. Mr. Shear said it was “generally assumed on Wall Street that assistance would be provided in a financial emergency.”

With the trading levels indicating that some traders were no longer as confident of that assumption as they had been, rumors swirled that the Treasury Department was preparing to issue an explicit guarantee of the debts of government-sponsored enterprises, or G.S.E.’s, to calm the market. A Treasury spokeswoman denied those rumors.

According to Gregory Peters, Chief Credit Strategist at Morgan Stanley:

There’s a clear lack of confidence. There’s no confidence in ratings. There’s no confidence in banks and the dealer community. There’s no confidence in hedge funds. And so no one in the market trusts each other.

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Equity seems to keep "Slip sliding away":

Americans’ percentage of equity in their homes fell below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday.

 

Homeowners’ portion of equity slipped to downwardly revised 49.6 percent in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent in the fourth quarter — the third straight quarter it was under 50 percent.

That marks the first time homeowners’ debt on their houses exceeds their equity since the Fed started tracking the data in 1945.

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Blanche Evans, Editor of Realty Times, discussed yesterday her idea for Bernanke’s principal reduction plan.  A product she has dubbed a NERB:

How about a new balloon note that only pays off when the home is sold with equity?

Here’s how it can work. The lender can create a new loan package for a troubled homeowner at today’s market rate, in effect, writing down the difference between the original inflated value and today’s deflated value. Let’s call the loan a NERB loan, short for Negative Equity Refinance Balloon.

The homeowner gets a new fixed rate note at current market value, and can make payments as long as he or she likes. When it comes time to sell, the bank gets all the equity up to the difference in the original loan and the adjusted loan, plus a reasonable interest rate for having been so nice as to keep the homeowner from defaulting. If the homeowner stays in the home until it’s paid off, that day doesn’t come until the interest, tacked on at the end, is paid off, too.

It’s a win-win for everyone. Prices are still falling, and that’s keeping buyers on the sidelines and homeowners stuck in homes they can’t afford or can’t sell.

The NERB helps keep shaky borrowers in their homes, reduces competing inventory for sellers, gives buyers confidence to get back in the market, and it doesn’t penalize those of us who purchased within our means and with good credit.

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