Housing Doom

Keith-

There’s that saying about “Absolute power corrupts absolutely” I suspect “unlimited line of credit” does the same thing. I believe it has just become incorrect to write “moral hazard”. The correct way to write it now is MORAL HAZARD.

No, that’s still not quite right, is it? Maybe I need to increase the type size a few points.

Igor says “foolish”- I think Igor is being generous.

Coffee -

I’ve been worried about that point for a while now.

In particular, that’s the fatal flaw in Roubini’s suggestion to shake down the agency debt investors, because any move against them will cause GSE debt yields to sky-rocket, which drives 30-year fixed, etc., rates through the roof, which further collapses house prices, which increases the damage to F&F so they have to further shake down the debt holders …

I.e. a non-linear “vicious circle” that nobody’s modeled for in their risk management models.

Continuing on #3, Doomers need not read the panegyric to Fractional Reserve Banking on the second page, but the author’s first point about the Fed’s target rate is apropos to policy vs house prices.

“Two Fed Myths That Need Debunking”, by Alan Sloan, Washington Post, July 22, 2008.

The case in point: the relationship — or lack of one — between the federal funds rate and the interest rate on long-term mortgages.

Since September, the Fed has reduced the federal funds rate by 62 percent — to 2 percent from 5.25 percent. But long-term mortgage rates are higher now than they were on Sept. 18, when the Fed began its rate cuts.

The rate on a 30-year, fixed-rate conforming mortgage — “conforming” means that the mortgage can be sold to mortgage guarantors Fannie Mae or Freddie Mac — was 6.44 percent the week before the Fed’s first cut and was recently 6.51 percent. Jumbo mortgages — those too big to be considered conforming — were going for 7.63 percent, up from 7.26 percent. (All of these numbers include upfront points that borrowers pay, in addition to their basic interest rate.)

The Fed and Treasury and many of the world’s big financial players would love to have U.S. mortgage rates decline because that would lend support to home prices, which could use it.

Falling home values — what we have in most U.S. housing markets — increase foreclosures, which increase borrowers’ pain and lenders’ losses. The declining value of houses as collateral for mortgages makes lenders less eager to lend and potential home purchasers far less eager to buy. It’s a vicious cycle that will end sooner or later — everything does — but it’s not something that the Fed (or any individual regulator or player) can control.

I wish I could leverage myself at a ratio of 1:65, go insolvent, and then get an unlimited line of credit. That’d be SWEEEEET!

FT’s editorial writer is smokin’ today …

“Fannie and Freddie”, Financial Times, July 23, 2008.

In other words, by doubling down on its great government-sponsored enterprise gamble, the government will either get away scot-free, for the time being, or else be forced to hand taxpayers a bill amounting to many hundreds of dollars per household. Standing ready to help the GSEs may be enough to ensure their access to private finance at no additional public outlay. But if the Treasury loses its bet, the cost is unlikely to be as low as $25bn. Remember that the GSEs’ loans and guarantees come to $5,200bn, that some 15 per cent is risky (alt-A or subprime) and that US house prices have not touched bottom. Remember too that the capital of the GSEs was a meagre $7bn on a fair-value basis in March. Taxpayer losses in excess of $100bn are by no means unthinkable.

Yet in the long run the worst outcome may be that the Treasury gets away with it, and the GSEs survive as they are. The moral hazard in granting these weakly regulated pseudo-private entities an unlimited guarantee has been raised to a new and extreme point. In the end, Fannie and Freddie should either be dismantled or brought within the public sector. Emboldened evasion of that unpalatable choice will increase the final cost to taxpayers, to say nothing of the collateral damage along the way.

Need a little work on that blockquote thingy, huh?

I read some of the details and feel ill. There are still way too many people that won’t make the mortgage payment if it is 0% if they feel they have negative equity.

The bulk of the benefit is for the corporations and investors. The government is only going to make the correction longer than it would normally be.

I am wondering if I should load up on some more financial stocks.

The PPT, Congress, Fed, the SEC, you name it — everyone has stuck a fork in or whapped the odd floating frog’s toe with a spurtle over the last few days. FNM / FRE shareholders must feel like Brownsville TX hang-glider pilots this week!

“Fannie and Freddie rescue, a bailout for whom?”, by Jennifer Ablan, Reuters / Forbes, July 23, 2008.

Since these sweeping measures were announced on July 13, securities in Fannie and Freddie have been on a tear. For instance, Fannie and Freddie shares are each up more than 100 percent since their lows on July 11, when fear over their fate was at its peak. Fannie closed Wednesday at $15 compared with less than $7 at its July 11 low, while Freddie ended at $10.80, almost triple its July 11 low of $3.89.

Last August, Fannie shares were trading at around $70 and Freddie shares were around $66.

Against the backdrop of the Fannie and Freddie government rescue package, the U.S. Securities and Exchange Commission last week also limited naked short sales of stock of Fannie Mae, Freddie Mac and brokerages, helping to exaggerate moves to the upside. In short sales, investors sell borrowed stock in a bet that a company’s share price will decline. In a naked short sale, speculators sell shares they haven’t secured first.

Still, a real threat to shareholders remains: the possibility of a government intervention to buy stock could leave them high and dry.

Igor says, “Crash!”

“Manfre: There are still way too many people that won’t make the mortgage payment if it is 0% if they feel they have negative equity.”

Full circle, it is equity, and only equity.

In every measure home prices are WAY TO HIGH. Why do taxpayers have to come to buy and support a bubble price. No one is big enough.

Ask an appraiser how to value a home using Income? Historically it is High is 14X and low is 10X. You need to ask your self how much would this home rent for? Multiply by 12 and then again by 12.(10-14 range)

550,000 for a 1300 sq ft home? What are people thinking Phoenix is? Bethesda Maryland? La Jolla?

Ask yourself if you would refinance your home at 1% if it underwater 100,000 Purchase price 335K and comps at 225K?

OK, What’s Wrong With This Picture?

“Wall Street Shrinks From Competing With Fannie Mae, Freddie Mac”, by Kathleen M. Howley and Bryan Keogh, Bloomberg, July 24, 2008.

Fannie and Freddie have proved indispensable. The government and the banks that tried to rein them in now rely on the companies to pull the housing market out of its worst slump since the Great Depression and keep the global financial system from collapsing. The combination of falling U.S. home prices and the evaporation of the market for subprime mortgages has left banks and brokers with $467 billion of losses and the inability to extend credit.