Michael Gracie

It looks good on paper.

The Fed lowered rates 75 bips, and as you might guess the banking stocks rallied soon thereafter. It makes perfect sense - they’re getting cheaper money, which is supposed to help margins.

Hours later there’s another move afoot - “emergency” prime rate reductions. Both M & T and National City have cut their prime lending rate by the same 75 basis points (and they are making good use of the PR channels in the effort as well).

Will consumers just start borrowing again in droves? Likely not. But, as a gargantuan pile of mortages ready to reset this spring, banks might just stave off an ever-increasing wave of foreclosures. Of course, the circumstances may add more fuel to the fire: banks are charging greater-than-nominal fees to renegotiate loans, and many of them are tacking those fees onto loans; they’re doing a whole lot of “driveby” appraisals too, meaning they’re throwing darts when determining the value of their collateral. And don’t forget - they are coughing up the free money they just received from the Fed while they’re doing it.

It’s a precarious fix, but it may just work. At least for a quarter or two.

So lets give it some before the situation spirals even further out of control.

The Washington Post reports: Study Finds ‘Extensive’ Fraud at Fannie Mae.

I’ve hinted that where there’s fraud, there are usually bigger problems, and in the case of Fannie Mae I think there is a lot more to the story than just some greedy executives. Hiding writeoffs suggests that assets in the portfolio are simply not worth what someone thought they were worth. That means home loans, and in some (if not many) cases, the underlying assets. I’ll give some credit to the intrinsic portfolio devaluation - FM pays a premium for the loans, and that is after the money centers paid a premium from the regionals, and the regionals paid a premium from the mortgage brokers. And with rates rising, those spreads are shrinking. Nevertheless, you have to ask why those premiums were paid in the first place, and the answer is the perceived value of the underlying assets, which for a fine period of time was rising faster than brokers could close the loans. The cocktail party talk was all “I closed on my new condo, and I already made $5,000!”

Heh. Americans have bet their retirement on home values. Pension funds have bet their beneficiaries’ retirement on home loans (they buy Fannie Mae bonds, don’t you know).

Big wagers, incestuous ties, greed, and fraud. Sounds like a Robert DeNiro movie - and if I remember, people often wind up in shallow graves in those.