The Fed Chairman is “reiterating” ad nauseum. Screwing follows.
I reiterate we need to forgive people for their misinterpretation of basic economic fundamentals
Bernanke, in a speech in New York today, reiterated his call for lenders to forgive portions of mortgages for some struggling homeowners. He said proposals should be “tightly targeted” at borrowers at greatest risk of losing their properties, and avoid providing an incentive for defaults.
The map is not pretty (scroll to the bottom) – states that are vital to the condition of the overall economy are showing heavy leverage, heavy delinquencies, as well as heavy “non-owner” occupation. Price drops are now being singled out as THE reason people are getting pummeled, and the Fed is urging banks to unilaterally revise mortgage terms to put mortgagees on an even keel. Screw market economics.
The people most at risk of default are: 1) those who have the least “skin in the game” (i.e. those who put the least amount of money down under the assumption that home prices would rise forever); and 2) those that as a result of delusional assumptions thought becoming a real estate investor was a guaranteed lottery win. As generous as banks are historically known to be, they aren’t going to reduce mortgage principal to a point where borrowers are sitting pretty – no, they are going to revalue homes and adjust loans down to just that new level. Mortgagees will still be without their imaginary wealth, and they’ll still be on the hook for the original principal amount should the house sell down the road. In other words, they are still screwed, and I suspect there will be few takers either.
The potential ill side effect of this?
During summer past, everyone thought that the mortgage problem was contained to the sub-prime sector. It was portrayed across the media spectrum as a low-income borrower, low-end housing problem. “Sub-prime, sub-prime, sub-prime” was drilled into the citizen vocabulary. However, it is becoming more apparent to more people that containment wasn’t the case, and now that the problem is being recast as a nationwide, multi-tiered issue of pricing. The predicted result – accelerating defaults. Anyone with the means to continue paying their mortgage, and who has now bought into the idea that their home really is worth less than their mortgage, is going to bring their stated income down to size and either beg the bank for a favor or downright threaten their lender with walking unless they do. The latter becomes an even more substantive ploy if the borrower is aware of the court backlog in foreclosure proceedings, the growing inventory of bank-owned properties, and/or the fact that the court system isn’t buying shoddy mortgage record keeping.
I reiterate that government subsidization is the answer, no matter what the long term cost may be
Bernanke also reiterated his call for a stronger role for Fannie Mae and Freddie Mac, the government-chartered companies that are the biggest sources of money for U.S. mortgages, to ease the crisis.
This, in spite of the fact that Fannie Mae lost 2.2 billion in the latest quarter and is now planning to raise billions in additional capital to stay afloat. As THE primary funder of mortgages, Fannie Mae (and Freddie Mac) are getting screwed – they will wind up taking a hit for the principal reductions on in-house paper. But with the Fed behind them, they can probably screw investors down line – the ones who invested in their bonds for their secure, income-generating potential. The ones that aren’t invited to the negotiating table. And of course they get to screw the last money in – $6 billion is likely the minimum necessary to keep the GSAs’ regulatory formulas in line, but unless they magically begin turning a profit they’ll be back at the trough in no time.
In the midst of conjuring this post, the market was not reacting as such. While Fannie Mae bleeds from all orifices, the market was taking light of the fact that Fannie said their loan quality was going to go up, and the stock was following the same path. It may take a few days or weeks to sink in, but dilution and/or unservice-able debt are rarely good ingredients for a stock’s price. Furthermore, the magic awaits – how is Fannie going to increase their purchases of “at-the-money” loans to desperate borrowers while portraying it as a higher quality portfolio? They can’t…someone’s going to get screwed.
Cringing at the thought of more screwing, and looking forward to continued reiteration.
UPDATE: Dan Mudd, CEO of Fannie Mae, says…
“We’ve got to get across a bridge where we don’t miss the opportunities we have…we will feast off this book of business we are putting on.”
Easy to say when the alternative is feasting on taxpayer dollars if you don’t get across the bridge, thereby missing all those wonderful opportunities.
UPDATE 2: More Fannie Mae facts.