Tag: home loans

From the “We’ll Keep This Mortgage Mess Unrealistically Propped Up Until It Kills Us” Files

President Barack Obama on fixing the home mortgage crisis (emphasis mine):

Right now, Fannie Mae and Freddie Mac — the institutions that guarantee home loans for millions of middle-class families — are generally not permitted to guarantee refinancing for mortgages valued at more than 80 percent of the home’s worth. So families who are underwater — or close to being underwater — cannot turn to these lending institutions for help.

My plan changes that by removing this restriction on Fannie and Freddie so that they can refinance mortgages they already own or guarantee. This will allow millions of families stuck with loans at a higher rate to refinance. And the estimated cost to taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.

Cutting to the chase:

1) Fannie Mae and Freddie Mac are not just ‘the institutions that guarantee home loans for millions of middle-class families’, they are the the institutions that guarantee home loans for millions of middle-class families, and are wholly-owned by the US Government (i.e. the taxpayers);

2) Given #1, any losses on guarantees must be absorbed by taxpayers, which means the ‘guarantee’ must now be getting extended to an assurance there will be no losses. Further, anyone wishing to sell their home after receiving assistance (many can’t right now – they’re underwater) would create a loss on someone’s balance sheet (i.e. the government’s) against the original mortgage amount. If some restriction is place on post-assistance transactions, the ‘flexibility’ this government action portends to create is dissipated on receipt;

3) Assuming #1 and #2 are totally off base, the lackey of last resort would be Fannie Mae and Freddie Mac bondholders. That group consists of institutions, foreign investors, as well as a bunch of little ol’ grandmas living on fixed incomes. Most of the final category don’t pay any taxes, so I guess the statement ‘And the estimated cost to taxpayers would be roughly zero’ has some merit regardless of outcome;

And finally…

4) The entire idea hinges on the premise that reductions in cash flow will ‘be balanced out by a reduction in defaults and foreclosures’. It’s a balancing act with emphasis on the acting – the first $200 billion pumped into Fannie and Freddie was followed by an increase in defaults and foreclosures.

While the last statement isn’t directly causal, what is would be that as long as housing prices are allowed to remain artificially propped up, qualified buyers who can actually afford the mortgages (that the unqualified cannot) remain on the sidelines.

Wave bye bye to another $200 billion.

Banks already “paying it forward”

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.

Fannie Mae debacle has no oomph

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.