Housing Bailout Masquerades as Stimulus
By Andrew Jeffery Feb 08, 2008 10:15 am
Fannie and Freddie asked to save the mortgage market.
Only the most Pollyannaish would argue that mailing checks to the spending vacuum that is the American consumer is an effective way to bolster the economy, so the true motivation for the unusually quick congressional action is for Fannie and Freddie to step in and support housing values.
The implicit government guarantee these companies carry has allowed them to be the sole source of liquidity since the secondary market for mortgages seized up last summer. However, even though Fannie and Freddie control the market for prime mortgages, they are unable to buy loans with a face value greater than $417,000.
High home prices and a stalled jumbo loan market mean potential buyers in areas with the fastest home price depreciation like California, Arizona, Nevada and Florida can barely find a loan. Combined with rampant speculation and exotic mortgages, illiquidity in the market for big loans has exacerbated the home price decline.
Even if expanding the reach of these institutions does jumpstart the market, its effects may not be as far-reaching as regulators hope. Fannie and Freddie's underwriting guidelines are tighter than most private lenders, so borrowers must have good credit and post sizable down payments to qualify.
At best, Congress's ruse will provide fodder for the November election as each party stakes its claim as savior of the American economy. At worst, by delaying the inevitable Washington has increased the severity of the eventual day of reckoning.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
(7)
Reply
2008-02-08 10:55:18
The Obvious
Thank you Andrew for stating the obvious. I say this with no disrespect or malice. Someone has to declare that the emperor has no clothes.
And also that the moves being made by the FED and the government are not intended to help you and I but rather the banks, brokerages and wealthy elite.
If we happen to benefit, so be it. But the help didn't happen by design. More like accident.
And also that the moves being made by the FED and the government are not intended to help you and I but rather the banks, brokerages and wealthy elite.
If we happen to benefit, so be it. But the help didn't happen by design. More like accident.
2008-02-08 12:19:01
Raising the cap
I may be in the minority here, but am I the only one who thinks that raising the cap for Fannie and Freddie is a good thing? The cap has been in place at this number since the 70's (correct me if I'm wrong). The whole point of raising the cap is now that the securitization market has basically disapeared to allow people who should be getting loans to get them at a fair rate. The banking industry is so hamstung from the excesses of the past few years that it can't lend effectively. The housing market needs to stabilize before the stock market can find a bottom. This is a step in the right direction.
I am still short the market and will be selling rallies by the way. I am predicting an discresionary spending drop of about $600 billion between 2006 and 2008 mostly because the housing ATM is closed, and partly becasue of rising food energy and borrowing costs. The US is still going to be a disaster, but it is nice when the government takes some action that actually helps the market instead of doing something stupid that makes the problem worse (ie a freeze on all interest rates). I would bet that the cap change becomes permanent over the next year or so as well.
The fed should have stepped in sometime in 2004 and put some restrictions on the securitization market and derivatives market. The pain is still going to get much much worse, but raising the cap is a GOOD thing.
I am still short the market and will be selling rallies by the way. I am predicting an discresionary spending drop of about $600 billion between 2006 and 2008 mostly because the housing ATM is closed, and partly becasue of rising food energy and borrowing costs. The US is still going to be a disaster, but it is nice when the government takes some action that actually helps the market instead of doing something stupid that makes the problem worse (ie a freeze on all interest rates). I would bet that the cap change becomes permanent over the next year or so as well.
The fed should have stepped in sometime in 2004 and put some restrictions on the securitization market and derivatives market. The pain is still going to get much much worse, but raising the cap is a GOOD thing.
2008-02-08 13:01:50
Raising the cap
Well first off, the cap had been raised sometime in the last 5 to 10 years so it's not like they have been stagnant.
Second, both Fannie and Freddie are dealing with rising loan delinquency/loss rates and trying to raise capital and loss allowances. They're not in any position to guarantee mortgage debt at a higher ceiling, no matter how much people want them to.
It may not matter anyway - no buyers in the marketplace means values continue to fall. Even then, loan standards are tighter so even if you wanted to buy, who's going to lend it when all of the banks are busy re-marking everything they have and writing it down?
Second, both Fannie and Freddie are dealing with rising loan delinquency/loss rates and trying to raise capital and loss allowances. They're not in any position to guarantee mortgage debt at a higher ceiling, no matter how much people want them to.
It may not matter anyway - no buyers in the marketplace means values continue to fall. Even then, loan standards are tighter so even if you wanted to buy, who's going to lend it when all of the banks are busy re-marking everything they have and writing it down?
2008-02-08 17:41:09
Another Way?
Thomas,
I found an article on Bloomberg that has some more details on how the changes to Fannie and Freddie will actually effec the market.
http://www.bloomberg.com/apps/news?pid=20601087&sid=albzArCDnWsI&refer=home
I believe, like Tony, that the real problem is not just that people need lower rates, but that the 'average' house is just too expensive for the 'average' person. Prices got too high because of unnaturally low interest rates and exotic mortgages coupled with speculation, fraud and Wall Street.
Although it is difficult to criticise attempts to salvage the integrity of the banking system, isn't there a better way? Washington continues to claim to be helping subprime borrowers, but none of their plans actually do much to help those that need it most.
Andrew
I found an article on Bloomberg that has some more details on how the changes to Fannie and Freddie will actually effec the market.
http://www.bloomberg.com/apps/news?pid=20601087&sid=albzArCDnWsI&refer=home
I believe, like Tony, that the real problem is not just that people need lower rates, but that the 'average' house is just too expensive for the 'average' person. Prices got too high because of unnaturally low interest rates and exotic mortgages coupled with speculation, fraud and Wall Street.
Although it is difficult to criticise attempts to salvage the integrity of the banking system, isn't there a better way? Washington continues to claim to be helping subprime borrowers, but none of their plans actually do much to help those that need it most.
Andrew
2008-02-08 22:22:07
Another Way?
So if we were to agree that housing is beyond the coverage ratio of the average wage earner. Why would you raise the cap? That to me is like saying... OK too many people are getting pulled over for drunk driving let's raise the legal limit. I don't think people should be buying homes that are 700K and if you want a mortgage that large show sufficient income or down payment to entice someone to make the loan. As my wife says:"enabler".
2008-02-08 23:54:43
Raising the cap
Freddie & Fannie are close to going under now. What will happen when these two are politically pushed to take on thousands of
$600,000 mortgages in a collapsing housing market?
Got GOLD?
Edmund OShea
$600,000 mortgages in a collapsing housing market?
Got GOLD?
Edmund OShea
2008-02-09 03:38:46
Raising the cap
Touche!
Here in California, and most other places I assume, properrty taxes
round out to 1% of the "sale value amount."
At $600,000 that comes in at $6K a year, or $500/month on top of
the P&I payment on the newly purchased home.
Let's see: 20% down leaves a mortgage of $480,000, or $2726
a month P&I @ a 5.5 rate, plus the taxes, or PITI, it comes in at
$3276 a month.
I did the math: The first $20 an hour one makes would go to this
mortgage.(PITI) (20X40X4=3200)
Joe 6-pack can't afford this. So Big Ben is going to start dropping
cash out of the sky?
Seems that way; they just passed the stimulous package.
Whoopee! Politics: The art of putting off the inevitable.
(Latin translation: pol tics: "many lies")
What can they do? What WILL they do?
Only one answer: DUAL currencies. An internal $ and an external $
for global trade. They did it before.
....But that was before mouses went <click> and moved assests
somewhere else.
It's getting interesting, isn't it!!!
Here in California, and most other places I assume, properrty taxes
round out to 1% of the "sale value amount."
At $600,000 that comes in at $6K a year, or $500/month on top of
the P&I payment on the newly purchased home.
Let's see: 20% down leaves a mortgage of $480,000, or $2726
a month P&I @ a 5.5 rate, plus the taxes, or PITI, it comes in at
$3276 a month.
I did the math: The first $20 an hour one makes would go to this
mortgage.(PITI) (20X40X4=3200)
Joe 6-pack can't afford this. So Big Ben is going to start dropping
cash out of the sky?
Seems that way; they just passed the stimulous package.
Whoopee! Politics: The art of putting off the inevitable.
(Latin translation: pol tics: "many lies")
What can they do? What WILL they do?
Only one answer: DUAL currencies. An internal $ and an external $
for global trade. They did it before.
....But that was before mouses went <click> and moved assests
somewhere else.
It's getting interesting, isn't it!!!
Get real-time options trading ideas from Steve Smith, veteran options trader and newsletter author, plus let him show you the way to cut risk and boost your returns through the strategic use of options. Click here for a free 14 day trial to OptionSmith by Steve Smith.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved
