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Subject: Thoughts about Fanny Mae/Freddy Mac?

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David_K
Posts:61

07/10/2008 11:44 PM	Alert
Considering they are in all likelihood going to cease to be independent companies any more, how do you think this will affect the RE market as a whole?

UnsureBuyer
Posts:211

07/11/2008 2:46 AM	Alert
Look forward to a taxpayer funded federal bailout because these two institutions are "too big to fail." A few scapegoats might see jail time (à la Enron, WorldCom, etc from the dot bomb days). Prolonged pain & economic retraction... Important question: Is this just a few isolated companies? Or are we just seeing a very slow domino effect that will bring the US economy tumbling down with slow recovery like Japan's decade long recession....

UnsureBuyer
Posts:211

07/11/2008 2:55 AM	Alert
http://mises.org/article.aspx?Id=1099 (small excerpt) The government attempted to offset the stronger yen by drastically easing monetary policy between January 1986 and February 1987. During this period, the Bank of Japan (BOJ) cut the discount rate in half from 5 percent to 2.5 percent. Following the economic stimulus, asset prices in the real estate and stock markets inflated, creating one of the biggest financial bubbles in history. The government responded by tightening monetary policy, raising rates five times, to 6 percent in 1989 and 1990. After these increases, the market collapsed. (Go to link to read the rest of the article)

Eugene
Posts:258

07/11/2008 8:27 AM	Alert
Troubles at Fannie Mae and Freddie Mac are greatly exagerrated. They didn't participate in subprime lending, they didn't issue HELOCs and second mortgages, their loans are either under 80% LTV or have PMI. Wachovia and WaMu got way deeper into this mess and they are still standing. This may be a good buying opportunity for their stocks.

rkf619
Posts:37

07/11/2008 8:43 AM	Alert
While Freddie and Fannie only guarantied 80% LTV loans, how many of those loans were really 100% LTV when the HELOCs were piled on? We all have seen that when an owner has no skin in the game he is more likely to default which puts the value of not only the second mortgage but also the first (Fannie and Freddie's loan) in jeopardy. In the case of default, the 80% LTV loan is in default too and must be recognized as such on Fannie and Freddie's books. Furthermore, these days is a 20% cushion sufficient to protect the lender on a house in foreclosure in a distressed region? PMI is only as good as the provider - Ambac, MGIC and most of the other big PMI providers are no longer creditworthy and their shares are trading like penny stocks.

rwsinmissionhills
Posts:311

07/11/2008 10:07 AM	Alert
Unsurebuyer: I subscribe to your philosophy: Yeah, our tails are going to be dragging for at least a decade, and we totally brought in on ourselves. Our economy will not grow. Think about our economy??? What do we produce? DO we produce? No, we serve each other in grand style. I have never been able to wrap my mind around how and economy/culture can exist by just serving each others needs. That's how we've come to do it the good ole US--we have a disproportionate amount of self indulgent whiners and prima donas. Seriously, we have been setting ourselves up for deserving a stinging slap in the face, and here it is folks. This is one of the oldest stories in human history. We didn't invent it and we didn't end it.

Brian
Posts:2210

07/11/2008 12:24 PM	Alert
Fannie and Freddie will fail. In fact they are being setup to fail as we speak. The mortgage bailout plan is forcing the GSEs to guarantee even more mortgages of people who shouldn't be homeowners to begin with. What will that do? Add more junk to the existing pile of crap. The GSEs need to be more selective (not less) of the mortgages they guarantee if they want to improve their financial health.

Brian
Posts:2210

07/11/2008 12:32 PM	Alert
Think about for a moment. If you are in the business of making loans, you need to qualify the borrowers very carefully and make the money back a little at a time. It's a business based on volume and very conservative financial management. The problem is that loan brokers made all their easy money up-front and parked $5 trillion of junk in the GSEs. The GSEs were setup to fail. The system made it so easy that everyone was encouraged to make the up-front fees and dump the mortgages in the landlfill. The taxpayers will be the greatest suckers.

Eugene
Posts:258

07/11/2008 12:42 PM	Alert
Fannie and Freddie can't and won't fail. Letting them fail would result in a crisis of epic proportions. Their only problem is relatively low capitalization.Their portfolios are mostly solid, they have little exposure to bubble markets. It's a known fact that something like 80% of all loans made in San Diego at the peak were I/O and neg-am. That automatically rules out GSEs, which primarily trade in 30-year fixed loans. There may be some homeowners who got 80% 30-year fixed + 20% HELOC, but those were the exception rather than the rule. They have lots of loans from 80's and 90's and lots of loans made in non-bubbly places like Texas and Colorado. Compared with the amount of money Fed has spread around so far, monetary injections required to keep Fannie/Freddie afloat are peanuts.

Eugene
Posts:258

07/11/2008 1:00 PM	Alert
The mortgage bailout plan is forcing the GSEs to guarantee even more mortgages of people who shouldn't be homeowners to begin with. What will that do? Add more junk to the existing pile of crap. The mortgage bailout plan isn't forcing GSEs to do anything. FHA is not a GSE. The GSEs need to be more selective (not less) of the mortgages they guarantee if they want to improve their financial health. The GSEs are quite selective. As of April '08, serious delinquency rates in Fannie Mae's book of business were 0.62% among loans without PMI and 3.15% among loans with PMI. Compare with 20-30% delinquency rates of Alt-A's and subprime loans. Loans without PMI were up to 80% LTV when they were issued. Even with a 20% drop, a good chunk of equity is recoverable through foreclosure. Loans with PMI constitute a relatively small part of their portfolio.

Brian
Posts:2210

07/11/2008 1:47 PM	Alert
A government bail out is failure. Would you argue that Bear Stearns didn't fail? If the GSE's portfolios are so good then why are they undercapitalized, despite the housing boom for the last decade? Something doesn't jibe with reality here. Warren Buffet was conservative and he's sitting pretty now. Can't say the same about the GSEs. What about rework of loans in the bail package that Congress is proposing? Who will guarantee those junk loans if not the GSEs? Also, the FHA loan limits are being increased as the market is dropping... Makes a lot of sense, huh? Like I said, the government is being setup to absorb all the loses of the mortgage industry while the loan brokers make the money-up front.

jqcoffey
Posts:24

07/11/2008 1:54 PM	Alert
Given that the Fed and Paulson are explicitly NOT denying the NY Times bailout/contingency plans for Fannie Mae and Freddie Mac (link below) I have to wonder where Eugene is getting his information the leads him to believe that they're both just fine and worthy of investment. The implication of the non-denial is that there most definitely is a bailout plan in the works, which means that the Fed and Treasury Departments are very nervous about their potential for collapse. They were caught blindsided by the Bear Stearns debacle and are making sure they're prepared for what would be a much bigger problem. While I agree with his assessment that neither will be permitted to fail, in the event the bailout plan is enacted, their stocks will fall tremendously and their ability to purchase new loans will be seriously eroded. This, to me, clearly indicates that everything is most certainly not fine at Fannie Mae and Freddie Mac. It also tells me that now is also not the time to buy either Fannie Mae or Freddie Mac's stock or real estate. Keep that rental and look elsewhere for investment advice. http://www.nytimes.com/2008/07/12/business/12fannie.html?hp

windmill
Posts:15

07/11/2008 1:58 PM	Alert
rwsinmissionhills I have thought much about the same things, what do we produce as a country? The only thing I can think of that we do produce and we produce it EXTREMELY well is war... if there is anything else someone can think of let me know. thanksrws

jqcoffey
Posts:24

07/11/2008 2:09 PM	Alert
Brian, I agree with you on pretty much everything you've said, however, you state: "Like I said, the government is being setup to absorb all the loses of the mortgage industry while the loan brokers make the money-up front." To whom exactly should we look to for help at this point? Simply letting 20% of the homes in the country go into foreclosure and then rot while their market values plummet in a no-one-can-get-a-loan-even-if-they-were-dumb-enough-to-want-one environment is certainly not a recipe for avoiding a depression. Believe it or not, San Diego is in one of the better positions of the bubble-heavy real estate markets. In Atlanta, for example, whole neighborhoods have disappeared and homeless people are being paid to live in homes to keep out the "riff-raff". Some communities are actually considering demolishing (presumably tax) foreclosed houses to prevent vacant neighborhoods from becoming ghettos. The only solution to the crisis is a government bailout of some sort. The trick will be figuring out how the government can aid in an orderly decline in real estate prices while still allowing some people to remain in their houses. Don't forget that 20 million new renters trying to rent a bunch of foreclosed homes (the only things vacant) will cause a bit of a problem as well, and thus, the we can't just say "screw 'em." As a former home owner who didn't buy a stupid mortgage and had 20% down and am now renting, I wish we could say "screw 'em" so that I can afford that house on the hill in Pt Loma, but I don't think that that's a viable option at the macro level for the US economy. http://www.economist.com/finance/displaystory.cfm?story_id=11708045

David_K
Posts:61

07/11/2008 2:12 PM	Alert
We don't manufacture much anymore, but we still produce tons of "ideas". Americans might not be involved in the manufacture of the cell phone, and Qualcomm doesn't produce a tangible product, but still their "ideas" have changed the world for better or worse. Technology has decreased the amount of man power everywhere with respect to manufacturing. In fact most people find it surprising the China itself has lost millions (about 20 million) of manufacturing jobs over the past decade. This is not because they are manufacturing less, but there are less manufacturing jobs as more and more things have become automated.

henrysd
Posts:4

07/11/2008 2:19 PM	Alert
Here are parts of an acticle from PIMCO, the bond king -- http://www.pimco.com/LeftNav/In+Focus/2008/Simon-+Agency+MBS-+01-2008.htm. [quote] The Agencies have several layers of credit protection in place to support the MBS guarantee. The average current loan-to-value ratio, which is basically the amount of money that you have loaned against the value of a property, for Fannie and Freddie’s guaranteed mortgages is 59%. This 41% borrower equity provides an important cushion against significant home price declines. Also, the surplus capital reserves of each Agency are approximately $8 billion, and both Agencies have regular access to debt markets to raise additional capital. .... It is important to remember that the Agencies collect a fee to guarantee loans – currently averaging 23 basis points, which is historically ample coverage for credit loss. [end quote] The article was originally meant for investors in Agency Mortgage Bond guaranteed by GSE and I just borrow some facts from it. Also the article was written in January and the company was in general pretty good shape that time. The current total portfolio LTV probably increase some how due to housing price drop. With the conventional loan limit increase this April as part of Bush stimulus package, and potential more guarantee of some non-healthy loans from currently debated congressional housing bailout plan, I don't know if the LTV could be in danger zone if some massive junk loan is attached. I think the stock market this week is protesting congressional ideas for any mass housing bailout plan which put the burden on GSE and taxpayers. It is a choice of either let anyone on the boat sink with the boat, or only those people already drowned to sink.

Brian
Posts:2210

07/11/2008 3:05 PM	Alert
jqcoffey, I don't disagree with you. I don't have a solution. My response is how did we let it get to this point? Who were responsible? I'm just pissed off that I'm going to have to pay for the plunder of the American economy. Perhaps, I should have cashed-out and borrowed to the hilt and walked on millions in loans. I would be sitting pretty in Belize right now. jqcoffey, you also make a good point about other cities. How did cities such at Atlanta and Minneapolis where housing prices are much lower than San Diego, and where median income is similar to San Diego get into such a mess? You would think that prices were affordable there. That goes to show you how overpriced San Diego is and how much harder we still have to fall. On the topic of the GSEs, I lean more on the side of letting them sink, and then pass new legislation for a new organization that will start from a blank slate and only purchase the good mortgages. The stew is rotten already and it needs to be dump out. ------ David_K, yes we produce a lot of ideas and many of them are scams (securitization of mortgages). The problem with ideas is that they can be instantly copied and exported without cost. The thing about manufacturing advantage is that it takes years to reproduce it in other countries. Look at how Korea and Japan have leapfrogged America in Internet and Mobile technologies. Increasingly, our best ideas are being dreamt-up at our top university by foreign born students. Those foreign students increasingly return to their home countries after acquiring the knowledge here. If you hang out the universities, you will realize that the foreign students are confident young folks from well-to-do families -- not the poor yearning for America immigrants of yore.

rwsinmissionhills
Posts:311

07/11/2008 4:04 PM	Alert
There is kind of a related discussion going on Off Topic: Economic heartburn. Here is my contribution on that topic: 613867. I agree. (Don't for get hydrogen!!!!! I think hydrogen is the holy grail, but I am biased!) Here's another peeve of mine. With Exxon's unprecedented billions of dollars in profits, why are they not investing in energy? They know the petroleum party is going to end in the not too distant future. Here is the perfect chance for them to help build a completely new industry. (although it's also kind of scary--If some entity like Exxon were to get a big break in say hydrogen, they could be masters of the universe). However, I am not sure our government is going to step up to the plate on this issue. Unfortunately, I have kind of a front row seat on some of government research funding stuff. They still give tons of money for health care research (and for our biggest health care challenges, we already pretty much know the cure--it's PREVENTION and behavior modification, but I digress...) and, yeah, it funds jobs. Call me a nazi, but I don't think that spending billions on coddling and enabling people who develop behavior related diseases is productive for our economy, nor do I think it is going to be a big export. (remember the Reagan era and the military-industrial complex? Well now I think we have the medical-industrial complex and I don't see how that is productive. It's a high price service item.) Yet, the government funds energy related issues at a relative pittance compared to the health stuff. There is no incentive for young people in the US to become scientists to carry on the types of research that we need to form a strong economic base. (OK--there are scientists in biotech, but I'm telling you, they are not the ones making the dough--It's the finance and business guys making the money, but for all their rewards, they are not developing a strong enough economic base--IMHO) Being a scientist takes hard work, discipline, it's hard to cheat (and get away with it for any length of time), and the pay is bad!!! The little emperors our country has raised in the last few decades aren't going to be interested in that. No way. And on this topic of fanny mae/freddy mac: Yeah, I think it's going down the tubes and I am quite certain that the taxpayers (current and future--ie our kids (or immigrants--hey -- wait everybody--come back!!! We need taxpayers! ) are the ones who are going to pay. I absolutely hate to say this because I have always considered myself somewhat of a patriot, but I think the sun is setting on American greatness, such as it were.

UnsureBuyer
Posts:211

07/11/2008 4:19 PM	Alert
Posted By rwsinmissionhills on 07/11/2008 4:04 PM I absolutely hate to say this because I have always considered myself somewhat of a patriot, but I think the sun is setting on American greatness, such as it were. Uh oh, don't bring up Edward Gibbons and The History of the Decline and Fall of the Roman Empire... We might have to start another off-topic thread about the decline of the US a superpower. So the interesting bit of news I caught today was that there was talk of putting Fannie & Freddie under a government conservatorship. Conservatorship means stock value = bupkis (for those not functional in Yiddish, that means "nothing"). :)

UnsureBuyer
Posts:211

07/11/2008 4:20 PM	Alert
p.s. I figured something about quoting. Don't use the "Quote" button available when you're writing a message. Instead click on the Quote link at the upper right hand of the message you want to quote. Also, thanks jp for that blockquote info. Hmm... oh crap, this is the wrong thread.

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