Libertarian ping! To be added or removed freepmail me or post a message here.
Posted on 09/07/2008 9:02:41 AM PDT by CodeToad
NEW YORK (CNNMoney.com) -- Federal officials unveiled an extraordinary takeover on Sunday of troubled mortgage giants Fannie Mae and Freddie Mac, signaling the most dramatic move to date aimed at shoring up the nation's housing market.
(Excerpt) Read more at money.cnn.com ...
Yep. And Fan and Fred holding onto a good-sized chunk of this toxic paper didn’t help one little bit, either.
And the taxpayers get the shaft as usual.
The markets have known something like this was possible for quite some time now.
This doesn’t totally wipe out common stock holders. When the takeover was announced (w/o details) Fri afternoon, Fannie and Freddie stock took a sizeable hit in after hours trading. This bailout effectively gives the gov’t an option on about 80% of the two companies. This is bad for shareholders, but not as bad as it could have been and probably not too far out of line with what the market was expecting.
Many of the bank and homebuilder stocks went up in Friday’s afterhours; probably because the gov’t moving to back Fannie and Freddie debt takes that uncertainty away and does help get credit flowing again.
Trading in FNM and FRE will be fast and furious tomorrow, but I think this has largely been priced in by the rest of the market. At this point, FNM or FRE common stock is basically a lottery ticket.
In a perfect world, the first source of capital that should be required is a return of every nickel of campaign or political event contributions ever made by FNM & FRE to candidates or the two political parties. I know, never happen - but we can dream.
I am a real estate appraiser....and object to your inclusion of appraisers in your comment.
Respectfully, I think you are conflating what the video advocates SHOULD be done with what this bailout IS LIKELY to do. I humbly suggest you watch it again.
Yes, I agree with you, this effectively doubles the Federal debt.
But the central conceptual notion the video advocates, as I see it, is whether this bailout/takeover/seizure, whatever you wish to call it, is a “market clearing” move or is a “preserve biz as usual” move.
I suggest it is the latter, and not only that, it is an explicit and extra-Constitutional and taxpayer-funded ratification of the latter.
Housing prices are influenced by many things, of course, among them; supply and demand; prevailing wages/earnings; desirability of living in a given area; recent comparable sales [”COMPS”] and the availability of mortgage credit.
The ready availability of mort credit is IMO the fundamental mandate/purpose of F & F. Supporting the operations of F&F is a triad of factors; the biggest of which IMHO was the (formerly) very high quality of the debt instruments resold into the secondary market. The fact that F&F debt traded only slightly higher than risk-free Treasury debt indicated the universal high regard the market placed upon such instruments. This was proven by the very small spread that used to exist between Treasury and F&F debt. F&F at one time ONLY purchased “confoming” loans; which meant that the loans had pretty darn rigid underwriting requirements: The ability of the borrower (homebuyer) to service the payment stream from verifiable sources at no more than 36% front-end and 28% back-end load; the loan-to-value of the loan relative to the value of the collateral (the house’s appraised value) and a 20% down payment which guaranteed that the borrower had a serious stake in the game and would not casually default. These lending guidelines had been established by longtime banker experience. There was a time (in fact MOST of the time in histories of F&F) that if the debt service on a home loan consumed 28.4% of your after tax income YOU DIDN’T GET THE LOAN. If the loan was more than 80% LTV, YOU DIDN’T GET THE LOAN. Period!
But then, F&F went into the business of fudging their own rules, and did so big time. Fast forward to now, and the giant rise in home prices has undermined the LTV factor in the soundness of a great many of the loans now sold into F&Fs’ book of biz. In other words, they are holding a tremdous load of crap, to put it bluntly. As if that weren’t enough, the recasting of the variable-rate loans has placed many, many borrowers into tenous positions as to their ability to service the loans. You will note that mortgage rates, in general are HIGHER than they were before the Fed began its latest round of rate cuts. You may say “big deal, rates went from 5.75% to 6.375% and that’s still low by generational standards and I remember 18% mortgages...” and etc; but the point has to be made that PREVIOUS MOVES by “Bazooka Hank” and “Helo Ben” haven’t quite had the desired effect, have they? So maybe these guys aren’t the geniuses they tell us they are? And just to add some additional topping to this melting sundae, the forced liquidations of surrounding homes has further tarnished the collateral value of subject properties, because as you probably know, homes are sold based upon those COMPS I talked about earlier. 5.75% to 6.375% may not seem like much but in the world of bonds & morts it’s more than a 10% move; meaning, payments on adj-rate morts are set to rise almost 11%! Figure your own mort payment (or rent) into that equation and I think you’ll agree, that’s a non-trivial move; especially when apparently, housing values are continuing to fall.
So, it was a bubble, and these guys are at fault and those guys are at fault and it all started when blah blah blah.
Point being, here we are. Do we now seek to engineer a market clearing process or do we ensure the survival of the purveyors of the fraud and questionable dealings that got us into this mess; ON THE BACKS OF the 90+% of taxpayers who not only DIDN’T benefit, their homes lost value {via the COMPS mechanism] plus their savings lost value plus the purchasing power of their dollars lost value. Just how much flesh is there supposed to be on the taxpayer bone? Just how far do we trust these guys whose financial engineering helped get us into this jam and whose palliative moves have so far made the problems WORSE?
This seizure is NOT a “market clearing” event. It is yet another a hot-potato handoff to the gullible taxpayer, IMHO. NOTHING is to be done about all the folks who bought F&F debt thinking it was good as Tsys when the prospectus clearly, clearly stated it wasn’t. It WON’T lower house prices; it will synthetically attempt to PRESERVE home prices (but it won’t work)
Most galling to me, is that when F&F work to clear their books of the underperforming and defaulted loans (AND: the underlying foreclosed properties) IT WILL BE NONE OTHER than the banks themselves, recapitalized by this taxpayer handout, who will be in the optimum position to cherry-pick and self-deal (remember; Morgan Stanley is the advisor/consultant on this deal) themselves the best deals.
Good tip, thanks.
Thanks! That answers my question.
Exactly and this is another Bush Administration disaster.
The appraisal industry and state boards have a way of dealing with dishonest appraisers. We are obligated by state law to file complaints against dishonest and fraudulent appraiser - which I have. As far as my degree, I have a Juris Doctorate from Gonzaga.
Ping!
Libertarian ping! To be added or removed freepmail me or post a message here.
Neither Obama nor McCain have a handle on economics and finance. They are both lightweights in this area. But of course McCain is the better candidate, by a long shot.
This plan should lower interest rates, thus increasing # of home loans and stimulating building activity...hopefully.
But the act was introduced by two Republicans, including McCain’s current campaign economic advisor, so nobody will go there IMO.
true, but gramm was one of the authors of the act, as was leach, both republicans.
and gramm has served as an adviser to mccain.
Cool, can we get welfare for that? /s
Whoa!
Thanks
Where’s Herbert Hoover when you need him? /sarc
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.