The winners, it seems to me, are:
(1) The bondholders, including the foreign governments and investors who own $1.4 trillion in U.S. mortgage debt. I feel like a sucker for investing in treasury bonds rather than Fannie and Freddie bonds. I accepted the lower return because of the lower risk. It turns out the risk wasn’t any lower at all!
(2) People who want to buy, sell, or refinance a house right now. It seems to me that this is a legitimate, but short-term, concern. If Fannie and Freddie failed, the market would eventually readjust to life without them. There would probably be less credit available overall, but then, isn’t the point that too much credit was extended in the go-go years?
The losers are:
(1) The shareholders. If the government purchases new shares (and I understand this to mean a new issue of shares, not purchases on the open market), current shareholders will be diluted. Tough luck.
(2) You guessed it–the taxpayers. The government, after failing to regulate Fannie and Freddie properly, now wants to saddle us with the liabilities that have resulted from their overly sunny and lax practices.
Maybe someone will correctme on this, but I don’t see the same kind of systemic risk in the mortgage market as in the securities market. If a big brokerage fails, it raises the risk that investors will lose their investments for technical reasons having nothing to do with the health of the companies in which they’ve invested. This is because the brokerages are technically the owners of their customers’ securities, and their secured creditors have rights in the securities that may be superior to the rights of the hapless investor. But if Fannie or Freddie fail, it seems to me that the main losers are the people who invested in Fannie or Freddie, which is as it should be, right?
TedF
Not a whole lot I can add to this but I would like to point out one little known fact.
Some may wonder who holds all of this agency paper and is now breathing a sigh of relief to know that the US Taxpayer will guarantee their profitable returns.
They are foreigners yes, but what I found most odd was the ranking of which foreign entities held the most of it.
Numbers 1 and 2, China and Japan, will surprise no one. But not far away, at number 3 is …
…. None other than that hotbed of prosperity, the Cayman Islands.
Hmmm …. now who exactly are these wealthy Cayman Islanders and where did they get all of that money to begin with?
I will leave you guessing, which is all we can do due to “strict secrecy” in their banking complex, but I would wager that your guess is the same as my guess and that the same guess everyone else would make.
Hmmm …
So investors want ex poste facto security for their interest in Freddie and Fannie. Since the USA would be bankrupt but for the printing presses running 24/7, we can look forward to more runaway inflation destroying the savings and retirement programs of all working class citizens. Not that your friendly politicians look at you as their victim. Expect the investors to shell out well for campaigns.
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p>Wasn’t all this played out in the Savings & Loan Scandals of the 80″s (Hmm, I wonder what Senator McCain remembers of that time…). Then on a smaller scale in Rhode Island in the 90’s with RISDIC? When are people going to say they’ve had enough? When will we throw the bums out?
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p>Go back over the newspapers of the 50’s and 60’s and you won’t find a foreclosure tombstone for months. Then look at the 70’s on up and the increase in each decade? Should it tell you that something was wrong? Check the birth and rebirth of Freddie and Fannie. Bailout now and again in twenty years and again, and again? Or walk away and let the market take over?
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p>I once had a friend, long since gone to his reward, that lived through the Depression. Back then, he told me, there were so many deserted, foreclosed homes that families would move into them then go to the bank and offer to pay rent to live there. The banks, seeing an opportunity, often would charge rent and try to get the tenant to save enough to make a downpayment for a mortgage on the property. The bank won and the squatters won. Today we again have the sight of foreclosed, abandoned properties all over this country. Often looted, they serve no purpose to shelter families living in automobiles and on the streets. How can that picture be fixed? I doubt it is in a bailout.
<
p>
The investors are S.O.L. under any scenario. The companies may continue to exist, effectively taken over by the taxpayers, and eventually stock may be sold again.
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p>But for the moment, it is clear that the proposal doesn’t bail out investors, who stand to lose 100% of their investment.
You are confining your thinking to the equity side of the equation. For all intents and purposes the stocks have been trading at near zippo for some time … equity holders are already irrelevant.
This was a bailout of the bond holders, the paper hangers, trillions in liability, who are now free of what little worry they may have had. The best government money can buy ….
These are “government sponsored entities.” There has long been debate about whether this meant that the government would back their debt, essentially as a guarantor. The market eventually concluded that the government would, and the entities are able to borrow money on more afvorable terms than the purely private sector. Althought it had about 40 years to do so, the government never took any steps to disabuse anyobe of this notion. One is tempted to conclude that the government agreed that it would back this debt.
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p>What did they do with the money they borrowed? They bought residential mortgage paper from banks that made residential loans, so that those banks could lend to another borrower without waiting for 30 years to recover its investment.
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p>Did they buy just any mortgage? No. It had to be a loan for less than a certain size, and meet certain borrower qualifications and LTV ratios. This is where “20% down” came from. No subprime lending from these guys, though they did, unwisely, ast it turns out, loosen their own standards a bit too much.
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p>Over time, because of their quas–governmental status, they behaved like semi-private creatures of Congress, and became a useful place for retired legislators, Democrat and Republican alike, to make a lot of money before retiring for real. Collectively, it is fair to say that these politicians did not run the business as well as we might have hoped.
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p>Also, over time, the secondary mortgage market created by these guys grew well beyond Freddie and Fannie. This is where your subprime lending came in. When those loans started to turn, the rest of the secondary market dried up. That is why Congress caused Freddie and Fannie to loosen its standards A LOT in the last stimulus bill, in order to try to keep the market functioning.
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p>Lately, they have been trouble borrowing, because the market is in a rather bearish mood. If they can’t borrow, they can’t buy mortgages. If they can’t buy mortgages, then your local bank is much more limited in its ability to lend. That means that, if there are 100 units on the market in your immediate neighborhood (as there are because of the elevated default and foreclosure rate), there may only be capital to make 60 mortgage loans during this year, meaning that 40 will have to wait for cash buyers, or hope to sell next year.
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p>That in turn, would cause real estate values not to decline, as they have been, but crash, which would wipe out the life savings of a HUGE percentage of the population, as for most people, their home is their single largest asset.
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p>So, in order to avoid this mess, the government has made noises that, yes, indeed, it is the guarantor of Freddie and Fannie debt, clearing up any doubt. Which enabled them to borrow in the market at reasonable rates again yesterday.
Without writing a book, are you trying to say that investing in the debt of a certain entity isnt investing?
Shh .. dont tell Warren Buffet, he will be completly bummed out.
I was trying to expalin that what is going on with respect to these two entities is an awful lot more than bailing out the investors in FM debt.
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p>In any event, “bailing out” is a misnomer in this context, because investors in FM debt did so with the understanding that the debt was guaranteed by Uncle Sam, and priced it accordingly.
It is clearly stated in UNAMBIGUOUS language, that the debt is in no way insured or guaranteed in any way, by the US Government.
Of course the US Government doesnt always do what it should but when a debt instrument is so painfully worded to avoid any misrepresentation than who is the misrepresentation being made to?
There is nothing else going on in this debacle other than bailing out investors … nothing at all … let them fail.
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p>Let Them Fail “
They had to say that because the situation was unclear, lest they get in trouble with the SEC. As I mentioned, this status of the debt of these quasi-governmental agencies has always been murky.
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p>Nevertheless, for forty (40) years, though Democratic and Republican adminsitrations and Congresses, the markets have assumed that the whole point of the creation of these “government sponsored entities” was that the government would in the end, back the debt. Otherwise, why would they exist at all? The debt was priced accordingly.
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p>Interestinly, no one, for forty years, thought it important to correct that impression.
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p>”Letting them fail” would precipitate the collapse of the real estate market, nationally, resulting in a destruction of accumulated wealth unseen in this country since 1929-30. I’m pretty sure it is the policy of both political parties to avoid that kind of result, even if it would screw some rich people.
Something has accumulated on my shoe and it isnt wealth.
The net effect of this BUBBLE to me was a 300% increase in property taxes … Whoo-hoo.
Sure One can sell at the higher price but people cant hang their hats in a safety deposit box.
Anyone who sells at the high price buys another at the same jack up.
Renters pay up the shnooz also.
Housing costs are the number one thing keeping people poor and yet we are supposed to FEAR what would happen if …
Come on … Use your noggin’
And I am glad that neither you nor anyone who agrees with you is in charge of policy.
More of the same is a guarantee. Long live the status quo.
I’m not sure there is much of a market without these guys.
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p>All of the players in the mortgage market are in big trouble at the moment. They each hold all kids of uncollectable debt, and can’t raise any capital on anything other than onerous terms.
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p>I have read, this morning, (but can’t remember where, or I would just link it) that Fannie Mae and Freddie Mac accounted for like 70% of new mortgages in the first quarter of ’08. If they fail, there would be no mortgage market, which would be darn near catastrophic.
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p>Shareholders are cooked, indeed. But the taxpayer shouldn’t complain too much, as the taxpayers, as part of the economic stimulus bill, caused Fannie and Freddie to guaranty much larger (previously “jumbo”) mortgages, thus causing Fannie and Freddie to expose themselves more, even when other players were backing away from the mortgage markets in order to reduce exposure.
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p>Fannie and Freddie are the definition of “too big to fail.” But bailing them out is going to make the S&L situation of 20 years ago seem like child’s play.
they said Fannie and Freddie account for 50% of all residential mortgage debt in the united states.
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p>it was players like Ameriquest, Countrywide, and people like Deval Patrick that got us into this mess. They should bear some responsibility in cleaning it up.
They just don’t have the kind of dough to do it. Ameriquest is not long for this world, and Countrywide might just take Bank of America (which bought it in order to try to shore up the mortgage market.)
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p>I don’t think your assignment of responsibility is any more insightful than the liberal line which assumes that everything bad is due to evil “predatory” lending.
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p>Reality is just more complicated than that, even if it disrupts a pointless dig at the governor. An awful lot of capital was made available for residential lending, which caused every single player in the system to ignore repayment risk, from the borrower, to the mortgage broker, to the lending institution, to the folks who packaged the mortgages into securities, to the folks who invested in those securities. In short, pretty much the entire financial sector.
of these companies bear some risk.
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p>You can ask my friends, I’ve been warning all of them, including my parents, against this meltdown for at least 3 years. That when the initial period of these ARMs were going to come due that they were going to get burned, that their house values would drop. Everybody said i was crazy. Well looks like I’m being vindicated.
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p>Deval Patrick and the other executives at these firms should be held responsible both fiscally and criminally if warranted. I’m sorry it’s not a dig.
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p>Full Disclosure: in December of 2002 I was offered a job with Ameriquest which I declined after asking around the Real Estate industry about their practices.
Deval was never an executive at Ameriquest. He was on the board. At least get your facts right while you’re mindlessly attacking the Governor.
I consider Board members and Executives to be pretty much one and the same, they do carry the same weight for Corporate governance reasons don’t they. So I’ll amend.
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p>Deval Patrick and the other people responsible for running these firms.
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p>Or are you going to say the Board members have no say in how companies are run?
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p>You sure do like to play with semantics don’t you?
Yikes, that kinda says it all. You might want to bone up on Corporations 101 and get back to us.
There are those who believe that Mr. Patrick had a more active role than that of a typical Director.
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p>I’m of the opinion that they’re wrong. It’s a stronger argument to dismiss Deval Patrick’s role as a Board of Director of Ameriquist as as nothing more than a rubber stamp, hired more for his history with DOJ rather than financial and banking expertise. It’s therefore difficult to assess blame or certainly credit for any claimed success.
Please note that I say this as someone who agrees with you more often than not.
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p>This was a credibility straining comment. In my experience, the only ones who confuse executives with directors vote for Jill Stein and Ralph Nader, and others who believe that corporations, private property, and the profit motive are plagues upon the earth.
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p>Here’s how it is: board members have a limited say in how companies are run. At Enron, Halliburton, and at Ameriquest.
This isn’t your ordinary director, this is Deval.
inkling of what is going on no? They should be asking questions, they should be driving policy. You aren’t saying that Deval was hired just to make the predatory lending to the minority community charges go away are you?
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p>Board Members set policy and direction for the company. In this case the policy and direction was to give people loans they couldn’t afford. I’m sorry but this was systemic and the Board Members share some culpability.
you just don’t stop, do you?
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p>David, how is this not a baseless attack? IMHO these posts should be deleted and EaBo should be warned. I’m damn near ready to give these baseless, absurd posts zeroes.
How is this baseless. Was Deval or Was Deval not on the board of Directors of Ameriquest? Was Deval or Was Deval not hired to help take care of the problem of predatory lending at Ameriquest.
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p>
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p>You see Ryan it’s based in facts which makes it not baseless. Ameriquest continued to issue sub-prime loans after Deval Patrick came on board. Many of which were interest only ARMs which are coming up with new rate this year. So this is not a baseless line of attack. Deval Patrick admits that he was hired to do exactly what I said he did.
remains the same the next time there is an Enron or Tyco, and the liberals want to toss s slew of Republican Rangers in the clink because they were on the board.
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p>For now, I agree with Ryan for a change, that this is absurd.
Ken Lay got what he deserved and since I was not blogging then there is no internet trail of my saying so then but I did. Enron and Tyco were the direct results of the relaxing of capital gains taxes while keeping the double taxation on dividends. Hell the whole 1990 run up in stock prices was based on that. Investors were focused on capital returns instead of making yearly profit via dividends. This allowed those companies to hide whether or not they had real money because they didn’t have to pay it out in dividends.
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p>Ken Lay et al betrayed the trust of the shareholders and got what he deserved. There like it.
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p>I think you would be very surprised to hear my thoughts on all executives that skirt the law. It’s not just Democratic ones.
Executives are not directors.
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p>For Enron, how about Wendy Gramm? There would be a good start for prosecution.
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p>Enron and Tyco were the direct result of greed obstructing judgment. The relaxation of capital gains whilst doubly taxing dividends impacts thousands of companies, and nearly all avoided the fate of Enron and Tyco. The difference is that the folks at Enron and Tyco [and I include their affiliated legal and accounting folks] allowed their greed for excessive profits at the expense of others destroyed their judgment [and in some cases, the evidence].
additional legislation. If someone wants to break the law, they will.
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p>All of those guys at Dime Bank back in the late 80s didn’t do jail time because new laws enacted after the ’90 meltdown reclassified their actions as unlawful retroactively; what they did was unlawful in the first place.
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p>Biggest concern I have with the rush to pile on new regulations right now is the aftermath. Think any of you first time homebuyers right now better keep saving because after everything is enacted, you’re not going to get a loan with anything less than 15-20% down.
were that there weren’t profits. And the system set up by which capital gains by means of stock performance was rewarded while profits by means of dividends weren’t led to this.
The deliberate fraud was also a factor, I believe.
was only able to happen because of the underlying market focus on increased share price vs. showing real money. The shell games were only able to be played because without a focus on profit and dividends there was no need for real hard cash.
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p>yes there was fraud but the fraud was able to be perpetrated because of the rules set up.
When discussing who’s to blame, I always say it’s the fault of my good friend’s daughter.
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p>She’s 23 or so, no college education and yet was hired as a mortgage broker. Like so many brokers, she was in the eyes of the customer, an expert.
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p>Her job was to lend money and convince the homeowner he could afford the mortgage. In exchange she collected a commission.
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p>Her boss, the mortgage company, passed her application on to Underwriters and the mortgage company wasn’t liable for default because he passed the application off the bank underwriters who made the final approval.
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p>Bank underwriters took the application, approved the funding and knew there was risk, but figured it wasn’t so great because i) housing mortgage default rates are historically low ii) the debt was bundled so even if one defaulted the other 999 would be ok, iii) they were going to sell it to someone else. Not their problem.
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p>Rating agencies knew about the low default rates and bundled debt and rated the bundles as low risk.
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p>Hedge funds and institutions bought the bundles because the Ratings Agencies said the bundles were ok.
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p>See! It’s all that 23 year old girl’s fault.
Personal responsibility. So many people took loans out to buy new cars, pay for vacations, pay off debt, pay for breast implants… while others simply bought houses they could not afford. Another “Prodigal Son”-ish story. We had people who should never have gotten a loan in the first place, but thanks to government efforts to let low income people get a loan and now we have foreclosures, what a surprise. Now WE all suffer for it.
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p>I’m sick and tired of hearing about people who got ARMs but didn’t realize the interest rates could go up that far. If you don’t understand that you should not get a loan. Then there are the people who were victims of predatory lenders, wolves dressed like lambs. GIVE ME A BREAK (yes, I used ALL CAPS). Wah, wah, wah… Hey I lost money in the stock market… “I didn’t know the stocks could go DOWN… can I get my money back???”
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p>Foreclose on the idiots who took out too much money on their houses, send any brokers who forged papers to prison, fire mortgage/bank executives who loosened their mortgage standards to allow people to get loans without the means to repay them and tell all the homeowners who houses have decreased in value lately that they have actually increased in total value by 200% in the last 5-7 years so stop whining and complaining.
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p>And what about this proposal that we bail out the homeowner by eating $50,000 (or whatever the difference is) of their loan since their house has decreased in value (they owe $300,000 on a house worth $250,000). And we are suppose to feel better since they will be forced to “share” the profits if they sell their house in the future. How about we “take” the first $50,000 of profit that we “gave” them and then they can KEEP anything over that. They fucked up, not us (tax payers, banks, Feds).
<
p>
In your last paragraph there is a thread of an actual idea. Lets go with it.
Ideas are something that has been completely lacking in this conversation for many moons.
You said …
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p>”How about we “take” the first $50,000 of profit that we “gave” them and then they can KEEP anything over that”
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p>That is an actual sound idea with some precidence.
I am reminded of the phenom we have in Massachusetts known as chapter land. It is a program which allows property owners to pay at a substantialy reduced rate once they enroll their properties into the program, with the catch being that in order to get out of the program they must pay back the difference.
Since we are somehow supposed to feel compelled to keep people in homes that they couldnt afford to begin with, doesnt it sound at least feasable that some type of program like this would be better than a coerced reduction in balance due for those chosen few?
We’ll wind up thinking that Republicans have no idea how the business world works.
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p>Please note that bailing out Freddie and fannie doesn’t do much to help the existing defaulted mortgagor, who will lie in the bed that they made.
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p>You seem to be confusing the identities of buyer, lender, and secondary market here, which makes this rant a non sequitor.
how have they let things get this bad? Let’s not politicize a problem created by morons of both parties.
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p>I was referring to other people remarks above and taking the opportunity to comment on the mortgage issue in general.
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p>Why is always a rant when people blog in opposition to how you feel. I guess it’s like George Carling once said about “every going slower than you is an idiot and every driving faster is a maniac…” Or more to the point, most people are too egocentric to believe the points of opposition and suddenly a person with passion or speaking from their heart is just “ranting”.
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p>
the dems have had the house for 2 years now, but not by sufficient margins to actually force meaningful changes on the industry – which has still yet to happen. Republicans have done all they can to prevent any government regulation on the industry. That’s your party, not mine. There are plenty of faults that can be laid blame on the Democrats – capitulating being my least favorite – but this mess is Elephant dung.
Whu can’t we focus on the people who caused the problem, the borrowers? Is it so politically wrong to say the borrowers borrowed too much money? Can’t we admit that pesonal responsibility is at the heart of the issue? We are talking about adults here, not elementary school students. If a bank gives me a credit card with $25,000 credit limit and I use it… “I am responsible for that debt”, period. The bank shouldn’t be held responsible for giving me the credit card.
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p>What happened to our society that so many members want to be held blameless for their short comings?
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p>This is not Elephant dung, it a simply human waste!
You pointed the finger first. Ryan rebuts you, and you cave just like that?
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p>BTW, the Dems have only had House and Senate since January 2007. 18 months. I know, to Republicans it feels longer…
now the taxpayers have to pony up to turn the worm back. Laissez-faire, my faire aisse.
and there’s certainly personal accountability – the people who have defaulted on their loans are losing their homes. What else would you like to do to them? Really?
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p>The bottom line is this: mortgage firms were giving out bad mortgages. We’ve known this for a long, long time. I can remember people talking about the variable rate loans and how they were attracting people who really couldn’t afford mortgages for the houses they were buying… 5 or 6 years ago. This isn’t new.
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p>Who’s fault is that? Well, everyone’s. The people who sought these loans – but obviously they’re paying the ultimate price via foreclosure. It’s the industry’s fault for disregarding long-term sanity in return for brief moments of profit. Ultimately, though, it’s the Government’s fault – most especially the Republicans who have been creating this policy. The industry should have been as heavily regulated as we do banks. We simply can’t afford to gamble with our economy – and we certainly can’t keep affording to bail all these companies out. Soon, countries around the world are going to have to stop bailing us out!
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p>So what the hell do we do? Largely, the damage is done. But for heaven’s sake, we need to get this industry regulated. We need to do every last bit we can to save economy – which means saving as many homes from being foreclosed as possible. that may mean the industry will have to compromise more than it would want to, but what else is there to do? Ultimately, that’s in the industry’s interest, the government’s interest and certainly in the interest of the citizenry.
Democrats didn’t exactly object to Republican policy regarding mortgage lending guidelines. I think it is fair to say that this is a systemic eff up, with plenty of blame to go around. Efforts to make it a purely Republcian problem will wind up looking just as silly and desparate as Eabo’s attempts to blame the whole thing on a boiard member, above.
I am not blaming the whole thing on “one board member” am I. I am saying that collectively all the board members and executives should be made to pay for setting up a system they should have known was doomed to fail. The fact is Deval Patrick happened to be a board member. People on this board seem to want to give him a pass because “everybody was doing it”. You know what, everybody should pay. They have put our economy on the brink of collapse by their actions. They put housing and owning a home out of the reach of countless Americans by driving up home prices. Well you could have bought a home if you used their loan products, but you’d lose it in three years. People with good credit needed to use these loans as well because the price of a home was so out of whack.
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p>So don’t put words in my mouth that aren’t there. All of the executives of Ameriquest, Countrywide et al are to blame and all should be made to pay. Yes that includes Deval Patrick, but it also includes Bush Ranger, and current U.S. Ambassador to the Netherlands Roland Arnall.
Arnall passed away recently. So it should have included him.
Biden is one of my least favorite Senators. There are certainly more corporatist Democrats than I would like, but none of that changes the fact that the Republicans were the ones who set the policy back then, who would have set policy regardless of how strong the Democrats resisted. The problem with the Democrats is that almost none of them were willing to truly challenge the Republicans on these kind of issues, especially given the fact that the industry certainly has a few key Dems in their pockets. Purely Republican? No. But they’ve been dictating the policy for the past 10 years and more.
Regulation, i.e., the enforcement of the laws to make sure everyone benefits from this market, is done by the executive branch, headed by the President and his appointees to the Federal Reserve.
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p>Bernanke has new regulations for lenders this week, so they don’t make stupid loans that won’t be repaid. As Krugman notes, if the Fed can do this now, they could have done it five years ago. But Alan Greenspan didn’t want to regulate this market.
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p>Krugman makes a good point about one member of Freddie Mac’s board of directors, Fred Malek:
In short, the people who’ve run the government de-regulated important rules for the markets, and their friends profited by it… and we taxpayers are getting stuck with the bill.
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p>I’d like to let these two FMs fail, but if we are going to bail them out, then their directors’ and executives’ compensation needs to be dropped down to about $150,000/year. And even that high a salary might be rewarding stupidity… we’ll have to take solace that $150,000 per year is a painfully low amount of money to these people.
http://www.nytimes.com/2008/07…
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p>Freddie Mac and Fannie Mae weren’t subprime victims. By def, subprime mortgages couldn’t qualify for purchase by these two entities.
Fannie and Freddie have something called affordable housing goals that they’re required to meet each year. Under recent policy, they were given credit towards meeting the goals by purchasing securities guaranteed by subprime loans, thus putting more capital out into the market to make more of these loans.
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p>In the grand scheme of things, it’s still a relatively small part of their portfolio, but they’re feeling the pain just like many of the investment banks and others who purchased these securities.
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p>This is a good explanation of what happened from the Washington Post.
Be careful here, in that the solution in all of this mess will be the lack of credit for poor areas.
the poor areas got redlined in a different way — if you look at a map of foreclosures in MA, they’re concentrated in about 10-12 cities/neighborhoods, none of which I would consider higher income. The Boston Fed has put together some great charts/maps on this. Particularly this one.
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p>The problem wasn’t the affordable housing goals per se, it was that Fannie and Freddie could fulfill the goals by buying securities backed by subprime loans. The GSEs act as a market regulator in some aspects — they only buy loans that meet certain underwriting criteria (that’s why their automated underwriting systems are the industry standard). We probably would have been better off if they bought subprime loans directly, instead of in already securitized form. They might have imposed some discipline on an essentially unregulated market, and at least some of the abuses could have been prevented.
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p>Maybe the goals are unrealistic at their current level. Frankly, maybe there are fewer people in the US that can afford to own a home than Congress and the Bush Administration thought. Maybe Fannie and Freddie should have been pushed to be more innovative in meeting the goals and not given the easy way out of buying subprime securities. We’ll probably never know, but Congress should definitely keep a much closer eye on how they meet these goals.
People make an assumption that the problems at Fannie Mae are new or somehow related only to the recent housing market meltdown.
While this is true in the sense of media saturation of the story, the troubles at these institutions are far from recent developments.
The problem is the result of decades of cumulative mismanagement, now neatly packaged and recieving the band aid.
Perhaps this 2005 article will refresh some memories
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p>http://www.freemarketproject.o…
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p>I agree that there’s not a good market without them today. But the market will bounce back. There will be less credit available, but that’s not a bad thing in the long run–the crisis, remember, is a result of the overextension of credit to uncreditworthy borrowers. (This is not to blame only the borrowers for their uncreditworthiness, or to blame only the banks for poor underwriting–everyone in the market bears some responsibility).
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p>One other point I want to make is that there may be a decrease in social mobility. Some people at the margin will be unable, say, to move from Texas to Massachusetts or from Sudbury to the Back Bay because they can’t get a new mortgage, even though they are current on the mortgage in their old house. This may be particularly unfortunate given that the oil market is giving people incentives to move into more densly populated areas with public transportation and shorter commutes. It would be a shame if the housing market put a damper on this.
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p>TedF
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p>TedF
You are correct that the existing problem is because a lot of money was lent to people with bad crdit.
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p>The existing problem is not that people with bad credit can’t get loans. That is a market correction.
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p>The existing problem is because people with excellent credit can’ get loans because nobody is lending to anyone, period. That is a credit crunch or liquidity crisis, and tends to have extremely negative effects on the broader economy.
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p>Bailing out Freddie and Fannie is an attempt to see that credit markets don’t cease to be.
I know that this line is repeated early and often on the news but have you seen first hand evidence of this? That “people with excellent credit can’t get loans because noone is lending”?
I know, I have fair credit and am still drowning in unsolicited offers for anything from revolving credit to HELOCs … the whole gammit. And thats with FAIR credit.
ISnt it more true that the PERCIEVED problem is that the spigot has been turned off for those who are already in debt up to their eyeballs?
…is not consumers who can’t get loans. That is still a fairly liquid market at the moment, except for student loans, which are having a bit of a crisis at the moment. Sallie Mae had to stop consolidating loans, as did several top lenders and smaller banks have gotten out of the student loan business all together. It can also be difficult to get home financing over 400,000.00 but that is not really going to have a tough impact on the general economy, is it?
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p>The problem is business financing. Just as home owners were financing with exotic loans so were business people with industry loan pools, cross collateralization, etc. Those products are disappearing and lenders are dotting every “i” and crossing every “t” now when they are making business loans, which for small businesses are often secured by the business owner’s personal assets. Lenders just aren’t making cash-flow based non-recourse loans right now. And what is most people’s greatest asset? Their house of course, which is worth less today. Big business is having a hard time getting substantial sums of leverage capital together because there is less liquidity in the capital market and small business can’t find loans, and when they can they cannot offer sufficient collateral to secure them. The credit crunch isn’t slowing down consumers, it is slowing down business. That is the real problem.
$450M of film financing from Deutsche Bank. To illustrate your point.
I think that people’s reliance on having liquid equity in their homes is part of the problem. If the answer to the crisis is to do what we need to do to keep the credit flowing and the mortgage debt mounting–well, I don’t think that’s much of an answer in the long run.
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p>TedF
In the end, government has to clean up after the elephant.
The government caused the S&L mess.
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p>The Government extended deposit insurance with the Garn-St. Germain Act but didn’t extend regulation. In fact, it cut the FHLBB audit staff.
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p>What you had was a government policy that gave business the right to take depositors’ money with no risk of loss.
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p>I was auditing S&L back then. The S&Ls would take the deposits and ‘swing for the fence’, investing in bizarre and speculative real estate deals. We (the auditors) knew in the early 80s that there was trouble YEARS before the S&Ls went down, but frankly, no one in Government would listen.
Normally I’d say, Sure, it was the government’s fault. But whose ring was government kissing when it deregulated banking, restructured electric utilities, and set the stage for today’s crisis?
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p>Government changes hands periodically, some say cyclically. But the neocon advantage is that it is easier to give away public assets than to create them or nationalize them back. So when in power they can siphon off great wealth that can’t simply be siphoned back.
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p>By the time the bailout du decade makes the headlines, the deed is long done, the cow is long gone, and there’s really nothing that public outrage can do. As you point out elsewhere, the behavior of capital markets suggests the players anticipated this latest one–as they should have.
Today v. Friday (post bail out announcement v. pre), not much has changed: spreads between US Treasuries and Fannie/Freddie are smaller but not by much. Stock prices are unchanged.
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p>That tells me the market knew all along that i) the government thinks Fannie/Freddie are too big to fail and ii) Equity holders are possibly screwed.
the Federal government has created an enormous incentive to jump in with both feet on a mortgage — Schedule A interest deductions on (IIRC) up to $1,000,000 of loan. So Uncle Sam is creating financial encouragement to take a loan, and if the interest rate goes up, so does the deduction!
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p>Here’s a thought: cut back the interest deductions. $1,000,000? Let’s cut it back to $500,000. While we’re at it, let’s cut it back so homes over a certain square footage (say 2500) only get a fraction of the deduction. A 3000 square foot home would only get 2500/3000 = 86% of the interest deduction instead of the full 100%.
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p>Why are we subsidizing McMansions? If you can afford it, you don’t need the subsidy from the middle/lower-middle class or from the upper class.
Rush Limbaugh was railing against the government bailout today. I agree with him, this should not have happened.
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p>However, it should have been headed off much earlier. We should not have huge corporations that, if they fail, profoundly impact our economy. We should have never been in this position. We should not have banks (investment or otherwise) so large that their failure can take down the US economy.
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p>That is something I expect Rush would not agree with. Corporatist conservatism is all about “bigger and bigger”. Monopolies and oligopolies are seen as fantastic capitalistic institutions, and any movement to limit them is decried as “unnecessary regulation” or “tampering with the free market”.
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p>Having dozens, hundreds, thousands of companies that basically serve the same purpose may be “inefficient”, in market terms, but the alternative is to pay insurance against the failure of a handful of huge companies — something we don’t seem to like to do.
Any financial institution that can’t be allowed to fail should be a government entity.
Well, at least regulate them adequately!
are in fact quasi government entities.
similar (I guess) to the Commonwealth bailing out the MBTA. Does anyone else feel stupid, or am I the only one who was arguing as if these were private entities? Needless to say, I’m a lowly renter and have not had occasion to deal with either of these illustrious institutions.
have contributed along with the subprime companies to the massive run-up in housing costs. Which you as a renter since i don’t believe there is rent control anymore in greater boston, have had to cope with. So you have been affected by them however indirectly.
As “government sponsored enterprises” or GSEs, they are authorized to do certain things by the govt but privately owned and for-profit. That’s not much less private than, say, Major League Baseball, or a large company that has its own state tax laws written for it.
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p>A few basic answers in this front page Globe article today:
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p>I can’t claim to understand financial markets, and maybe the market reaction last week was warranted, but markets often remind me of toddlers and spoiled children. Something doesn’t go their way, and no matter what the underlying reason, they have to make a stink.
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p>Emphasis mine.
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p>What would things look like if everyone’s home/property values took a big plunge? Not many people want to find out, and I think that’s the bottom line behind this action. We can criticize and question and gripe about how we got here, but we are here and my non-expert opinion is that this action was necessary.
If you look at median house prices versus median incomes, you’ll see that houses are more expensive to the buyers today compared to the 1960’s. Here’s an Excel Spreadsheet from the NY Times outlining the exact figures since 1968. In 1968 a house was 2.9x the median income. Today it is 4.5x the median income.
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p>Keep in mind that median income is somewhat misleading because if you look at the charts, the median family income hasn’t changed that much since the 1960’s, but many families now have two earners instead of just one, and that has driven up family costs such as child care and automobile expenses (not to mention education, since now you need to educate your daughters for a career instead of just being a homemaker).
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p>Bottom line: it seems like housing prices need to decline by 50-75% to be where they were in the 60’s. And that means that new housing will become prohibitive to build, because what builder is going to spend $200k to build a house that is worth $75-100k?
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p>On the other hand, wouldn’t low housing prices be a boon to people looking to buy? Imagine if you could spend $100k for a house rather than $400k? Wouldn’t that drive down your expenses? Maybe even make you happier about the 20% pay cut you need to take when you get laid off…
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p>Why would the 60s multiple be the ideal for the housing market and how can we look at this without also looking at the relative changes in prices of other things in the same timeframe (e.g., health care)? I don’t know, I’m just asking.
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p>This might look nice if you isolate to a first time buyer who has all of their assets in safe investments (savings account, mattress, etc.). But for the person who needs to sell their existing house and/or was relying on other less-secure investments for a down payment, it’s a non-starter. There are all sorts of ripple effects, most that I can’t even get my head around, that would be caused by a collapsed housing market (you named one above – construction workers with no work).
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p>Another thing to consider is if the actual assessments of houses plummet, the back-end of prop. 2.5 could come into play in communities where it does not yet, the one that limits the total levy to 2.5% of the total assessment of properties in the town. What sort of effect would this have on local services?
we think a housing crash/readjustment (back to reality) is a good idea, the fact is it’s seemingly inevitable. Housing just became so expensive that no one could reasonably afford it. That’s much worse for this state than a market readjustment.
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p>We need homes young people and working people can afford, in every region of this state. Even to this day, that’s not really the case – though its increasingly likely that it will be. As I said, whether we like it or not, it’s not exactly something we can change. That’s just the nature of the market.
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p>What we can do is make sure we do everything reasonable to make sure that as little people are hurt by it – and as many people benefit from it – as possible. Maybe a day and age when the median home in Greater Boston is $200,000 rather than $400,000 would be an overall good thing? If not, it could likely be reality. And, if it is, there are policies we can create that can help dull the pain for those who would feel it most.
But Ryan, as I contemplate what I just spent yesterday between Exxon, Baystate Gas, and NStar paying the monthly bills (boy am I glad the new house was gas rather than heating oil), and see current heating oil prices approaching $5 per gallon and electricity rates about to increase 20-30% this month, I think our region’s total cost of housing whether you rent or own is about to get a lot worse. I don’t even want to think what this coming winter is going to be like around here when people are paying close to $1,000 for a tank of heating oil.
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p>Given the Northeast’s unique reliance on heating oil v. the rest of the country and the fact that we pay about the highest electricity rates in the nation, this does not auger well for our region going forward assuming this energy bubble doesn’t pop soon.
there.
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p>Then again, Democrats are about to storm in to office in the highest numbers during my lifetime, so we may very well see at least some relief… gas does historically go down when Dems are in office.
does your lifetime include the Jimmy Carter and Ronald Reagan presidencies? Because that was exactly backwards as far as gas prices go.
I found interesting: this story from “yahoo! news” about Fanny and Freddy’s lobbying arms.