Reuters: http://www.reuters.com/article… [no dividends]
Housing Note: http://www.housingwire.com/200…
This is no longer the worst housing crisis since the Great Depression, this is the worst housing crisis, period.
http://seattletimes.nwsource.c… Seattle Post – US Government the 800 pound gorilla in the mortgage market
[cross posted at Red Mass Group]
Please share widely!
Though I confess I don’t know the history of Fannie and Freddie that well.
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p>And I don’t necessarily have a problem with certain things being nationalized – I kind of like the way Alaska set things up so that citizens would share in the benefits of the oil pipeline. (That’s socialist, too, isn’t it? It certainly would be called that if a Democrat had done it, I’m sure.) But I don’t know enough about financial services to have a strong opinion on whether it would generally be a good idea to nationalize it. My gut would say no.
It’s gone now…
Go to the direct link.
http://www.youtube.com/watch?v…
the National Review- which started as an Anti-Red, conservative magazine, came out today in support of the takeover.
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p>The Economist has a small history of these two Government-Sponsored Enterprises (GSEs) here
isn’t really at all public. It was just started with some push by the gov, because it served the public interest. I can’t remember who said this on BMG (maybe Sab?), but it was essentially this: Freddie and Fannie Mac are as public as Major League Baseball. Both are in the public interest and get certain, special privileges from the government.
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p>As for the government take-over, of course it’s socialist policy… one of the most socialistic things I’ve probably ever seen the US gov do in my lifetime. That said, I’m not opposed to a larger mix of socialism in our capitalism/socialism government scale. In the end, too, these are two entities that should more than break even – even after this somewhat rocky last few years. Though, then again, I guess that depends on leadership. Who we elect matters – and if these two companies become major new chunks of this government, we don’t need a Bush-like friend pick put in charge of these very important government agencies.
They were socialist agencies when the were established. They had government backing: i) state tax exemptions ii) exemption from SEC fraud laws iii) access to government line of credit, and most importantly iv) a public expectation, proved true, that the US would never let them fail.
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p>The banks that invested in them are going to take a hit, just like individuals who invested.
I think of both socialism and capitalism as based on some sort of philosophy. When I look at most politicians, I fail to see any glimmer of a philosophy in their actions. (Is expediency a philosphy?) More interested in appeasing their lobbyists, getting re-elected, staying out of jail, I see the vast majority of them do whatever they have to do in support of these three items.
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p>It isn’t as this was not predicted. Even Henry Paulson’s Goldman Sachs was selling the mortgage securities short while recommending them to customers. One congressman had predicted the failure as far back as 2002. Talk about walking into this with eyes wide open…
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p>The dangerous part is that now the US is just paying the interest on debt, rather than the debt itself. The old saying is that “there’s no free lunch.” Some of us remember when a penny, nickel, dime or quarter would by you something. Not now, why not? Citizens should be asking themselves why not.
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p>Time for Americans to learn that these problems are generated by our politicians. The very same ones we look for to solve the problems. What kind of suckers are we?
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p>What will it take before people realize that we cannot continue to spend without consequences? How long can the beat go on?
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p>Here the Democratic Party can take a lead over the utterly corrupt Republicans. Endorse financial stability, lessen spending. (Isn’t the Cold War over? Why not bring all the troops home? How much will that save?) Why not have another “Truman Commission”? There are so many ways to save money, so little time.
My understanding is that both entities have been placed in conservatorship, that is, the old management was fired, new managers have been appointed by the government and stockholder voting rights have been suspended. The stock still trades. If the government injects capital into either company, then the current shareholders of that company will be severely diluted. If the companies recover without government funds, then the share values might recover. Right now, the better analogy is bankruptcy, not nationalization.
The takeover was socialization of the risk, not of the profit. The profits are long gone into the pockets of executives (in the form of excessive compensation) and the shareholders in the form of dividends.
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p>This asymmetry–private investors and executives profits, taxpayers assume the risk that created the profit–is precisely why Fannie and Freddie must not be allowed to leave conservatorship as purely private entities. I plan to post on this when I have a minute. Because they are “too big to fail,” they ought to be treated like a utility company. Instead of providing electricity or gas, they provide the thirty year fixed-rate mortgage, a product that does not exist in many other countries precisely because of the absence of organizations like Fannie or Freddie.
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p>Sorry for the lack of links–I will try to post on this when I can.
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p>TedF
Isn’t it ironic that Mr. Ownership Society has overseen some of the largest
bailoutscorporate welfare scandals in history? And McCain was in the Senate overseeing pertinent laws for how many decades?<
p>I have no problem whatsoever with certain industries being nationalized. I have a HUGE problem with corrupt CEOs parachuting out of their failures with sacks of gold.
The taxpayers that get no advantage from either entity are to belly up to the bar and spend their hard earned tax dollars on the bailout. Anywhere from hundreds of billions to trillions. Tax dollars from them and their heirs. Nobody goes to jail. Nobody gets a dope slap. Bank robbers get 20 years. My jaws are tight. Where’s the outrage?
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p>The politicians that created the problem want to be re-elected? Oh!, for the good old days of tar and feathers…
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p>I’ve but one vote for each politician on my ballot. I think I know who to cast my votes for. Out with the incumbents!
Let’s replace Kerry, Kennedy, Frank, Biden, Ried, Pelosi…
Says Krugman;
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p>
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p>The fact is that Fannie Mae was originally a government agency; it was privatized in 1968, not for any good economic reason, but to move its debt off the federal balance sheet (and Freddie was created 2 years later as a competitor.) Private ownership of Fannie and Freddie never made any real sense, and was always a crisis waiting to happen.
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p>So what we’re really seeing now is deprivatization. It’s not something like the UK government seizing the steel mills; it’s more like firing Blackwater and giving responsibility for diplomatic security back to the Marines.
You people might be surpised that the Wall Street Journal editors and columnists agree with most of what you say, as do I. If one of us goes broke will Uncle Sam bail us out? Of course not. So much for the supposed free, capitalistic society we live in. As for the ridiculous payouts to incompetent administrators, Barack got it right on this one. They should not get one penny until we, the taxpayers have been fully repaid, with interest.
Well, to those elitists, whatever party they call themselves, only their own oligarchy members count.
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p>The rest of us, people like you and me, are mere, shadowy extras, spear carriers, and rubes to fleece.
consumers to make millions off of…
I suspect this tale of a regulated boom and bust will be one of the signatures of the Bush legacy.
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p>Fannie and Freddie were nationalized primarily because of concern that foreign bond investors would lose confidence in the bonds, and hence, in continuing to lend half a trillion bucks a year to the USA. Actually it’s a twin-towers sort of thing; publicly, concern for the mortgage market and real estate values; privately, the concern of our president to continue procuring half a trillion bucks from abroad for the federal government to pay for expenses beyond revenues each year. As a matter of GOP policy, I think it’s fair to say access to borrowed money for the federal government probably trumps the occaisional nationalization of a market sector.
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p>So, we’ve got a “credit crisis”, a half trillion buck a year trade deficit, and a half-trillion buck a year federal budget deficit. And much of the boom and bust in the housing market was driven by cheap credit, which was our national policy between about 2002 and 2007. How exactly we have a credit crisis when foreigners are still willing to lend us an additional half trillion bucks a year is mind boggling.
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p>In prior housing cycles, we learned that housing booms and busts were local affairs, that there was seldom any real boom and bust at the national level on housing prices. But this time, our financial wizzards packaged up batches of local mortgage bonds into “collateralized debt obligations”, lopped off the “risky” part and sold that while then asserting “this other stuff has no risk!”, and voila – the private sector succeeded in nationalizing the mortgage and housing markets! Where we “couldn’t ever” see a national bust happen before, a new horizon opened!
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p>Lefty economic bloggers were speculating on how this would unfold as of around 2004. The bubble built two more years, Bush got re-elected on his wizzardry for growing the economy, and the rest is history.
And for the rest of you—-go do some research.
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p>FYI, Bill Clinteon appointed the head of fannie mae—the guy who made over 50 million bucks in five years and who ran the company into the ground.
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p>Banks and mortgage companies sell mortgages. They then turn around and sell them. Fannie mae and Freddie Mac buy them up. Well—when the realestate market was on it’s upward spiral, (and red-lining so-called was declared illegal) banks and mortgages companies began selling mortgages to people that had zero credit, insufficient income, and essentially were very, very high risk. As a result, Fannie mae and Freddie mac buying up all of this bad paper as did many large banks. Then along come other large banks and buy into the paper that Fannie mae and Freddie Mac hold. You can now see the how the financial entanglement is forming. Two or three years ago, Alan Greenspan is standing on the roof of the FED waving red flags screaming at the top of his lungs: stop, stop, you’re about to drive off an open bridge—–but everyone pooh-pooh’d Greenspan as an alarmist.
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p>Then the realestate bubble burst—and then the economy went south. All of the people with balloon loans were in immediate trouble. Then the folks who were “just” able to make their mortgage payment were in trouble, then the foreclosures started. And—then the folks who walked on thin ice, those wo never should have had a mortgage in the first place began to default, because they were losing their jobs, or however they came up with the mortgage money. Now the financial avalanche began to pick up speed. Because Freddie Mac and Fannie Mae are “semi- public” and depend on stockholder confidence, the stockholders began to closely monitor there investments. When the avalanche began to pick up speed, stockholders began to sell. As selling increased and the stock began to plummet, EVERYONR began to sell. But it was too late and the stockholders lost everything and now all these big banks who are holding billions of dollars in conceivably worthless paper were looking down the barrell of a run on their banks. The icing on the cake is that now FDIC is on thin ice.
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p>The culprits: The US Congress for blocking federal regulators from intervening some time ago. The blame goes both ways, however Barney Franke has blood all over his hands. Bill Clinton’s appointement of the CEO of Fannie Mae was equally castrophic. The major mortgage companies in USA (one of which employed Deval Patrick), major banks, Wall Steet, ( Joe Bidens kid) and naked greed. There is no doubt that Dennis hastert may wind up speaking to a grand jury before everything is all said and done as well as Reid and Pelosi. They all colluded in the screwing of the American taxpayer and the near destruction of our economy.
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p>Personally, I think they should waive trials and have some public executions on a scaffold built in front of the NYSE. It made believers out of the French Oligarchy—Having congress and the Wall street elite witness their friends heads being seperated from their torsos may have a lasting impact on them.
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p>This is a classic care of the best of intentions going awry, the law of unintended consequence, greed, and dishonesty all coming together in 2008.
I basically agree with this. Democrats share a lot of the blame, because they have unintentionally encouraged lending to uncreditworthy borrowers in the name of expanding homeownership. This is why I wrote earlier that any reincarnation of Freddie and Fannie cannot be private, profit-making entities. If there is a public policy to make affordable credit available in order to encourage homeownership, fine, but regulate the crap out of it–require income verification, honest appraisals, credit checks, etc., and only allow Freddie and Fannie to buy conventional mortgages, e.g., the 30-year and 15-year fixed rate mortgages. Require the companies to keep enough liquid assets on hand to satisfy creditors in case liquidity dries up. Appoint government bureaucrats to run the companies. Require the banks that make mortgage loans to keep a percentage of their loans on their own books, to avoid the craziness that securitization promoted.
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p>And if this means that some folks can’t “afford” homes (I put “afford” in quotes because it turns out that many of those who thought they could “afford” homes really couldn’t), that’s also fine. If Fannie and Freddie are to be public entities and their liabilities publicly guaranteed, then uncreditworthy borrowers will have to improve their credit before qualifying.
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p>TedF
I too have been saying a major cause of the mortgage crisis was lending money to people who had no means to pay it back. Credit has to be tightened and money can only be loaned to people with good credit, proper income/debt ratios and verified medium term employment. Something you touched on which I think many have glossed over is proper and LEGAL property evaluations. I have closed many loans on the last 15 years and all Realtors have “estimators” who give very liberal property evaluations. This “over” valuation of properties has been a major linchpin in the bottom of the market collapsing. Another important issue is the percentage of the down payment required. When the banks required 10% (or 20%) down payment, they were already building in a 10-20% valuation buffer should the market go down. With 0-5% down, very little is protected.
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p>As for the politics, I would say a hearing should be convened but I must admit I would have little hope of any substantial outcome.
Ever wonder what would have happened if this whole “get an 80% mortgage, then a 2nd mortgage for the balance” so you don’t have to pay PMI scheme never came into being?
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p>There was and is a valid reason for PMI (as we are now witnessing). How this was ever allowed is beyond me. Funniest (in a sarcastic way) is the purveyors of the 2nd mortgages are in the ultimate screwed position; they can’t even try and foreclose because all that would do is write their position to $0 since they’re second in line on what is undoubtedly an underwater property.
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p>That being said, things sucked in the late 80s when real estate imploded, but it will come back. At least this go around most people have reasonable interest rates on their mortgages rather than the 11-12% prevalent in the late 80s.
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p>Funny enough, here in New England we’re really not in as bad of a position as the rest of the country due to the fact that it is basically impossible to throw up significant new construction since pretty much everything that is buildable as already been done years and years (if not decades or centuries) ago. If you’re out in FL, AZ or CA with huge tracts of former desert/cornfields filled with half empty developments, you’ve got a long way to go to bounce back.
help out homeowners who have fixed rate mortgages to be able to afford homes at prices that wouldn’t make sense relative to their incomes otherwise.
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p>But I’d rather have bought a house at a low price with interest rates at 11% and falling, than buy an overpriced house on a low adjustable rate mortgage in an environment that is more likely to see rising than falling interest rates.
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p>Sooner or later, the rest of the world is going to stop lending the USA half a trillion bucks a year, and that doesn’t bode well for interst rates (or home valuations), especially if the government continues spending 5% of GDP beyond what it is willing to raise in honest revenue.
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p>There were no low priced houses at 11% if you bought in the late 80s sport. Your house value fell significantly, you were underwater, and when interest rates dropped you couldn’t refinance your 11% mortgage because you owed more than the appraised value. That was reality.
And put the country on the easy money path that Bernanke now has to clean up after.
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p>If you haven’t noticed, many of the mortgages that have gone into foreclosure where those that had very low adjustable rate mortgages which, when they reset, resulted in monthly payments skyrocketing.
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p>Greenspan wanted people to get into those mortgages, I suppose it was a convenient way for the FED to try to get more control over economic stimulus since those mortgage rates are closely tied to interest rates the FED controls. But in retrospect, it was one of the worst blunders by the federal reserve in its history.
This from David Kotok, a good analysis of the forces played out over the weekend:
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p>http://www.cumber.com/commenta…
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p>Was listening to Marketplace on the drive home and they were going over the stock positions held in FNMA/Freddie Mac by various mutual fund companies. Don’t think many folks in Fidelity will be too happy looking at their September statements, to say the least.