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Posts Tagged ‘Fannie Mae’

[Crazy Inconvenient] Appraiser Should Use Recent Comps

November 12, 2008 | 1:53 am | |

In Kenneth Harney’s column this week “In Times Like This, Only the Freshest Comps Will Do” he discusses how lenders are requiring appraisers to use more recent comps in their appraisals.

Wow! Shocking!

  • Can you believe that appraisers should be using comps that are more recent to reflect the current market?
  • How will we “make the number” for the lender so the deal will work?
  • What an incredible inconvenience to everyone involved in the transaction!

Last night I was the speaker at an event and a loan officer came up to me beforehand and said (I am paraphrasing):

“It’s a pain these days to get deals done, not like the old days. We have no access to the appraisers anymore. It’s crazy!”

How do you respond to this?..other than: Are you out of your &*%$#% mind? That’s the kind of thinking that got us in this mess. Good grief.

A “comp” or comparable is a piece of evidence that reflects market value of the subject property by comparing it to and making adjustments for differences. The older the “comp” relative to current value and the more adjustments that need to be made, the more diminished its relevance is to estimating market value.

Major lenders and investors such as Fannie Mae and Freddie Mac are “beating down on the appraisal” by demanding 90-day comps or fresher

Lenders shouldn’t need to require more current comps to be used if the appraiser is on the ball, especially in a declining market area.

Here’s a classic example in Ken’s article:

“Some sellers are taking a beating,” he said, citing a recent transaction where the appraisal came in thousands of dollars below the signed contract price. Had the seller not agreed to eat the difference — take a lower price than the buyer had agreed to in the contract — “the whole deal could have fallen through”

Duh! That’s simply the process of finding the market. The seller was willing to take a lower number. Don’t lay it on the appraiser, who has to prove the market value to the lender empirically.

Here’s a problem though. In weaker real estate markets, there are fewer sales to select more recent comps from. Contracts are the guiding light even thought closed sales are required.

An appraiser colleague of mine told me this many years ago:

Everyone’s smarter than you. The buyer, the seller, the buyer’s real estate agent, the seller’s real estate agent, the mortgage broker, the lender, the buyer’s real estate attorney and the seller’s real estate attorney. They are all looking at you as the final step in the deal.

They already know the “number”.

Another problem, is the education of sellers on the value of their home.

The housing market may have gone bust, but many homeowners are still living in a bubble.

Despite dismal housing headlines and reports showing falling prices nationwide, owners in some once-hot areas still believe their home is gaining value or at least holding its own.

In other words, everyone else’s property values are weakening except their own.

It took John Cicero [no relation to my business partner in our firm Miller Cicero] and his wife an appraisal, some convincing by their real estate agent and some hard-to-swallow facts to get them to lower the $525,000 listing price on their five-bedroom home in Valrico, Fla. They closed two weeks ago for about $380,000.

“We didn’t really understand the severity of the market,” Cicero said. “We lost close to $100,000 in equity so we were walking away from real money.”

Ok, so this isn’t rocket science.

The value of a home isn’t in a vacuum (even though vacuums literally suck). The value of home is in relationship to others that would compete for the same buyer using the principle of substitution.


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[Conforming Defined] The More Things Change, The More They Stay The Same

November 10, 2008 | 1:11 am | |

The Federal Housing Finance Agency (FHFA) announced that the conforming loan limited for mortgages will remain at $417,000.

The Federal Housing Finance Agency (FHFA) today announced the conforming loan limit will remain $417,000 for 2009 for most areas in the U.S. but specified higher limits in certain cities and counties. The conforming loan limit is the maximum size of loans that Fannie Mae and Freddie Mac can purchase in 2009.

According to provisions of the Housing and Economic Recovery Act of 2008 (HERA), the national loan limit is set based on changes in average home prices over the previous year, but cannot decline from year to year. Loan limits for two-, three-, and four-unit properties in 2009 will remain at 2008 levels as well: $533,850, $645,300, and $801,950 respectively, for homes in the continental U.S.

In theory, if housing markets continue to fall sharply in certain parts of the country, the implied mortgage risk will actually increase because the cap on the mortgage limit can not be reduced. Of course we are in the middle of a financial crisis caused by throwing risk out the window so it’s ironic that it’s actually against the best interests of the financial market to be more conservative in this regard. Probably because that’s not really the problem.

So we keep the loan limit the same again despite:

  • declining market conditions
  • change the name of the agency to FHFA from OFHEO (OFHEO was responsible for oversight of Fannie and Freddie before they needed to be bailed out)
  • run by the same person as before who now suggests FHFA has plenty of ammunition (no offense intended to Mr. Lockhart).

From the contrarian department…

Yet here’s something new (hat tip to Holden Lewis of Mortgage Matters) that definitely doesn’t conform to longstanding rhetoric from someone who reported last year at this time about 5 months in a row that the problem with credit was temporary…

[NAR Chief Economist Lawrence] Yun says, without giving specifics, that the federal government should step in to stabilize house prices. That’s quite a plea, coming from a representative of an organization that’s usually all for hands-off government. There’s nothing like a severe recession to make free-marketers abandon their principles with alacrity.

And the contrarian-contrarian department…

Here’s an opinion that’s contrarian to those who claim to be contrarian: lowball offers in a weak real estate market don’t work according to accomplished real estate author, writer, agent, speaker Ali Rogers, well-known for her book “Diary of a Real Estate Rookie

Some real estate gurus would argue that that’s okay, you should go ahead and make ridiculous offers, because if you’re willing to ask a gazillion people you’ll finally run down one exhausted one who will capitulate. Then, hey, it’s like you won the lottery.

One problem with that strategy: I don’t generally think it works.


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[Treasury Resource] Government Sponsored Lawyers

September 11, 2008 | 12:53 am | |

Last week I discussed the surge in litigation concerning the abuses in subprime lending and the corresponding need for more lawyers, especially for pro bono work.

Next up, the legal state of Frannie.

Just because the US Treasury took over the GSE’s and moved them into a conservatorship under FHFA doesn’t mean they have a plan on what do with them. The first order of business was to prevent them from collapsing. Next, structure and direction, Lastly, prosecution.

There is a brief but excellent article in the New York Law Journal that summarizes the army of lawyers needed: “Scores of Lawyers Tapped in Takeover

In the weeks leading up to the federal government’s takeover of Fannie Mae and Freddie Mac, dozens of top lawyers worked to figure out the best way to save the two Washington-area mortgage giants.

The in-house teams at the U.S. Department of the Treasury and the Federal Housing Finance Agency, which is now the conservator for the two companies, were dealing with lawyers from at least nine private firms

Many were involved and are still involved. Here are total counts, but not all were working on the takeover:

  • 2,000 US Treasury attorneys plus outside counsel
  • 90 Freddie Mac attorneys plus outside counsel
  • 130 in-house Fannie Mae lawyers plus outside counsel
  • 40 in-house FHFA lawyers plus their outside counsel

The total is…a lot.

The attorneys are there to interpret and structure the unprecedented legal arrangement of the new entity as well as going after those responsible:

Even the battalions of lawyers may not be able to ward off lawsuits in the wake of the takeover.

AFSCME’s Mr. Ferlauto said that “there is activity going into holding those people responsible for not appropriately providing guidance.” He said he expects some pension funds to look for ways to sue the outgoing boards and management, and said lack of transparency, inaccurate guidance, fraud, and market manipulation could all be grounds.

A lot has to go into the mix before we can begin to talk about things getting fixed.

So in the meantime, please, please, don’t kill all the lawyers.


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[The Surge Redefined] This Time It’s Financial, International

September 9, 2008 | 1:08 am | |

Not surprisingly the Dow surged today, signaling the US Treasury is moving in the right direction. This size of this action was beyond the ability of the Fed’s balance sheet.

Do you really think this action was taken to protect the housing market? The GSEs were too big to fail? Dan Gross at Newsweek sees things a bit differently:

The bailout of Fannie Mae and Freddie Mac will be sold and marketed as efforts to shore up the U.S. housing market. That could be. But they are really meant at shoring up our damaged international financial standing, preserving leadership and making sure the U.S. Treasury Secretary doesn’t get tarred and feathered at the next G-8 meeting. In a world of significant global financial imbalances, the doctrine of “too big to fail,” has been replaced by the doctrine of “too international to fail.”

There is a very well laid out explanation of the US government’s balance sheet in Randall Forsyth’s column in Barrons called: Beginning of the Financial “Surge”. If you don’t subscribe to Barrons Online, you should consider since the financial markets and the housing/credit market are now joined at the hip.

The Treasury Sunday acknowledged the federal government’s role in creating the “ambiguity” leading investors to assume it would stand behind Fannie and Freddie debt and MBS. Now it said it had a “responsibility” to “avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and mortgage backed securities,” totaling some $5 trillion held by investors around the globe. That doesn’t include the trillions more in derivatives contracts entered into by Fannie and Freddie.

Trillions: I wonder what those derivatives contracts are worth in relation to outstanding MBS? My very limited experience working with Wall Street and housing related derivative products last year tells me it has got to be a mind boggling amount. All the more important to facilitate stabilization now.

Another Barrons piece by Steven Sears, “The Fannie Mae, Freddie Mac takeover signals big trouble, not an all-clear.

indicates there are a lot of market gyrations in the future for investors…

“Once the euphoria ends, we need to decide where to go,” Credit Suisse’s strategists told clients…Investment-bank traders, who cannot be identified because they are not allowed to speak to media, say trading is very slow and what they are seeing gravitates toward adjusting bearish positions. “No call buyers,” is what one trader said.

In other words, its really a new playing field. Let’s not let our expectations surge too soon.


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[GSEs Get A Seizure] It’s About Time

September 8, 2008 | 12:01 am | |

It finally happened. The GSEs are no longer private corporations. The bailout is finally here.

I called this bailout on October 5, 2005 and was teased or ignored. History teaches us we forget history.

I have been lamenting (whining) for the past several months that nothing has really changed since last summer when the credit markets imploded. Sure, we had the stimulus plan and the housing bill became law, NY AG wrangles a deal with the GSEs to change the way with mortgage brokers and appraisal management companies were involved in the mortgage process. The housing bill created the FHFA which was a new and improved OFHEO, which had been in charge of GSE oversight before the seizure.

GSEs have been taken over and we are in bailout mode. Its fair to say this is the worst mortgage crisis in history.

Why the GSEs were doomed

They had an unfair advantage over competitors because they were protected by the federal government. Thats the very same government that was forced to bail them out. It makes a strong argument for promoting fair competition.

You can’t serve two masters:

the investors who put up capital and a government that wanted to help the housing industry and extend home ownership. In the end, they failed to serve either one very well.

The irony about the GSE set up is that was consistent with most members of the mortgage pipeline. Appraisers served the mortgage broker and the lender. Mortgage brokers served the borrower and the lender. Banks served the investors and their shareholders.

Fannie Mae continued to play with their spreadsheets even after the accounting scandal.

Fannie Mae did not have a grip on their accounting practices, OFHEO/FHFA was ill equipped to keep them in check, or they were simply incompetent. Remember FNMA kept revenue off the books in the original accounting scandal a few years back so they would not draw attention and be able to show better results the following year. Now they didn’t meet capital requirements to offset their mortgage market exposure.

The proposal to place both mortgage giants, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies’ debt might not be repaid.

Despite all the confidence telegraphing by Lockhart (OFHEO), Mudd (FNMA) and Syron (FHLMC), few really believed the GSEs had a grip on the extent of the situation. After all they were part of the process.

They hold or back 5.3 trillion in US mortgages which is about 50% of the mortgages out there. The GSEs accounted for about 80% of new mortgages being issued since last summer’s credit crunch. With investor confidence fading fast, the Treaury department could not let the last pillar left in the mortgage market crumble and it appeared to be headed that way.

What does this mean to housing?

Its not clear until this all shakes out, but probably not much initially.

However, if the investors see the faith and credit of the US in action and this brings them to the table, it may eventually bring more liquidity to the credit markets and that may bring some of the risk down, lowering rates or tempering their rise. However, housing still has a lot of shakeout with foreclosures and inventory, but at least this is a step in the right direction.

It’s actually the first constructive step towards recovery. If we are going to pay through the nose, it might as well be towards something positive, as painful as that is. The stimulus plan and the housing bill are painful, but don’t do anything about solving the financial crisis.

“I would view it as the beginning of the markets recognizing and accepting the reality of our financial problems, which is the beginning of fixing them,” said Mr. Rosner, a managing director at Graham Fisher, a financial research firm.

In other words, perhaps there is hope credit markets will get a grip in the next couple of years.

An aside
It has always been my observation that Freddie Mac was the step child of Fannie Mae. It stemmed from my appraisal background. Freddie Mac let Fannie Mae design their forms. Freddie Mac was essentially created after Fannie Mae to provide competition for it yet it nearly always let Fannie Mae take the lead. Even its stock price seemed to mirror Fannie’s. But Freddie didn’t get into hot water in the accounting scandal and Freddie Mac was agreeable to the Treasury take over before Fannie Mae because they had more of a handle on how short their capital was. In fact one could suggest that when it counted, Freddie Mac was the leader all along. Of course, that doesn’t matter any more. CORRECTION: It was Freddie not Fannie…nevermind.

Inter-office announcement
Its a time for change: I win the office pool on the WAMU bet. Good grief, he should get an award for outstaying his welcome.


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[Pink Houses] Pre-fab Factory Made Fad To Not Really Mobile Homes

August 20, 2008 | 11:24 am | |

I am struck by the extreme range and contrast of housing development beyond traditional on-site construction. From mobile homes on the low end to art-like pre-fab homes on the high end.

Single-wide, double-wide, wide-load

The mobile home market, which often represents the lower end of the housing demographic, is seeing particular hardship right now in the availability of financing. It is sort of a a hybrid of real estate and chattel (personal property).

In the development of mobile home parks it is not unusual for the home owner to be situated on leased land, something not generally done in traditional home building. Pre-fab homes (the kind you see being hauled in two halves on semi-tricks) are generally lumped into the same category. A few years ago there was a meltdown in the manufactured home mortgage market so now the new housing law directs Fannie Mae and Freddie Mac to come up with new loan products and flexible underwriting standards for manufactured homes. Don’t count on it.

Tubes on stilts

On the other end of the spectrum, pre-fab housing is seen as making a statement, an artistic interpretation of housing. The exception would be the type where the art/brand transcends the house, like the Frank Lloyd Wright utilitarian homes scattered throughout the midwest and Levittown. Long since bastardized to match today’s living standards. Worthy of the Museum of Modern Art, the emphasis is placed on design over functionality and practicality.

And of course, The Haute Couture of Suburbia



I digress… Little pink houses for you and me. And while we are thinking rock n roll, here’s proof that the wheels really coming off the wagon.


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[Culture Of Debt] Should We Keep Our Fannie Private? Or Go Shopping?

July 29, 2008 | 12:01 am | |

I have been knocking around the concept of whether the GSEs should be become government agencies. It’s a strange predicament for the taxpayer, because of the implied guaranty that was bestowed on the GSEs by the federal government (strangely, to make President Johnson’s Vietnam War budget look more palatable).

That long debated guaranty was made tangible this past week with the housing bill that just passed both sides of Congress. The federal government, since the late 1960s, finally showed the public that the GSEs are too big to fail.

There was an ongoing concern that the GSEs were getting too big

The dilemma for me is the fact that the taxpayers bailed out the GSEs. It could cost nothing, or as much as much as several 100 billion dollars, depending on how the economy and the housing market holds up.

This liability to the taxpayer is a significant financial benefit to the shareholders of GSE stock, perhaps bolstering their share price above where it may have fallen. Take on liability without future reward.

Of course it is also of significant benefit to the taxpayer to keep a key component of the housing market afloat, a lynchpin of our economy.

A short essay by Alice Rivlin of the Brookings Institution, covers this territory in: Do We Want Fannie Mae Public or Private?.

My cynical laissez-faire side says that government could not have managed this situation any better than the private sector did and vice versa. Look at how HUD has played a nominal role in solving this problem. Private sector innovation with actual, real, engaging, competent, regulatory oversight.

Not just government oversight…

Indivuduals need to reconsider placing themselves in harm’s way, financially.

Last week’s Op-Ed article by David Brook’s The Culture of Debt suggests that:

People don’t change when they see the light. They change when they feel the heat.

That Op-Ed piece inspired an hilarious response from a reader (hilarious to me, anyway):

Mr. Brooks does not mention one important reason societies develop good habits or bad ones: Our leaders can have transformative impact.

Franklin D. Roosevelt calmed us down. John F. Kennedy got us to volunteer. Ronald Reagan made us less dependent on government. George W. Bush could have asked us to sacrifice. He didn’t. His post-9/11 advice was to go shopping. Obviously, too many of us did just that.


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[GSE Reminder] Hey, There Are No Guarantees

July 21, 2008 | 1:58 pm | |

Fannie Mae and Freddie Mac are government sponsored enterprises (GSE). Yet they have shareholders and are profit driven. They play a critical role in the stability of the US mortgage market (and housing) by promoting liquidity, helping mortgage rates and availability consistent throughout the country.

One of the things that made them have a competitive advantage over others was their inferred backing by the federal government.

In the New Yorker this week, James Surowiecki writes in his column Sponsoring Recklessness

The two companies have long been required to tell investors that their securities are not guaranteed by the federal government. But in the financial markets everyone has always assumed that this demurral was just window-dressing, and everyone, it turns out, was right. Last week, when fears of a possible collapse of the two companies threatened to spark a major financial crisis, the Treasury Department and the Federal Reserve quickly came up with a rescue package. What had been an implicit guarantee became an explicit one

Fannie was privatized in 1968 so president Johnson could move the debt off the federal books to help sell the Vietnam War budget, not to help the mortgage market.

Help to the consumer in terms of their impact on keeping low mortgage rates may be exagerated.

A paper by the economist Wayne Passmore, of the Federal Reserve, suggests that in fact Fannie and Freddie have only a small effect on the interest rates that homeowners pay, saving them less than one-tenth of a percentage point.

The GSE self-preservation mechanism has been aggressive lobbying using former high placed government officials, very effective in enabling them to grow to $5 trillion in mortgage debt. A blip on the radar could cause more damage than Congress is able to burden the taxpayers with.

More than $10 billion in losses in the past two quarters, the GSEs (and FHA) are looking for more money to capitalize to help bailout the housing market at Congress’ urging.

Holden Lewis over at Bankrate wrote a great post on this last week called The GSEs and moral hazard.

Daniel Gross, my friend over at Slate and Newsweek, makes a better argument for the help GSEs provide to the taxpayer/homeowner suggesting that a bailout of the GSEs would actually be a bargain.

I guess I have a hard time accepting that anything the federal government would do would be a bargain and the long term concept of nationalization of the GSEs would be cost effective, but hey, I don’t have to refinance my mortgage.


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[Favoritism Update] Special Interest Groups Rates, Countrywide

June 16, 2008 | 1:02 pm | |

I wasn’t surprised to learn that US Senators get mortgages – that makes them – normal.
I wasn’t surprised to learn that US Senators get special deals – that makes them – normal.
I was surprised that key individuals who have influence over the mortgage clean-up didn’t recuse themselves from mortgage related perks or disclose them in advance.

I would hope that these incidents reflect nothing more than bad judgement by the officials involved. Here’s a great recap by Portfolio.com.

According to the WSJ, US Senator Dodd (CT) got special rates on two mortgages:

Sen. Christopher Dodd, a top figure in Democrats’ response to the housing crisis, defended through a spokesman two mortgages he reportedly received under a special Countrywide Financial Corp. program that awarded preferential interest rates to people referred to as “friends” of the company’s chairman and chief executive, Angelo Mozilo.

And US Senator Conrad also got a favorable rate from Countrywide:

“It appears Countrywide waived one point on my mortgage,” Conrad, a North Dakota Democrat, said in a statement today in Washington. “Although I did not ask for or know that I was receiving a discount, and even though I was offered a competitive loan from another lender, I do not want to have received preferential treatment.”

Conrad said he also received a loan from Countrywide on an eight-unit apartment building in Bismarck, North Dakota, even though the lender typically serves properties that have four units or less. He said he had decided to refinance that loan with another institution.

James Johnson, former head of Fannie Mae, just resigned from the Obama campaign for getting favorable financing from Countrywide.

Property records show Mr. Johnson has received more than $7 million in loans from Countrywide since 1998, the first coming in the waning days of his Fannie Mae tenure. He borrowed $392,950 on a row house in Washington’s Dupont Circle neighborhood, with the rate set for the first five years at 6.375%.

At the time, initial rates for such loans ranged from about 6.2% to 6.5%, according to data compiled for The Wall Street Journal by HSH Associates Inc., which surveys lenders.

And that created an awkward situation for Senator Obama:

Obama has made reforming how the housing market is regulated a centerpiece of his economic platform; as Fannie Mae’s CEO, Johnson worked closely with Mozilo facilitating what became an out-of-control mortgage boom. The massive accounting irregularities discovered at Fannie Mae after Johnson was no longer CEO (but still a consultant) don’t help either.

In other words, everyone seems to be completely and absolutely unaware of favoritism, but feel it is possible that favoritism exists.

Here is a visual recap of current and former government officials associated with Countrywide’s efforts.

  • Christopher Dodd – US Senator
  • Kent Conrad – US Senator
  • Richard Holbrooke – former UN Ambassador
  • Donna Shalala – former Secretary of HHS
  • Alphonso Jackson – HUD Secretary
  • James Johnson – former CEO of Fannie Mae

We are going through a mortgage/credit problem that began, was fueled and based on favoritism. The mortgage process during the housing boom was characterized by the lack of neutrality which is why investors ended up owning portfolios of inflated assets.

I am certainly exaggerating the impact here but the credit problems are unprecedented. Should it be a surprise to us that, even with the most neutral or unbiased intentions, a public official would be concerned how this would appear to the public if known? Isn’t the one of the goals of fixing the credit problem, to allay investor concerns over the lack of neutrality?

Or are we jealous that we didn’t get better mortgage rates. I know I am.


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[Premature Lecture] Agencies Go Full Court Press On Self-reflection

May 20, 2008 | 11:05 am | |


It seems a bit early to start reflecting on the lessons learned from the housing/mortgage problems we face, since, well, we still face them.

Don’t get me wrong.

It is always good to look back over your efforts and evaluate whether anything different could have been done to yield a different result. It is just that this infers closure and it is too early to summarize.

OFHEO – James Lockhart, the director spoke last week at the 44th Annual Conference on Bank Structure and Competition in Chicago (think Auto show, only less metallic paint) on the “Lessons Learned from the Mortgage Market Turmoil.”

He arrived on the scene after the party already begun and despite the criticisms levied towards both him and his agency, I actually think he did well with what powers he has to employ.

Plus, he likes charts “To set my remarks in context, I often like to start with a chart that gives some perspective…” Start with a chart and I am on your side.

Key lessons learned

  • what goes up too far goes down too far. In other words, bubbles burst.
  • mortgage securities are risky and that there is a long list of financial firms that have had problems with those securities, including problems related to model, market, credit, and operational risks. A key lesson from the savings and loan crisis that was ignored was not to lend long and borrow short, as structured investment vehicles (SIVs) did.
  • Another lesson ignored is that in bull markets investors and financial institutions tend to misprice risk, which can result in inadequate capital when markets turn.
  • A new lesson that should be learned is that putting subprime mortgages, which almost by definition need to be worked, into a “brain dead” trust makes no sense.
  • Another lesson is that overreliance on sophisticated, quantitative models promotes a hubris that has frequently caused serious problems at many financial institutions

Lessons learned specific to the GSEs

  • The first is about pro-cyclical behavior during the credit cycle. An important issue for supervisory agencies is how to create incentives for institutions to behave in a less pro-cyclical manner without interfering with their ability to earn reasonable returns on capital.
  • A second lesson from recent experience is the importance of capital. Capital at individual institutions not only reduces their risk of experiencing solvency and funding problems and of contributing to financial market illiquidity, but also helps them avoid the need to retrench in bad times and miss what may be very attractive opportunities in weak markets.
  • Those two lessons provide compelling arguments for a third: legislation needs to be enacted soon that would reform supervision of Fannie Mae and Freddie Mac and, specifically, give a new agency authority to set capital requirements comparable to the authority the bank regulatory agencies possess.

These are important points because the GSEs dwarf other debt and the GSEs have been losing money as of late. Here’s a few charts that may be of interest from his speech:


FDIC – Sheila Bair, FDIC CHairman was speaking in Washington, DC at the Brookings Institution Forum, The Great Credit Squeeze: How it Happened, How to Prevent Another http://www.fdic.gov/news/news/speeches/chairman/spmay1608.html on the same day Lockhart was speaking in Chicago. A full court press of self-reflection. Like Lockhart, Bair has been very outspoken and I believe lucid in her depiction of the problems at hand. To her credit, she has clearly articulated the problem with the mortgage system.

Her salient points are:

  • …things may get worse before they get better. As regulators, we continue to see a lot of distress out there.
  • Data show there could be a second wave of the more traditional credit stress you see in an economic slowdown.
  • Delinquencies are rising for other types of credit, most notably for construction and development lending, but also for commercial loans and consumer debt.
  • The slowdown we’ve seen in the U.S. economy since late last year appears to be directly linked to the housing crisis and the self-reinforcing cycle of defaults and foreclosures, putting more downward pressure on the housing market and leading to yet more defaults and foreclosures.
  • Reform is not happening fast enough
  • She explains HOP loans are NOT a bailout
  • The housing crisis is now a national problem that requires a national solution. It’s no longer confined to states that once had go-go real estate markets.
  • The FDIC has dealt with this kind of crisis before.

Take away

Both OFHEO and FDIC seem to be saying we need to take action now and they were powerless to do anything before this situation evolved into its current form?

It makes me wonder whether any regulatory proposals will do much good. Regulators did not take action or propose safeguards while the problem was building. How can they suddenly have wisdom now? While these recommendations and insight seem prudent but isn’t it kind of late for that?

Speaking of monoliths, here’s Steve Ballmer getting egged in Hungary.


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[Kayak Liquidity] Mortgages Underwater, Or At Least Those With A Pool

May 14, 2008 | 12:04 am | |

In the past week, I took out my sea kayak (SS. Miller Samuel) and boat (dubbed “Mom Said”) for the first time this season and have started wondering if it has influenced my perception of the credit crunch. Are we already underwater? Zillow and Shiller thinks so.

Last week, the WSJ ran a fun story on page 1 by Michael Corkery called For Mortgages Underwater, Help Swims In.

While lawmakers in Washington struggle to solve the nation’s foreclosure crisis, officials here are using a small fish to clean up some of the mess.

The Gambusia affinis is commonly known as the “mosquito fish” because of its healthy appetite for the larvae of the irritating and disease-spreading insects. Lately, the fish is being pressed into service in California, Arizona, Florida and other areas struggling with a soaring number of foreclosures.

The mosquito fish is well suited for a prolonged housing slump. Hardy creatures with big appetites, they can survive in oxygen-depleted swimming pools for many months, eating up to 500 larvae a day and giving birth to 60 fry a month. That can save environmental crews from having to repeatedly spray pesticides in the pools while the houses grind through the foreclosure process.

Of course, Fannie Mae wants to keep those houses occupied so fish don’t factor into the credit crunch. In James Hagerty’s article Fannie to Aid Underwater Loans:

Fannie Mae is preparing to introduce by midyear a program of refinancing mortgages for people who owe more than the current value of their homes, a situation known as being “underwater.”

The plan is the latest twist in efforts to contain the surge in foreclosures on homes in much of the U.S. It differs from a bill approved by the House on Thursday that would authorize the Federal Housing Administration to insure loans for distressed borrowers only after the lender has written down the principal — something many lenders are reluctant to do. Fannie’s refinance plan would result in new loans of equivalent size, leaving the borrower underwater but giving him or her a lower monthly payment or at least a fixed rate.

Of course, there can’t be a discussion about liquidity without the mention of beer and wine.

Judy Weil, editor at Seeking Alpha, posts a funny: Maybe Beer Will Help Stimulate House Sales.

A group of real estate agents is hosting a free condominium and beer-tasting tour.

I can only imagine the liabilities the Oregon agents were subject to without thinking. Of course, wine generates the same result. It also makes me wonder about Baltimore.

To help you steer through this complicated morass, the following video will show you others that lost their cool.


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[GSE Pin Cushion] Will The Saviours Of Housing Need Saving?

May 8, 2008 | 12:57 am | |

Ok, let me get this straight. Fannie Mae:

Actually Fannie Mae’s stock dropped 5.7% yesterday so maybe it’s not love afterall.

Ok, what am I missing here? It seems to me that the GSEs can not be the housing market’s sole saviours and we risk serious damage to our financial system if housing drops sharply this year and Fannie & Freddie get taken over by the government and assume the liabilities…

But some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion — the capital that their regulator requires them to hold — underpins a colossal $5 trillion in debt and other financial commitments.

The companies, which were created by Congress but are owned by investors, suffered more than $9 billion in mortgage-related losses last year, and analysts expect those losses to grow this year.

More regulation is need to protect the GSEs from faltering. OFHEO lowered their capital requirements in exchange for making Fannie Mae go out and borrower $6B to help protect against further housing market declines.

“Regulators need all the tools they can get to make sure these companies don’t fail, especially since we’re talking about entities that have over $5 trillion in financial commitments and debt,” said Senator Richard C. Shelby of Alabama, the senior Republican on the Senate Banking Committee. “Six billion dollars looks like a pretty paltry sum, and if we get into a further housing downturn, that capital can go pretty fast.”

The dilemma (although its not really a dilemma because there few other options) is whether to entrust the GSE to get the nation out of the mortgage problem that is keeping housing from stabilizing.

Increased roles for Fannie and Freddie could be just what the doctor ordered to maintain confidence and liquidity in the mortgage markets at a crucial time and stave off a far greater crisis. However, if the crisis continues to deepen, these companies could go under and possibly push the worldwide financial system into turmoil.

William Poole, a former Federal Reserve Bank president, said that Fannie and Freddie are “at the top of my list of sources of potentially serious trouble.” And according to Senator Mel Martinez, a former secretary of housing and urban development, the companies “could cause an economywide meltdown if they got into real trouble and leave the public on the hook for billions.”

It seems to me like this is one small solution of many others that are needed. It’s going to be a long time to ride out this downturn and common sense says that the GSEs can’t weather it alone. FHA lost money last year too. I am starting to think we are making things worse by trying to fix the problem.

Here’s a great piece by Randall Forsyth of Barrons called Show Me the Monet where he says more than half of all homeowners who bought in ’06 are underwater and that’s the tipping point for foreclosures. He wonders how the worst of the credit crisis can be behind us.


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