Monday, June 14, 2010

Your Next Trillion $ Bailout: Half of All Outstanding Mortgage Debt Via Fannie Mae and Freddie Mac

The mother of all bailouts is appearing before our eyes in the form of Fannie and Freddie. They have become a toxic dumping ground for mortgages that cannot be modified, rejiggered, or otherwise ignored portending mark to model cash flows. Regardless of whether you are a renter, home owner, or loan owner, Fannie Mae and Freddie Mac will end up costing you and your children hundreds upon hundreds of billions of dollars over the coming decades. All of this of course in the name of "affordable" housing!

"Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

Fannie, based in Washington, and Freddie in McLean, Virginia, own or guarantee 53 percent of the nation’s $10.7 trillion in residential mortgages, according to a June 10 Federal Reserve report. Millions of bad loans issued during the housing bubble remain on their books, and delinquencies continue to rise. How deep in the hole Fannie and Freddie go depends on unemployment, interest rates and other drivers of home prices, according to the companies and economists who study them."

And now for an excellent potpourri of quotes from various sources / individuals:

  • "Neither political party wants to risk damaging the mortgage market, said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and White House economic adviser under President George W. Bush. “Republicans and Democrats love putting Americans in houses, and there’s no getting around that,” Holtz-Eakin said."

  • "With no solution in sight, the companies may need billions of dollars from the Treasury Department each quarter. The alternative -- cutting the federal lifeline and letting the companies default on their debts -- would produce global economic tremors akin to the U.S. decision to go off the gold standard in the 1930s, said Robert J. Shiller, a professor of economics at Yale University in New Haven, Connecticut, who helped create the S&P/Case-Shiller indexes of property values. “People all over the world think, ‘Where is the safest place I could possibly put my money?’ and that’s the U.S.,” Shiller said in an interview. “We can’t let Fannie and Freddie go. We have to stand up for them.”"

  • "“Do we really want to go to the central bank of China and say, ‘Tough luck, boys’? That’s part of the problem,” said Karen Petrou, managing partner of Federal Financial Analytics Inc., a Washington-based research firm. The terms of the 2008 Treasury bailout create further complications. Fannie and Freddie are required to pay a 10 percent annual dividend on the shares owned by taxpayers. So far, they owe $14.5 billion, more than the companies reported in income in their most profitable years. “It’s like a debt trap,” said Qumber Hassan, a mortgage strategist at Credit Suisse Group AG in New York. “The more they draw, the more they have to pay.” Fannie and Freddie also benefited by selling $1.4 trillion in mortgage-backed securities to the Fed and the Treasury since September 2008, bonds that otherwise would have weighed on their balance sheets."

  • "Treasury Secretary Timothy F. Geithner has vowed to keep Fannie and Freddie operating. “It’s very hard to judge what the scale of losses is,” Geithner told Congress in March."

  • "The number of loans more than three months past due has risen every quarter for more than a year, hitting 5.5 percent at Fannie as of the end of March and 4.1 percent at Freddie, according to the filings"

  • "“We need to have a housing-financing system in place,” Senate Banking Committee Chairman Christopher Dodd said last month. “If you pull that rug out at this particular juncture, I don’t know what the particular result would be. We’re caught in this quandary.”"

  • "Yes, "extend and pretend" worked so well for Iceland and Greece. Allowing the companies to go under and hoping that private financing will fill the gap isn’t realistic, analysts say. "It would require at least two years of rising property values for private companies to return to the mortgage-securitization market", said Robert Van Order, Freddie’s former chief international economist and a professor of finance at George Washington University in Washington. Absolute nonsense. There is a price at which private financing will loan money for houses. The standards will return to reasonable risk management, meaning 20% down and a 36% "back end" ratio, and money from private sources under such lending standards would fund the market now."

  • "Whatever the fix, the money spent will not be recovered, said Alex Pollock, a former president of the Federal Home Loan Bank of Chicago who is now a fellow at the Washington-based American Enterprise Institute. “It doesn’t matter what you do or don’t do, Fannie and Freddie will cost a lot of money,” Pollock said. “The money is already lost. There’s an attempt to try to avert your eyes."

As you can see in the example provided below, paper issued by the GSE's is not backed by the full faith and credit of the United States Government. So why do we continue to lie about "affordability" and prop up housing prices as a matter of national policy? The biggest of too big to fail are truly Fannie and Freddie. Note the bold print in the document below.

Enjoy paying your income taxes going forward as well as that near zero percent interest paid on your savings accounts, you'll be cleaning up the giant mess that has become the GSEs, soon to be joined by the FHA. Whether it's accomplished via increased taxes or currency devaluation (QE/printing), the middle class will foot this bill over the long haul. The too big to fail banks will not get the short end of this stick.

The bottom line is that private financing for mortgages at current housing prices is truly non-existent. So why would anyone in their right mind plunk down their hard earned wages for a 30 year lease on money from a bank to "buy" a home right now? When the only entities willing to back mortgage debt are government backed GSEs with unlimited bailout support, that should send a very clear signal that home prices are well out of alignment with wages, and that those prices are still truly overvalued. This situation cannot continue indefinitely, and sooner or later those who play the game will pay the fiddler when the bill comes due.

Related links and sources noted below:

http://www.bloomberg.com/apps/news?pid=20601109&sid=an_hcY9YaJas&

http://www.ritholtz.com/blog/2010/06/gses-1-trillion-dumping-ground-for-bad-bank-loans/

http://globaleconomicanalysis.blogspot.com/2010/06/fannie-freddie-mother-of-all-bailouts.html

http://market-ticker.denninger.net/archives/2402-Fannie-And-Freddie-Weve-Fixed-Nothing.html




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