yesterday regarding the Agencies involvement with a new program to
finance home construction.
Basically Fannie and Freddie are going to be the new bankers for HFA
(Housing Finance Agency ). Treasury is buying the debt for this, so the
taxpayers are at risk. It is not that big a deal, yet. It starts out
with a modest $28b.
This is a stimulus. Plain and simple. If you have any doubt whether
this is intended as a stimulus consider the words of some of the big
shots who put this plan together:
“Supporting the work of state and local HFAs is critical to the
Administration’s broader initiative to stabilize the housing market,
which is helping to keep mortgage rates low and mortgage finance
flowing for American households across the country,” said Treasury
Secretary Tim Geithner.
“We applaud the successful completion of the HFA Initiative. Freddie
Mac is proud to provide an essential financial link to the nation’s
state and local HFAs that will support affordable homeownership and
rental housing and help stimulate America’s housing markets,” said Freddie Mac CEO Ed Haldeman.
“These bond proceeds, combined with the $7.7 billion in retail
housing bonds the Initiative requires state HFAs to issue, will allow
HFAs to finance more than 200,000 affordable homes, while generating jobs and tax revenue for the economy,” said Susan Dewey, president of the National Council of State Housing Agencies (NCSHA)”
Okay, so we all agree that this deal was hatched up to create a
stimulus to the housing market. Maybe that type of thinking and action
is justified. I disagree with it, but that is not relevant. I do
however feel strongly that if these meddling steps in the economy are
taken there should be a discussion about it and a vote should be cast.
There was no discussion about this. There was no vote. How quick was
this thing rammed down our throats? Real fast according to FHFA
Director Demarco:
“Their (Fannie/Freddie) successful execution of over 125 separate transactions, all in the final month of 2009, was an impressive achievement.”
So how is a program of nearly $30b in federal subsidies not put on any
budget? How is it there is no vote on this much money? This is
substantially larger than California’s deficit. If Treasury wrote a
check to cover California without a vote there would be hell to pay.
The answer is sadly easy to find. The reason is simple. It is right in
the information from the FHFA and confirmed By F/F. It is the very last
line:
“The Initiative is expected to come at no cost to the taxpayers and to the Government Sponsored Enterprises.”
So when you ‘expect no losses’ you don’t need a vote. It doesn’t have to show up in a budget.
But here is the problem. The same people who are today saying this is
not going to cost the taxpayers a cent are the same ones who tomorrow
will tell you that Fannie and Freddie will cost us more than $500
billion.
I am very disappointed at the Administrations efforts to create
stimulus programs outside of the budget process. The ‘openness’ thing
sounded so good. Nothing has changed. Each Administration has used the
Agencies as a quiet form of intervention and stimulus. In the process
they wracked up $7 trillion in off balance sheet financing.
NOTE:
A side comment, directed to Director DeMarco. What is the cost of
issuing an 8k for Fannie? More broadly the question is what is the cost
of maintaining a public float and all of the related costs that are
required? How many SEC lawyers do you have under you that are involved
with all of the documents/disclosure required? Is that cost (F/F) more
than $50mm? Is it more than $100mm? Are you aware that the shares of
F/F are just trading fodder for computers? The owners of those shares don’t care anymore about 8k’s.They can't read.
Here's what they're gonna do -
1. transform freddie into some sort of subsidized loan program and fannie into some kind of giant public housing / rental / operating and service company.
2. give the banks a subsidy to buy equity (generated via short sales) and keep it on their books at a risk-free rate. the mortgage owners and originators go half-sies and split the debt and equity.
3. business and people taking huge RE losses will be able to write those losses off against income.
4. tax deductions for mortgage interest expense will be phased out over time.
5. property taxes will have to come way way down.
**
so, you end up w/ asset prices going way down - but with the losses more equitably distributed among the buyers, originators, debt owners, equity holders, owners, operators, and public interests.
easy.
"Why is there no vote?"
Well, very simple. In Fascism there is no vote
According to Luther Vandross...
"A house is not a home..when there's no one there.."
http://www.youtube.com/watch?v=4t-bpP2sL_U
Apartment vacancies are at record levels, so why do we need more apartments?
certainly not for the benefit of tenants...
they need income to pay rent and live, survive..
the purpose of this program is to siphon federal money into the pockets of developers...
housing trades at less than the cost of new construction, so after these "homes" are built and developers have pocketed the fees and profits from the transfer of land at inflated prices, they will default ("non-recourse") and leave the government and taxpayers with the losses.
More looting...
Looks like the US is finally taking a page from the Canadian playbook. Up here in Canada the Canadian Mortgage and Housing Corporation has inflated its balance sheet from about $60B pre-crisis to approaching $300B by taking on all the crap the Canadian banks have on their books. But no one pays attention up here since the CMHC are well below the radar screen.
We like to pat ourselves on the back for having no banking crisis but what have we really achieved? House prices are now 19% above the same time last year and are over $100,000 higher on average than the US. All we've done is postponed our crisis to another day when interest rates finally rise in response to inflation.
great piece, Bruce. thanks for keeping us apprised.
.
It will have to get much worse and much more painful before meaningful change happens. Time to pay the piper...or perhaps your tax money/savings value will once again valiantly ride to the rescue of those that are TBTF?
Neko Case
Things That Scare Me
http://www.youtube.com/watch?v=EBLI9jq6tUY
Fluorescent lights engage
Blackbirds frying on a wire
Same birds that followed me to school When I was young
Were they trying to tell me something
Were they telling me to run
The hammer clicks in place
The world's gonna pay
Right down in the face of God and his saints
Claim your soul's not for sale
I'm a dying breed who still believes
Haunted by American dreams
Haunted by American dreams
.
.
It will have to get much worse and much more painful before meaningful change happens. Time to pay the piper...or perhaps your tax money/savings value will once again valiantly ride to the rescue of those that are TBTF?
Neko Case
Things That Scare Me
http://www.youtube.com/watch?v=EBLI9jq6tUY
Fluorescent lights engage
Blackbirds frying on a wire
Same birds that followed me to school When I was young
Were they trying to tell me something
Were they telling me to run
The hammer clicks in place
The world's gonna pay
Right down in the face of God and his saints
Claim your soul's not for sale
I'm a dying breed who still believes
Haunted by American dreams
Haunted by American dreams
.
I think it gets back to manufacturing jobs. You cannot have financial security and or military strength based on an economy of minimum wage service jobs. I don't blame President Obama for this, but he needs to do his best to repair it now. I think he is being very strongly misled by Summers and Geithner that throwing out more garbage paper will solve the problem of garbage paper already in the system.
What Geithner and Summers are doing equates to looking at a filthy room with garbage everywhere and saying "Hey lets get some dump trucks and add more rubbish to the floor and maybe they'll think it's normal"
I would guess few people know better than Krasting what happens at the end of junk paper legends.
What makes you think Obama wants to repair anything? Wake up and smell the coffee.
We have millions of affordable homes available in foreclosure. Little Timmy G is reallt getting on my nerves. He really is one of these guys who thinks he is really smart but the word from people who knew hin at the IMF is that he is a light weight. Dangerous guy.
I think NC captured this type of shenanigan quite well earlier today - clearly part of a pattern as observed above i.e. Xmas eve announcement. The change in calculating the stimulus impact from the BS of jobs saved+created to the absolute BS of jobs touched by stimulus=stimulus jobs is one more sign of desperation.
Obama’s “Get Tough on Banks” Again Tries to Play the Public for Fools - 01/15/2010 - Yves Smith
I've honestly never understood things like this. How can the Executive branch commit the government (by buying the bonds)? Was this appropriated by Congress? Is there a catch-all item in the budget that allows this spending?
For that matter, how can Obama commit $100MM for Haiti? He cannot appropriate. And all administrations do this, so it is not specifically an Obama or Democrat thing (though they have turned it into an art form).
Seriously, is this legal?
Go ask Rahm.
"... will allow HFAs to finance more than 200,000 affordable homes, while generating jobs and tax revenue for the economy,”
someone needs to ask what kind of jobs will be generated. other than putting $$$ back in the RE brokers pockets, what kind of jobs will be created?
The ultimate money laundering operation with the taxpayers as a backstop! Same story, different day.
Bruce, thanks for calling this out as FNMA/FRE is the biggest sieve that always flys under the radar.
I don't see this covered in the media, must not have happened....
Shouldn't it be "Slippery Pete", a la Seinfeld?
When the ultimate too big to fails (F/F) got sponsored last week by the Fed and were given carte blanche on their potential debt on Chistmas Eve, it became apparent that the Fed/Treasury were going to use the GSEs as a sieve that will not only eventually store all the toxic waste but also provide a financial mechanism that will keep money flowing in the economy.
Here is how it may work: the Fed takes bad paper from the big banks, and returns Treasury Certificates at par; free money for the banks. The Fed then places all of the Mortgage-backed BS into a special untouchable account or trust in the GSEs, thus inoculating the economy from the bad debt and removing it completely from circulation (no market for it as the Fed has it cornered...). Banks, with zero percent money backed by T-bills, can lend again and will.
Then one of three things will happen to the toxic waste: a) the mortgages get caught up and paid up, thanks to ever-low interest rates and easy money that is now easier to lend, b) the mortgages are completed in contract, as many of the underwritten properties will have been sold and the turnover of the mortgages will partially cleanse the system, or c) many more mortgages default into foreclosure (in this instance a short-sale has the same effect...) and are sold by the GSEs as REO under some special program to, you guessed it, to get everyone who deserves one a home. (Encourage more rapid turnover...)
Either way, in a matter of a few years, the M BS are dissolved in some way, shape or form and the Fed is off the hook for essentially trillions of real dollars (un-deflated hard assets such as residential and commercial real estate...).
Problem solved. Pretty ingenious, actually. But I am sure someone will point out the obvious flaws in this idea.
:D
I agree with your theory that the GSE's will become the dumping ground for the trash the FED has been accumulating. There's no such thing as "inoculating the economy from the bad debt" however. Someone has to eat the losses, and losses there will be. The assertion that we'll wait it out until the economy returns to pre 2007 "normal" is naive. My guess is that Bernanke already decided that the losses will ultimate be put on the shoulders of............drum roll please.........the USD. Gooobye standard of living, we were living way beyond our means anyways.
I don't mean to return to pre-2007 level of economy. My supposition is that with this method they can prevent a massive deflation in real estate, while freeing up billions for bank and consumer lending.
Incoulation of the economy would hinge on the idea that most of the toxic waste is derived from and extended from residential mortgages. Mortgages, by definition, are limited-term contracts, albeit usually thirty years. But hardly anyone realistically has a mortgage for thirty years. Either the underlying loan is paid off, refinanced or the home gets sold/foreclosed upon, thus making null and void the derivatives of mortgages that have been satisfied or retired in some way.
So the toxic waste simply evaporates as turnover in residential mortgages occurs naturally. With another government incentive through tax reductions and rebates, the turnover can be goosed pretty well and more of these derivatives will come off the balance sheets of the GSEs and the Fed.
Where am I wrong?
The scenario you present does sound potentially plausible in a round-about sort of way. From the financial spectator point of view it seems illogical that losses could just evaporate without adverse impact somewhere. Amazing not more comments to your scenario were posted here @ 0hdg. What is your time frame for this? After further review, do you see any potential flaws, unintended consequences not seen initially?
So, there is a free lunch after all. Thank God!
.
Slow and gentle currency devaluation at its best...
.
Bruce, sooner or later you need to let it go, and embrace Fascism.
I am almost at that point.
BS!!! Stop the Fascist Pigs!!!
BANK RUN BITCHES!!!
BANK RUN BITCHES!!!
BANK RUN BITCHES!!!
GOLD...
LOL!! Now I'll get my jackboots.