past week. They both point to how difficult it will be to bring some
stability back to the system. I am wondering if they are connected.
The first came as a surprise to me. Mr. Joseph Smith was supposed to be
confirmed as the Director of the Federal Housing Finance Authority.
Smith was a state banking commissioner from North Carolina. He was a
White House pick. Up until last week I thought he was a shoe-in for the
job. Kaboom.
Smith is out. Nixed at the last minute by none other than Richard Shelby
(R. AL). The ranking member of Banking, Housing and Urban Affairs waved
his arms and sent Smith back to North Carolina. Senator Shelby had this
to say:
Shelby's main concern was that Smith would be a “lapdog” to outside pressure to use the GSEs, at taxpayer expense, as vehicles for large-scale homeowner assistance programs.
Lapdog? Maybe, I don’t really know. But I doubt that is the reason for
canning Mr. Smith. This is politics. Senator Shelby wants his own guy
running things over at the FHFA. It is much easier to steer the outcome
that way. The early talk is that Mr. Smith is going to be re-nominated. I
doubt it. Come Jan. 1 there is a new set of voters on this. If Shelby
is saying "no" in December; the majority will say no in January.
We need a very strong hand in this position. 2011 will be the year that
Fannie Mae/Freddie Mac get put on the operating table and decisions will
be made what role these two dogs will have for the next decade or so.
Needless to say this is a critical step if we are to have an outcome
that moves us away from socialized mortgage finance. At this point the
D.C. lenders are 95+% of the new mortgage market. One way or the other
that number is coming down. How our dependency on Washington for the
loot that keeps the real estate market alive is resolved will be make or
break for the entire economy.
Normally I would say the side show political fight over this appointment
was just normal D.C. fun and games. Not the case this time. Keep an eye
on this fight, it will provide clues on the direction this is headed.
I have seen again and again where a study by the Congressional Budget
Office later becomes the basis for legislation. The CBO put out a report
on 12/23 that dealt with Fannie and Freddie. The paper is long and does
not contain much new information. The following is the cover page. I
thought it sends a terrible message. When I look at it all I can think
is, “The Federal Government is lending against every one of these homes!” Not the image they should be going for.
The CBO tries to layout all sides of the argument on this critical
issue. They are quick to point out that an extreme outcome is
undesirable. We can’t continue with the government providing nearly 100%
of all mortgages, and we can’t expect that the government’s role will
fall to a small number anytime soon. The CBO conclusion is that we have
to move toward the middle. They call it a Hybrid Market.
I think the CBO is right. While I would love to have Washington’s role
in the mortgage market eliminated altogether, that is just a pipe dream.
If we shut Fannie and Freddie down on new lending the economy would
tailspin into chaos.
The CBO did have one recommendation that I thought could be very useful. They want the government to recognize UP FRONT a mark to market cost of providing a mortgage. This cost would go on the budget as a current expense.
The Administration and Congress would fight over all aspects of the
budget (as usual) but if they had an agenda for housing
(stimulus/support) they would have to appropriate the money and vote on it where all could see the results.
The concept is relatively simple. Assume that the private market for a
30-year mortgage was 6% for a “good” borrower who has 20% equity down
payment.
Now assume that in its wisdom Washington wants to provide a stimulus to
the housing market. Fannie and Freddie are willing to provide the same
30-year mortgage at 5% and they are will to do it for a lower rated
borrower and they are willing to do it at 90% of the purchase price.
Clearly this is a subsidy that will ripple through the system. The
suggestion by the CBO is that government would record a charge UP FRONT
equal to the difference between the actual terms of the loan and the
market terms for the same financing. As the F/F loans have a high
advance rate they would get a higher return than the 80/20 deal. If the
market rate for the 90/10 deal was 7% then the cost to the government
would be the Net Present Value of the 2% over the life of the loan
(average 15 years). In this case the government would have to recognize
a current cost of ~$15 for every $100 they lend.
My example might be a tad extreme. The point of the mark to market is to
force Washington into recognizing that there is a cost to their
lending. For years we went by thinking that all that cheap money was in
fact without a cost. 2007-10 proved how wrong that was. Fannie and
Freddie will cost the taxpayers more than a half trillion before this is
all done.
Nothing will move Washington out of the lending business faster than if
they have to pay for it. Recent history shows beyond doubt that there
are real costs to subsidized mortgage lending. For the current budget to
take a hit that approximates the fair value of mortgages would be the
smartest thing we could do. The reserves created would go a long way
toward assuring that there would never be a blowup and conservatorship
again. If the reserves prove unnecessary after a period of time they
could be returned to the taxpayers as a bonus. From the CBO report:
CBO
believes that treating Fannie Mae and Freddie Mac as governmental
entities for the purposes of the federal budget, and accounting for them
on a fair- value basis, accurately reflects their current status. That
treatment also provides more timely and relevant information to
policymakers considering options for the future of the GSEs.For instance, if legislation required Fannie Mae and Freddie Mac to
increase subsidies on guarantees to first-time home buyers through a new
program, the program would show an immediate cost under CBO’s budgetary treatment.
If you’re a conservative and you want to see a smaller role for
government the CBO proposal on mortgages is the ticket for you. I can’t
help but connect the dots between Shelby’s "no" vote on Thursday and the
CBO report from the same day.
Something along the lines described by the CBO is coming. Barney Frank
does not have the influence or the votes to stop it. Strong hands like
Shelby will get their way. While the actual outcome is cloudy there is
one conclusion you can take to the bank. Mortgages are going to be more difficult to get and they will cost more in twelve months. That will hurt, but it is a good thing.
Note: Edward DeMarco is the acting director at the
FHFA. He has had this ‘temporary’ position for two years. Ed has done a
good job. I believe that his policies and actions have consistently
taken the side of the taxpayer. Exactly how it should be. DeMarco
deserves a shot at the job. I doubt he will get it. Another mistake.
estimate of the "unrecorded/undisclosed" losses hidden at the Fed and the big banks ?
Ans: Umteenbillion uncountable cagillions. Possibly more. Certain enough to take us out.
As a number of others have pointed out, we will survive that.
Bruce
All I know is that we keep pumping fresh blood into a gangrenous corpse.
We will run out of blood (printing and borrowing) before our masters revive the rotting corpse.
Either Tyler is wrong, and there is a real stock market, or the Fed is orchestrating a giant game of patty cake to generate the appearance of a healthy stock market.
Meanwhile the insiders keep skimming, a few day traders follow momentum, and the tab for the monstrous short term liquidity is fraudulently bound to our children and grand children.
I don't see this economy lifting off the ground before we hit the end of the runway. The problem is- one way or the other, we are all stuck on the same plane.
Why is someone "junking" these posts....? I for one am enjoying the read....
"Junk" is the new "Like" button.
+Like
edit: Good "Hollow Men" reference
"Either Tyler is wrong, and there is a real stock market, or the Fed is orchestrating a giant game of patty cake to generate the appearance of a healthy stock market."
I was thinking it's more like musical chairs again.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Former Chairman & CEO of Citigroup Chuck Prince
Mr. Prince doesn't seem to know the difference between dancing and being pulled by puppet strings.
LOL...sometimes they'll tell us all we need to know if we'll just listen ;-)
"It's interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine,"
Wells Fargo CEO John Stumpf at an "investment conference" Nov.2007.
We are the hollow men
We are the stuffed men
Leaning together
Headpiece filled with straw. Alas!
Our dried voices, when
We whisper together
Are quiet and meaningless
As wind in dry grass
Or rats' feet over broken glass
In our dry cellar
- "The Hollow Men," 1925
Yes, Yes, Yes...+1quadrillion
The "dark side" ghost story worked for Hank Paulson, but I'm surprised you are buying into this drama. Many of the dislocations you described have already happened (house values?, retail closing?). You assume the failure of a large bank or even serveral banks is irreversible and wil lead to chaos. For every BAC that closes, ten smaller banks could be chartered in a manner of days to service the depositors. Yes there would be disruptions, maybe even some violence, but it wouldnt be the end of the world, and in six months time the markets would be cleared of the bad debts and healing.
But will we have enough baby boomer era MBAs and PhDs in Economics to act as officers in the new banks? <sarc> What if we did a program similar to what we do with teachers in the USA. If you go teach in a disadvantaged school, they forgive your student loans. There are a lot of very smart Chinese business people with PhDs that would come to america to help us if we only would forgive our loans to them. </sarc>
Canada has a vibrant housing market without;
-deduction of mortgage interest,
-GSE sponsored-subsidized mortgage rates,
-substantative mortgage collateralization.
But it just won't work here....
We're Americans and History don't apply to us.
New Zealand has a viable housing market without GSEs too. No 30 year fixed rate mortgages though. Everyone has variable rates. You can choose a 25 or 35 year mortgage with the rate fixed for a period up to 5 years. When interest rates go up it hurts when you come to reset! We still had a housing bubble too but maybe not to the extreme of the US as you always know to leave a bit of spare cashflow for when rates go up.
you are spot on, knuckles........canadian banks were much more conservative with lending practices than US banks.......loan verifications, reasonable downpayments for mortgages and the CMHC role nicely explained in a previous post by Mr Salinger.
also, for what it is worth i lived in the US during the 1st runnup in prices in the 90s in New York, Boston and SF so know firsthand.
price increases in canadian markets did not come close to matching the runnups in major US markets which then spilled over into secondaries.
love your shit, dude. you are one talented fucker/writer, and very best wishes for the New Year.
sincerely
Guess you guys missed CIBC World Markets bet on Enron and the Asset Backed Commercial Paper theft.
Yeah, Canadian Banks were successful despite themselves not because of...
didn't miss the California fraud by cibc at all and not trying to come up with a 1 answer fits all........the real estate thing in canada was a totally different deal than what went up/down/up/down in the US for a whole host of reasons. 1 being speculation was not so much a part of the canadian culture as it was/is in the US.......in other words business was not second nature as it is to americans 2. the demographic shift from suburbs back into city living in NY Bos and SF for people, convenience, entertainment, shopping, museums, theatre, style and creating demand which helped push prices higher off of low lows after the crash in late 80s. 3 resurgent US econony leading a surging globalization........etc etc.
things changed very quickly and for many people too quickly.
canadians used to say how lucky i was to be being paid in USD, but it was also all relative. where i lived the cost of renting/owning skyrocketed........health insurance was out of reach for most. the cost of education was very expensive. you had to be making at least 10 or more a month or it was not worthwhile.......then there was the quality of life thing and i had the fortune to be living in a very nice part of town.
a senior executive from a major insurance co came to visit me onetime. he was in the city for 3 months as his co had been acquired by an american co........the guy was well paid and well educated and the co was paying the rent for his time in the US.......he was shocked at the sticker price.
looks like the big scare/tinychina rate hike thing has been blown off already.
it's all about being on the right side of price.
these fuckers are about to print more money than we can imagine.
best wishes for the new year, kayman. hope you prosper.
knukles
Not true. Nearly all the recent mortgages written by the Canadian banks were guaranteed by, or purchased by the Canadian government.
Same bs in the fall of 08, when the Canadian government bought up hundreds of millions of mortgages to provide liquidity to the Canadian banks.
Canada's media, like the U.S. pablum, likes to espouse the party line. Canadians smart, U.S. dumb.
Without the pipeline to Ottawa (same as the New York Cartel's pipeline to Washington) there would be no "successful" Canadian banks.
it's called the CMHC and has been around for decades - it is not fannie nor is it freddie - it is government sponsored insurance but is paid for by those who take out the mortgages
http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm
Mish says Vancouver ave price is $1mil and payments ave over 70% of pretax wages, worse than before the US collapse, he's calling for Canadian property crash soon.
The US will not allow the chi.coms to invade Taiwan, but we were ok with them buying Vancouver? I have done some serious research to discover that Vancouver is much closer to CONUS than Taiwan.
mish is full of shit........vancouver has always been expensive and with wider hi/low price swings relative to other cities/provinces for different reasons, one being it is a spectacular landscape, another it is british, it is a gateway to asia, the winter climate is mild, spring comes early, and it is an integral part of Canada.
tell mish to fuck himself.
Freddie and Fannie have been under the Fed's wing since the Greenspan days, and that is why we will never have a transparent view of what's going on at either institution. When the next banking crisis rears its head, I wouldn't be surprised if they get merged into nationally-operated mega-bank along with BAC and WFC. GM was the prototype for the dirty deal.
"If we shut Fannie and Freddie down on new lending the economy would tailspin into chaos."
I like you Bruce, but this is garbage. If propping up house prices so we can keep playing pretend is our "economy", then we have no economy. Banks would fail, but they provide no benefit to society. House prices would fall, but then people might be able to own a house, instead of renting one in perpetuity from a bank. FIRE industry participants will lose their jobs, but maybe then they can do something productive or fulfilling. Claiming chaos would result if we don't continue to worship the rent seekers is fearmongering, the same as Hank Paulson's bazooka extortion over 2 years ago.
http://vimeo.com/12860985
Young. Hot. Brash. With more covers in his first year than any rookie model, ever, and an attitude that says: Who cares? It's only fashion.
"I hear a lot of words, like 'beauty', and 'handsomeness', and 'incredibly chisled features'. To me that's like a vanity, a self-absorption that I try to steer clear of.
"I dig the bungee. I mean, for me it's just the way I live my life: I grip it and I rip it. I live it with a lot of flair. I live it on the edge, where I gotta be.
"I wasn't like every other kid, you know? -- who dreams about being an astronaut. I was always more interested in, uh, what bark was made out of, on a tree.
"Richard Gere's a real hero of mine. Sting. Sting would be another person who's a hero. The music that he's created over the years, I don't really listen to it, but the fact that he's making it -- I respect that.
"I care desperately about what I do. Do I know what product I'm selling? No. Do I know what I'm doing today? No. But I'm here, and I'm gonna give it my best shot."
Hansel.
Dead On! I'm sick and tired of rent-seekers succeeding by claiming that the sky is falling. It won't if Fannie/Freddie take a dirt nap. We can and should have a less regulated market. We can and should have smaller, decetralized financiers. Too big to fail = Too big to trust.
+1 Further, to the extent there IS chaos it will be concentrated on the idiots in Warshington and the banksters. Can't say as I'd mind weathering a bit of a storm to see all those rat bastards consumed in a malestrom.
Hansel, you said: "If propping up house prices so we can keep playing pretend is our "economy", then we have no economy."
You made your own argument. That's why it would fail. We have a fake economy.
And, what's more, I agree with your analysis and advice.
So, let the chips fall where they may. It will hurt like hell (yes, there will be chaos), but at least we'll have a future after the (name of event to be) ____. Aw heck - it's going to happen anyway... Just a matter of time.
Financial physics.
Yes, it's about time to let the chips fall where they may.
We have not tried that one yet.
...
If it says "Posted by: Bruce Krasting" I always read it. Great writing and great at digging up morsels.
I'm ready. You ready? Yep. I thought so.
BINGO - great comment by Hansel !
Only the gubamin'd try keeping housing prices up via subsidized mortgages when people can't afford overpriced housing.