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Market Prices In QE 7 As S&P Says Cost To Resolve GSEs Could Approach $700 Billion, Double FHFA Estimate
Two weeks ago, the FHFA, using Moody's assumptions and modelling, said that a worst case scenario for Fannie and Freddie could result in total costs to taxpayers of $363 billion, an incremental $220 billion to the $148 billion already spent to keep the nationalized housing branch of the US government. Today, S&P has released a stunner which says that actually fixing the GSEs, and "resolving and relaunching" the bankrupt entities, would actually cost as much as $685 billion, or over another half a trillion in taxpayer costs. And as for the reason why the market is surging, and will be until the US annexes Zimbabwe, now that it is pricing in QE 7, S&P says that according to its estimates, the backlog of shadow inventory is 40 months! Tomorrow: another trillion dollar capital defficiency hole, uncovered somewhere in the ponzi that is the US economy, will cause QE 8 to be priced in. And so on.
From S&P:
As Standard & Poor's Ratings Services sees it, the problems in the U.S. housing market are far from over. Moreover, with a growing portfolio of unsold homes, a sluggish economy, stubbornly high unemployment, the prospect of rising foreclosures, and billions in legacy losses, it appears unlikely in our view that housing and mortgage markets will be able to operate normally without continuing and substantial government involvement. That will likely mean further taxpayer support for Freddie Mac and Fannie Mae, the government-sponsored enterprises (GSEs) that, along with the Federal Housing Administration, now buy more than 90% of all home loans compared to less than half before the crisis.
That support has so far come at a price, which we believe is likely to rise substantially. Standard & Poor's estimates that the ultimate taxpayer cost to resolve Fannie Mae and Freddie Mac could reach $280 billion, including the $148 billion already invested--money largely spent to make good on loans gone bad. (Both GSEs are already in receivership.) That $280 billion, however, could swell to $685 billion, by our estimate, with the establishment of a new entity to replace Fannie and Freddie that the government would initially capitalize. Although federal authorities have taken no concrete public steps toward sponsoring a GSE alternative, , Standard & Poor's believes that it's a useful exercise to consider how much such a recapitalization might cost taxpayers.
Our assumption is that it could cost an additional $400 billion to establish a new mortgage intermediary, capitalized at 7% of total assets -- although a smaller entity could be formed and capitalized based on risk-weighted assets. That $400 billion would, in our estimation, be enough to cover all losses and to support new business. We illustrate this cost at the 7% level. We are not aware that the regulators are targeting any specific capital levels. However, in the wake of the financial crisis, we believe more capital than may previously have been necessary will likely be warranted--especially if the government transfers ownership of this new institution to the private sector. If the government retained ownership, however, we estimate that the surviving entity could be capitalized as low as 4% of total assets, or about $225 billion. The taxpayers could bear the recapitalization for a purely government-owned entity, although private owners (e.g., financial institutions) could also capitalize it cooperatively.
In coming up with these estimates, we have also assumed that the future earnings capacity of such an entity can support provision and reserve levels for further originations. We did not, however, impute future dividends since we didn't project operating earnings or losses to make our estimates specifically comparable with those that the Federal Housing Finance Agency (FHFA; the primary regulator of the GSEs) recently released.
On Oct. 21, 2010, the FHFA projected that total Treasury draws by Fannie and Freddie could total $142 billion to $259 billion, excluding preferred dividend stock payments. The FHFA bases its approach roughly on the approach that the federal banking agencies took last year in the Supervisory Capital Assessment Program, which produced potential rather than expected outcomes.
However, we based our analysis of the potential total costs of supporting the GSEs purely on their publicly available financial statements. Fannie Mae and Freddie Mac have not provided or validated any of the assumptions that we have used. Our primary goal is to offer investors an independent view on our assessment of the remaining credit losses embedded in the GSEs.
S&P also provides some additional unpleasant facts about the housing sector, which everyone but one Jim Cramer (who called the housing bottom last June) is all too aware of.
A Backlog Of Unsold Homes Is Exacerbating The Housing Slump
The U.S. housing market remained in a severe slumpthrough the first three quarters of 2010. As a result, we see very little momentum toward a more steady housing market in 2011. Despite reports of stabilizing mortgage delinquencies at Fannie and Freddie, we believe there is significant uncertainty related to the build-up in inventory, which is likely to continue to keep home prices down (see chart).
But these numbers don't reflect the store of seriously delinquent loans that could go to foreclosure (often called the "shadow inventory"). Standard & Poor's estimates that at the end of second-quarter 2010, the shadow inventory backlog would have taken the market just over 40 months to clear.
Moreover, we believe that Fannie Mae and Freddie Mac will continue to realize credit losses from their legacy portfolios over the next three to five years. The extent of those losses depend on, among other factors, the success of the newly initiated loan modification efforts and the ability to successfully resolve the foreclosure documentation issues that have arisen over the past few weeks. In addition, we are monitoring GSEs' success on their "put-back" efforts, i.e., their attempt to return to lenders mortgages they believe are based on representation and warranty breaches. We expect to see ongoing litigation over this contentious issue.
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I feel absolutely sick.. how is this a good idea? Fuck me.. this is insanity.
Can we puke together?
Wonderful news. Marvelous. Add another 210 dow points to the barbie !
TD,
i have capitulated. i am in the matrix. they now control me.... give up your efforts to expose the ponzi and join me.
'doesn't it feel like we are all 'pissing in the wind'?? what will it take to crack this open??
help!!
+1 LOL
How many years must a TBTF exist, before it is washed to the sea
How many years can some banksters exist, before they're allowed to be jailed
How many times can a man turn his head, and pretend that he just doesn't see
The answer, my friend, is pissing in the wind
The answer is pissing in the wind
what will it take to crack this open??
help!!
You would actually have to leave the country and walk away from the Ponzi to "crack it open". Increased default translates into more QE, until the very last ounce of labor evaporates into the willful recipient of entitlements.
You only earn what your value is to society, nothing more and nothing less so the degree of industriousness and ingenuity would have to out-create any loss in dollar-devaluation, taxes, inflation, crime, corruption in due process, etc.
In other words to succeed at all in today's day and age one would have to invent/create industry on the level of Bill Gates to make any dent in the create of wealth and insure one's survival.
This is the ultimate test of the entrepreneur in the know:
To create or contribute to the creation of 15 - 30 million jobs in the U.S. with "new" industry, technology or ideas that improve the standard of living for all.
It is a monumental task but it can be done.
For example if solar panels came down from $1,000/panel to $250 you could create nearly 1,000,000 jobs in the U.S. Each home could them afford to switch to solar if break-even was 3-5 years for adding this technology to their homes -vs- 15 yrs estimate today. That might be a good start.
Just put in the back with rest, thanks.
What me worry?
"Shadow inventory" or, as I like to call it, "consumer discretionary spending."
Quit paying your mortgage for a year or so, and buy Asian made goods like there is no tomorrow.
The new American dream, free shit and using what money we have to pay the bankers, meganationals and Asian workers. Success!
Nah, buying the real commodities for the Mad Max world, ammo and lots of cans of food.
The tea party won't be funding these GSE rat-holes. The MC banks themselves will have to privatize them or walk away also.
Really? Congress is now officially gridlocked and there is NO way that the PTB allow this bad paper back on their books.
The Tea Party is not going to be able to fix as much as many hope (like virtually nothing unless the Big O jumps onboard) and in two years, we sheeple will trudge back to the polls, blame the Tea Party for the continued deterioration of the middle class and revote in the Dems.
Good times.
'In a few years'? Yea youll live that long, if you can live like Jeremiah Johnson.
Max Keiser has been saying this for months ... that every time the Treasury goes deeper into debt by ordering a few more supertanker loads of FRNs from the Fed, the banks and GSEs will suddenly reveal even more toxic sludge that has to be cleared. Wash, rinse, repeat.
Let me know if I'm junking the shark, but are these mother fuckers deliberately ignoring the amount of put-backs upon mortgate originators/title companies/banks if the GSE's responsibly rid themselves of "non-conforming" mortgages??
Housing is broken, but we continue to rally. The consumer is broken but we continue to rally. I hope David Tepper is happy he got his Fed Put.... it comes with the expense of the destruction of the country. As soon as asia develops a viable alternative (which they will), the world dumps U.S. assets/dollars. The level of hubris our policy makers are operating with is staggering... I suppose when you are trying to build a world economy that's acceptable.
Would somebody please remind me why we're paying this much money for these bozos? Was it to keep the Saudi's happy? That's a serious chunk of change that could be put to better use even if the Banks were to collapse.
Don't worry, QE9 is just around the corner. Meanwhile, would someone please remind me how Banana Ben Bernanke differs from Charles Ponzi? Or is Bernanke the reincarnation of Ponzi?
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Forget stocks and bonds and buy weapons and food, thats the only 'trade' around, before the prices double and triple soon.
I can't believe that I am watching these fucks destroy our country. It seems sureal. I have three kids and there will be nothing to pass on to them.
Get 10-40 acres of good farmland 60+ miles from nearest Walmart, buy them each a nice battle rifle in .308 (with lots of ammo) and make sure they know how to farm and shoot. That is what my two boys are getting. Along with their real time education in how a great Country dies.
that is excellent advice.
Basement meet Mr. Dollar. Stratosphere meet everything else.
Lots of stats got buried in the press with the run up to the election but I did find this.
Southern Virginia - third quarter
residential RE sales down 32%
foreclosures up 36%
Green shoots. Wait until the full effects of the foreclosure mess hit. This is huge. Knock on effects in small towns will freeze the local economy for some time.
Where are Prechter, Mish, Harry Dent and all the other deflationist buttholes who claimed 'the FED will NOT destroy their balance sheet to create inflation'? Where is the $600 Gold they promised? Where is the rush for the hard to find US Dollar?
Hari Kari would be the honorable thing for them.
you forgot to mention my name? What? am not as importatnt?
A 40 month backlog of shadow inventory might be a bit on the light side. Dr. Bubble calculates just 1 in 21 distressed Pasadena,CA homes are listed on the MLS, where he visits a few " Real Homes of Genius " .
www.doctorhousingbubble.com
$700B is a low ball estimate. I say $1T minimum. My only thought on the matter is whether Congress will take the time to approve raising the cap or will the US Constitution continue to get trampled on ... like when Timmy the fascist Geithner promised "unlimited" support. They may not get another TARP through, but this is just as effective at bailing out the banking sector!
The US is not annexing Zimbabwe. Zimbabwe is annexing the US.
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