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The Sword Hanging Over the Housing Market
That is how much bankrupt federal agencies Fannie Mae and Freddie Mac are taking down in loan guarantees to the residential housing market.
Created in the wake of the Great Depression (the last one, not this one), these agencies were created to provide subsidies to the homeowners to revive a moribund market. These agencies entered prime time by accepting the securitization of these loans in 1968.
They worked in quite obscurity in Washington for decades, quietly fueling successive postwar real estate bubbles. Much of their debt was sold to foreign investors looking to pick up a small premium over Treasuries.
That was until they went one bubble too far, funding the explosion of borrowing that took place during the early part of the 2000’s. In 2004, a deregulation move resulting in the dropping of rules against using government guarantees to finance predatory, high cost lending to subprime borrowers.
It was all over but the crying. Once the market broke, default rates skyrocketed, and it suddenly became abundantly clear that these agencies had been grotesquely underpricing risk for decades. Borrowers starting making claims on their guaranties en masse, wiping out their entire capital. In 2008, the two agencies entered a conservatorship administered by the Federal Housing Finance Agency (FHFA), a de facto bankruptcy.
These lenders have been operating in limbo ever since. Like the other sacred cows of entitlements and defense spending, federal home financing is an issue our leaders would rather keep their heads in the sand over. It is clear they need to be recapitalized. But the chance of this congress, fueled by populist, libertarian fantasies, providing another $100 billion in bail out money for a federal agency is zero. That leaves the possibility that they will be eventually be phased out, leaving the private sector to take up the slack.
What will a fully privatized home loan market look like? Try a lot more expensive. That is where you find the jumbo market, which is already fully privatized, as there was never a government mandate to finance the homes of millionaires.
If you have a FICO score over 750, move all of your assets to you lender, including your IRA, 401k, 529 plan, and all of your securities business, you might get a jumbo loan for a 100 basis point premium over a convention FHA loan under $729,750. If you don’t jump through all these hoops and refuse to offer your first born child up as collateral, expect to pay a premium of up to 250 basis points, or 7.5% at today’s rates. This is why abandoned McMansions have soared across the land like a great blight, and can be rented for 30% of the cash flow demanded by an outright purchase.
What does this mean for residential real estate prices? I’ll attempt some quick, back of the envelop calculations here. Raise the cost of financing by 40%, and you can knock 40% off the value of your property. That is off of today’s prices, which are already down 40%-60% from the 2007 peak, depending on your neighborhood.
This will inevitably lead to a secondary banking crisis and another stock market crash. If you are wondering about those Armageddon type forecasts that have the Dow plunging down to 3,000, this is the intellectual foundation behind them. That is when we find out how much freedom really costs.
Rent, don’t buy. If the roof leaks, the furnace breaks, and the toilet blocks, you just call the landlord, as I have done with my wonderful new rental here in sunny California.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Increasing salaries in a crisis?
my co-op board said NYC is raising taxes on my property 86%-140% this year and this will bankrupt most owners. The reason is NYC said the property is up that much this year, cunts.
I'll gladly eat an 8% jumbo rate...if the principal is chopped in half...until then, it'll be my landserf's problem.
How does the star-rating system work here? Who rated this article, and why only one star?
because ZH has yet to provide the option of rating something with Zero stars.
"But the chance of this congress, fueled by populist, libertarian fantasies, providing another $100 billion in bail out money for a federal agency is zero. That leaves the possibility that they will be eventually be phased out, leaving the private sector to take up the slack."
As a libertarian, I resemble this remark. We get into these problems because of never ending government interventions. Money has been priced too cheaply, loan standards degraded because of the ability to offload them and an oversupply has been created. All these things are squarely at the feet of government. In a truly free market risk is properly priced and continuously repriced based on conditions. Government should get out of pricing and subsidizing not only housing, but labor and commodities. They will not and cannot ever get it right. Worse than that they purposely get it wrong as favors are cut to unions and large donors to improperly price labor and products.
We keep trying the socialist-collectivist-centrally planned fantasy and it keeps crashing and failing. Why not try the libertarian fantasy? Some guys in trigone hats and wigs did it over 250 years ago.
Bravo. No one could have said it better. Get them the hell out of the markets is right.
Excellent post!!!! Especially this:
It is the subsidies themselves that keep prices artificially high, distort risk and eliminate any possibility of price discovery. Skyrocketing college tuition is another great example of this.
Right on - It is really all about the correct pricing of risk. If mortage default risk is honestly assessed, there really is no need for the GSE's. Whether it is the teamsters, PERS, or Joe the Bookie, MB securities will find buyers.
Yep. The guy with all the money sets the prices. When government sets its sights on helping the less fortunate obtain something, its "blank check" pushes prices above what the middle class can afford, and ultimately everyone other than the uber-wealthy need government assistance to afford it.
Very good point. I've read that tuition rises one dollar for every two in subsidy. So the incentive to price infinitely high until it is so high only the government will pay...dearly. It also makes it completely unaffordable if you're not in the subsidy group. This is why contrary to modern statist-liberal notions, government intervention ultimately always results in higher prices, scarcity and lower quality...always.
It amazes me how politicians, both BO and W, and pretty much everyone else, except Paul, bitch about expensive tuition....in the next breath they speak of how they are going to increase grants and loans....and they never connect the fact that their solution creates the problem.
Also, no matter how many computers a university adds to its campus, the primary delivery method of its product (knowledge, grades, degrees) has an immutable cost structure. You cannot simply make an investment in capital and make professors go away.
I dream of prices that reflect true supply and demand...
Always and forever, every single time it's been done. Such a shame those pesky economic laws get in the way of "good" intentions...LOL
I still can't for the life of me understand how someone would categorize not wanting to provide additional bailouts to banks as "populist, libertarian fantasies", yet providing taxpayer subsidies to TBTF ponzi schemes are just good old fashioned capitalism? This is the epitome Orwellian wordplay or just pure psychosis.
Because the asshole that is MHFT understands that if the people get what they want, he's going to have to get a real job that produces real things... Instead of his current job as a ponzi paper pushing parasite.
Bingo! Brilliant! MHFT is a wart on the system.
Whassamatta with you guys? Don't get to kick the dog or abuse the kids so you come here anonymously to throw some trash? Shit, just pass on reading his articles.
MHFT makes many misstatements here:
'Borrowers starting making claims on their guaranties en masse"
Au contraire; the Fannie Mae prospectus begins with the statement that "these securities are not guaranteed by the full faith and credit" etc. GNMA debt was and is backed by the feds, but neither Fannie nor Freddie debt was.
Then there's this: "the jumbo market, which is already fully privatized, as there was never a government mandate"
Not true. The old Fannie jumbo cutoff was at $417k. Congress raised the cutoff to $729k, depending on location, specifically so that banks could dump many of their worst jumbos (between $417k and $729k) into the Fannie/Freddie dumpsters. There are many, many mortgages sized between $417k and $729k which are now in the taxpayer-guaranteed portfolio.
There's nothing fantastical about getting the federal govt out of the business of distorting the housing market. There's nothing ugly or draconian about the fact that not everyone in the country can afford a $600,000 home. There are plenty of cheap rentals out there, and I've rented for most of my life. Renting gives one the option of fleeing a bad job market for a better one.
He does get one thing right, however: It's not yet time to buy houses. Except perhaps in the most battered markets, houses have much further to fall. The MERS debacle is still utterly in limbo, and the economy is years from recovery.
Long time lurker, infrequent poster. This site is my life line to sanity.
Mad Hedge Fund Trader, you are a fucking dick. I have no idea why this outstanding site posts your utter shite.
Same reason you are allowed to post non-constructive comments, dude.
Just skip his articles. Easy.
If america didnt have to pay for wars and bailouts, we might be slighlt better off
http://nakedempire.wordpress.com/
banks are now scrambling to obtain short-term local reinflation of the real estate bubble while trying to save some of the subsidiaries in peripheral countries. estimates in insignificant Bulgaria are, that the ratio of indebtedness to property ownership in is still high enough to allow for another short term re-inflation of the bubble with consequences 6-8 months down the line...while community tensions rise with inflation and unemployment. just saying...