patrick.net

Is it phase out or bail out?

I was wondering what this is gonna cause to us, the people, and to the economy. Part of CNN article I read said,

"The Federal Housing Finance Agency, the government body that oversees the two mortgage giants, has estimated that losses through 2013 will cost taxpayers another $68 billion to $210 billion on top of the money already used to prop-up the firms and the housing market."

and

"FHFA estimates that between 40% to 90% of those additional bailout costs will simply be used to pay that dividend.

The National Association of Realtors is lobbying to end what it calls a "punitive dividend" and Jaret Seiberg, analyst at Concept Capital's Washington Research Group, said that structure is unworkable."

Sounds like tax payers lose, Lobbyists and those who causes this chaos wins.

I can't believe the erudite bastards of this forum aren't swarming all over this story. This has the potential to be the second most disruptive thing to happen to US housing in most of our lifetimes, and it seems to be favoring price deflation. I'm reading "long-term phaseout" to mean "fundamental long-term policy shift."

The article I read said that homebuyers would be the biggest losers from the government pulling out of support for mortgage financing, with 90% of mortgages in 2010 being somehow supported or guaranteed by them. I think homeowners are the ones who will wind up paying for that, though --not buyers, not taxpayers.

msilenus says

I can’t believe the erudite bastards of this forum aren’t swarming all over this story.

Their argument? Inflation will take over the home price appreciation. If that does not work then wealthy non-Americans will fill it up. :)

msilenus says

I can’t believe the erudite bastards of this forum aren’t swarming all over this story. This has the potential to be the second most disruptive thing to happen to US housing in most of our lifetimes, and it seems to be favoring price deflation. I’m reading “long-term phaseout” to mean “fundamental long-term policy shift.”
The article I read said that homebuyers would be the biggest losers from the government pulling out of support for mortgage financing, with 90% of mortgages in 2010 being somehow supported or guaranteed by them. I think homeowners are the ones who will wind up paying for that, though –not buyers, not taxpayers.

This won't be disruptive at all. This whole thing is just a plan to move all the profits of writing mortgages to private banks while still leaving all the risk w/ the taxpayers. Wall Street just can't stand the fact that ANYONE makes money w/o letting them take a cut so since they own the govt they're correcting the situation.

Since losses will remain guaranteed by the govt, access to loans won't decrease.

msilenus says

I can’t believe the erudite bastards of this forum aren’t swarming all over this story. This has the potential to be the second most disruptive thing to happen to US housing in most of our lifetimes, and it seems to be favoring price deflation. I’m reading “long-term phaseout” to mean “fundamental long-term policy shift.”
The article I read said that homebuyers would be the biggest losers from the government pulling out of support for mortgage financing, with 90% of mortgages in 2010 being somehow supported or guaranteed by them. I think homeowners are the ones who will wind up paying for that, though –not buyers, not taxpayers.

It's just a redirection of investment capital, from unproductive bubbles to perhaps something that will grow the economy.

Whats up with the entitlement of "I bought a house therefore taxpayers owe me a lifetime of subsidies", I don't get this at all really. You wan't to be paid, work for it. Don't take away what others have earned.

grywlfbg says

This won’t be disruptive at all.

Conforming limit lowered to $625,500 in Oct with further reductions in the future. . .

Tripling the GSE down payment to 10%

Banks holding "more capital" -- 5% equity piece -- of securitized loans. (WFC says that this alone will raise their minimum down payment to 30%.)

Increasing FHA fees again.

This is great stuff, if you're a renter. Either the PTB don't understand how the home market works or I don't. I'm laying money on the former : )

msilenus says

can’t believe the erudite bastards of this forum aren’t swarming all over this story. This has the potential to be the second most disruptive thing to happen to US housing in most of our lifetimes

I used to think that eliminating 30 year mortgages would lower house prices. But Australia doesn't have 30 year fixed rate mortgages and their house prices / affordability are far worse than ours now. The economy itself seems to be the driver. Removing 30 year mortgages could even have the opposite effect. 5 year arms are dirt cheap and you can afford more house with those low rates.

By ending 30 year fixed rate mortgages, the Fed will have much more control over the economy. All those people with adjustable rate mortgages will now have their spending controlled by the prevailing interest rate that the Fed can play with. Even Ben would be able to do it (manage the economy).

ChrisLA says

It’s just a redirection of investment capital, from unproductive bubbles to perhaps something that will grow the economy.
Whats up with the entitlement of “I bought a house therefore taxpayers owe me a lifetime of subsidies”, I don’t get this at all really. You wan’t to be paid, work for it. Don’t take away what others have earned.

No arguments here. I'm a happy sidelines-renter who had given up on the hope of the Federal government ever getting out of the business of goosing the housing market.

I'm just (quite pleasantly) shocked that something like this would even be considered today. It seems hard to take this as something other than an indication that the administration doesn't think supporting the housing market is key to supporting the economy over the long-term.

Troy says

grywlfbg says

This won’t be disruptive at all.

Conforming limit lowered to $625,500 in Oct with further reductions in the future. . .
Tripling the GSE down payment to 10%
Banks holding “more capital” — 5% equity piece — of securitized loans. (WFC says that this alone will raise their minimum down payment to 30%.)
Increasing FHA fees again.
This is great stuff, if you’re a renter. Either the PTB don’t understand how the home market works or I don’t. I’m laying money on the former : )

Thanks. That's what I get for not RTFA'ing and instead going off an earlier article I read that didn't have those details. I think those are good changes - however I'm still nervous about continuing our current system of privatizing profits and socializing losses.

no one has agreed to shut down freddie or fannie.

it's just a proposal.

it has to pass congress first.

msilenus says

This has the potential to be the second most disruptive thing to happen to US housing in most of our lifetimes, and it seems to be favoring price deflation.

bingo.

Look at all 3 options. #2 is I think a pretty good way to go, but none of them are "good" (as in supporting housing prices) for the housing market.

Somehow I think they'll drag their feet for a few more years yet on this.

@msilenus says

>This has the potential to be the second most disruptive thing to happen to US housing in most of our lifetimes.

Also agree...

BTW this is one of the most important posts this year IMHO on Patrick.net.

robertoaribas says

I have been surprised to see no discussion about this on any real estate related sites as well.

Agreed. No doubt the disappearance of Fannie and Freddie (I can't believe I'm using these flippant colloquialisms) will lead to downward pressure on house prices.

But there MUST be more to this than to "save taxpayers from future expense" and other such stated reasons.

I think the reason is one part Republican ideological feel-good, one part of permanently burying bank private mortgage losses alongside FNM/FRE, all paid for by the taxpayer, and finally a chance for banks to increase their profit margin on mortgages since FNM/FRE will no longer be able to dictate lower interest rates, lack of prepayment penalties, recourse-only loans, and any other leverage that homebuyers have had against the banks.

Yes?

This is is all about the banks finding a new way to increase their profit. First they made money by making crap loans and indirectly unloading them on the taxpayer, via FNM/FRE, and now they will make still more money by screwing the borrowers directly through onerous loan practices.

QUOTE:

The third option would create new privately owned companies to buy mortgages from banks and sell them as securities. Those securities would be explicitly guaranteed by the government as long as they meet certain criteria. The government would collect fees for that backing, just as the Federal Deposit Insurance Corp. insures bank deposits and regulates banks.

These new companies would essentially replace some of the functions filled by Fannie and Freddie. An array of academics and industry groups have backed such a proposal, and senior Obama administration officials, such as Treasury Secretary Timothy Geithner, have publicly discussed its merits.

ENDQUOTE

With option 3, the taxpayer is still on the hook. The only difference is that FNM/FRE and their taxpayer losses are buried and we start anew.

Who will be the new AIG, the company that will fail and "has to be" bailed out with taxpayer money when the new scheme goes bad?

The proposals are are bullshit. More of the same old crap.

justme says

But there MUST be more to this than to “save taxpayers from future expense” and other such stated reasons.

I read somebody's comment somewhere that this is a wealth transfer from home-debtors to the pension industry.

The baby boom is going to be living on pensions from now through 2050 or so and they're going to need interest rates higher than 3% to do so.

The difficulty here is that the system needs to juice pension returns without raising government rates, since we've tripled our national debt in the past 10 years already.

Every 1% rise in the government interest rate is $100B/yr now, which is a ton of money -- ONE MILLION gov't jobs at $100,000 per.

Troy, that's one quite possible reason.

Especially since the "pension industry" == "wall street".

I say pull the plug on Fannie and Freddie and let us see what real property values look like.

inflection point says

I say pull the plug on Fannie and Freddie and let us see what real property values look like.

About Fannie Mae and its Mission Statement
Fannie Mae is a government-sponsored enterprise (GSE) chartered by Congress with a mission to provide liquidity, stability and affordability to the U.S. housing and mortgage markets.

End Result

Provide Liquidity ... Failed
Stability... Failed
Affordability ... Failed

I disagree. The GSEs are not the locus of the problem.

It's all the other bullshit in the system -- basically everything EXCEPT the GSEs.

And redfin, they're cool too.

GSE's weren't the sole cause of the problem:
http://patrick.net/?p=612891#comment-714627
housing bubbled everywhere not just in the USA.

but i think thomas was just saying the GSE's failed at meeting their charter.

Well--they've pretty clearly added liquidity. Not sure how you can dispute that...

Here is what Yves Smith has to say about how the GSEs FNM and FRE did NOT NOT NOT cause the housing bubble:

http://www.nakedcapitalism.com/2010/08/more-debunking-of-the-freddie-and-fannie-caused-the-crisis-meme.html

with some material from

http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html

And here is what the same Yves Smith is saying about how shutting down the GSEs is just a big giveaway to the banks:

http://www.nakedcapitalism.com/2011/02/wall-street-co-opting-nominally-liberal-think-tanks-banks-lobbying-to-become-new-gses.html

Enjoy the truth.

"One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble."

If so why did Fannie have $90B in losses ?

If they had tougher standards and regulated ? why did they cover up these losses, lie to congress, and worst yet ignore any regulations ?

Its hard to imagine that friends of the GSE's in Congress, were calling for curbing regulation while the corruption over the GSE was being exposed long back in early part of the decade.

See for yourself. Makes Enron+WorldCom look like childs play...

http://www.youtube.com/watch?v=Yga7TlsA-1A

The GSE, were not the cause of the bubble, but they certainly fueled the fire.

thomas.wong1986 says

If so why did Fannie have $90B in losses ?

The losses on private label MBS are more than an order of magnitude (10x) larger than the losses of Fannie Mae. Wasn't it about 4T in evaporated asset value total? All of these losses are hidden behind mark-to-model accounting, whereas FNM has to be out in the open and socialize their losses upon the taxpayer.

The banks have been exploiting FNM and FRE for all their worth, and if the banks get to *be* the new FNM and FRE it will get even worse next time (soon).

Don't ignore the forest for the tree here.

bubblesitter says

msilenus says

I can’t believe the erudite bastards of this forum aren’t swarming all over this story.

Their argument? Inflation will take over the home price appreciation. If that does not work then wealthy non-Americans will fill it up.

I know, I could not believe when ("he") writes that, I don;t want to put his name as it might seem like I am picking on him, But my god man, to think Inflation is going to float the home price and or NON americans... there are COUNTLESS better R.E. Investment areas that would be (will be) bought up long before they come to a debt laden Country like USA. Some of the Bulls here are so stuck in OLD view, and soon they will have their eyes open.