How conveniant (as usual) that a story as serious as this is broken on a weekend!
Insanity has become the norm. The Washington Post is reporting that the Bush Administration is finalizing a plan to use Federal Dollars (uh... our money) to back mortgages for the nearly 8.8 million homeowners with negative equity. The plan would force current lenders to forgive a significant portion of the mortgage (in effect this is a forced short-sale) and allow the homeowner to refinance into a loan guaranteed by FHA.
Can any of the absolute idiots in this administration (that's really what it's come to, hasn't it... they are just crazy about trying to stop the inevitable) see that this will only drive housing prices further down, and faster at that? These homes are already under water and asking a lender to just forget about what is owed, and another lender to pick up the pieces only reduces the value of the asset further... without natural market forces in action.
The plan also requires the homeowner to remain in the property for an unspecified amount of time... how do you do that without some sort of "prepayment penalty" either implied or actually assessed... how do you do that? Isn't that restricting their freedom to live wherever the hell they want whenever they want? Better yet, isn't that the sort of thing that helped to get us into this mess in the first place?
All the math in the world doesn't add up to this, folks. The government realizes how perilous the situation is and is unwilling to tell us. They also realize that if things continue to get worse, cracks in the armor will expose the truth that is already pretty obvious from an anecdotal standpoint.
God Bless us all... we're gonna need it.
This should come as no suprise. Bloomberg is reporting today that Asset-Backed Commercial Paper Falls for Fourth Week . What does this mean to the rest of us?
Well... we've made it through one of this storm's many eyes, and the headwinds are picking up again. Simply put in the article:
"The market for short-term debt backed by assets including car loans, credit card receivables and mortgages shrank for a fourth consecutive week amid signs that credit quality is weakening."
Every wave of the credit crisis thus far has begun in a similar way. Asset backed short term paper demand dries up, funding for the long end wanes, and we have another failure.
Weren't we all done with this? Wasn't the Fed's Bailout of Bear Stearns and opening of a special discount window to the broker/dealers supposed to increase the liquidity in the markets?
From a separate Bloomberg Article:
"``The Fed is trying to drive a car with only slight control of the steering wheel and no control of the gas or the brakes,'' Clive Granger, the 2003 Nobel laureate in economics and professor emeritus at University of California, San Diego, said in an interview."
The coming days will see another wave of the credit crisis hit our shores. Look for a big failure or write-down in the wake of this part of the storm. Each wave gets bigger and bigger.
All-in-all it looks like the storm is once again picking up speed.
Make no mistake, here. Bear Stearns collapsed. KaPOOOIE! Gone. An institution that claimed to have a book value of $80 dollars a share in just a week was forced by the Federal Government to dump itself into JP Morgan for $2 dollars a share. Hmmmm.
Within days, Fannie and Freddie announced that their capital reserve requirements had all but been eliminated, and they would immediately begin to take on more and more of the remaining mortgage market.
This is nationalization, folks. Get ready for it. As a matter of fact, Wreckonomics predicted this back on March 1st... Pulling The Plug On Fannie Mae and Freddie Mac , when I said:
"This is a big set up for a taxpayer funded bailout, and yet another brilliant example of Wreckonomics... The goal here is for these companies to take the bad mortgages off the books of the big banks (that are all teetering on the edge of failure as we speak). Once this happens, it will be much easier for the sheeple to accept a taxpayer funded government bailout."
Nationalization is a very innocuous term for THE TAXPAYER, IN OTHER WORDS YOU AND ME AND EVERYONE AROUND YOU WILL BE PAYING FOR THE INCREDIBLE UNBRIDLED RISKS TAKEN BY MORTGAGE LENDERS and WALL STREET FINANCIERS. We will all be paying for the lies and manipulation. We will be bailing out the very criminals who, at the end of this crisis... if it ever ends, will end up even richer than when they started. The big boy network is circling the wagons, again, and we are getting stuck with the bill. But I digress...
As Doug Noland from Prudent Bear says:
"I have fully expected the GSEs, at some point, to be taken over by the federal government. It may have been orchestrated subtly, but I can only presume that such a historic endeavor was accepted this week as the only means of averting financial dislocation. And for their regulator to suggest that the GSEs today have any handle whatsoever over their unfolding “risk management” challenge is wishful thinking - at best...
As far as I’m concerned, much of the U.S. mortgage market was this week essentially Nationalized. I’ll take the dramatic narrowing in agency debt and MBS spreads as support for this view. Additional support arrived from comments from Mr. Lockhart, Mr. Paulson, and actions by the Federal Reserve. Having lived contently for years with the markets’ interpretation of the (grey-area) “implied” government backing of the GSEs, our policymakers are surely today satisfied with the inferred market acceptance of mortgage industry Nationalization. To be sure, the Fed’s Splashy “Sunday Night Special” bailout of Bear Stearns is rather trivial in both its implications and consequences when compared to Thursday’s Quiet Coup. "
Mike Shedlock of Global Economic Trend Analysis apparantly feels the same way...
"Fannie and Freddie are likely to get into further trouble but it will likely take some time as the housing market continues to deteriorate. Indeed, the actions by the Office of Federal Housing Enterprise Oversight (OFHEO) to give Fannie and Freddie more rope in which to hang themselves are "quiet" step that will play out over time. It's not a waterfall event. Down the road, should Fannie and Freddie blow up, expect to see shareholders brutally punished, just as happened with Bear Stearns."
The real question here is not whether we are right, but if it will do anything at all to help. Not likely. More evidence is surfacing that shows we are probably in headed for an even greater credit crisis. Subprime delinquencies are in the 30% range. This is absolutely amazing on it's own, but a recent report shows that Alt-A deliquencies are approaching 18%.
Alt-A loans, for those not sure, are loans where the borrower typically has a decent credit profile, but may be looking for 100% financing or cannot document their income in a traditional manner. Fannie and Freddie slurped up billions of dollars of these types of loans over the past 5 years, effectively tripling the amount of their loan book. These loans are starting to go bad an an alarming pace and according to Housing Wire,
"While non-industry media are incorrectly and inexplicably zeroing in on rate resets as the driver behind the recent spike of Alt-A borrower defaults, most industry experts that have spoken with Housing Wire have suggested that as many as 70 percent of Alt-A loans originated in recent years have been fraudulent.
“It’s fraud [that is] now coming home to roost, higher lending limits or not,” said one source, who asked not to be named. “Rate resets aren’t the problem here, and even if they were, LIBOR is low enough right now that it would ease payment shocks for most borrowers.”
That's right... 70% of these loans may be fraud. Really not that suprising and if true... another curveball. How do you help these "homeowners" save their homes? You don't. They probably don't want to anyway.
Is it any suprise that Fannie, Freddie Face “Severe” Capital Pressures? Nope. Not a bit. The bottom line still lies with the fact that a severe amount of fraud in an already loose credit system helped to perpetuate the largest housing bubble this nation, and in fact, the entire world has ever seen. Now the perpetrators of this fraud are attempting to cover it in every way possible. It's funny how the truth has it's own way of finding the light.
I will leave you with the following quote from Denninger at Market Ticker:
"Confidence is, at this point, basically gone."
Now we all know that Monday-Morning-Quarterbacking is the easiest thing in the world to do, and that most often the beer-laden couch potato rarely has any idea what the next play is really going to be. Funny thing in the game of Wreckonomics, however, is that all of us MM QBs seem to be ahead of every curve.
Today, Bear Stearns collapsed. Oh, I know... the headlines don't tell us that, but here's the headline from CNNMoney...
Bear Stearns Nose Dives On Rescue Plan
What else can you read into this? They collapsed on their own ridiculous ponzi mortgage bets.
This is on the heals of Carlyle Capital failing on the same insane bets.
The credit markets have been unwinding for over a year. Liquidity has evaporated, and the Federal Reserve has been propping up the banking system the entire time.
Of course, now that the prospects of a severe recession are evident not just to those being driven around in limosines and meeting in walnut or oak rimmed board rooms but the general publice, Martin Feldstein has this to say about it...
"The situation is very bad, the situation is getting worse, and the risks are that it could get very bad," Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida.
Wake up, America. The "I want it all, I want it all and I want it now" mentality has crushed us. It's about time we admit it and prepare ourselves for tough times.
More to come.
So... what does this all mean, and is it really a sign that the Fed is "helping" the markets? Consider this report from Housing Wire: (bold is my emphasis)
IndyMac Bancorp, Inc. said Tuesday morning that “panic market conditions” surrounding mortgages have turned the capital markets onto their head, and that as a result the thrift would likely miss its first quarter earnings guidance. The bank had originally forecast a net loss of $38 million for the quarter in an investor presentation on February 12.
In a filing with the Securities and Exchange Commission, IndyMac noted that “spreads on everything” had reached “near all-time historic levels,” and that the Pasadena-based thrift could not estimate the effect of market turmoil on its MBS portfolio.
“Spreads between Treasuries and other instruments, in particular, non-GSE mortgage assets, are difficult to ascertain, given the fact that there are virtually no new non-GSE mortgage securities issuances and the only resale activity is a handful of distressed sales,” the company said in its filing. “As a result, the financial impact of this spread widening on Indymac is difficult to estimate at this time, but it is expected to have a negative effect on the value of IMB’s MBS portfolio.”
Seventeen percent of IndyMac’s MBS portfolio is classifed as “trading” for accounting purposes, which means that write-downs to this portion of the portfolio will directly impact earnings for the quarter.
The thrift said 86 percent of its total MBS portfolio was comprised of Alt-A-backed securities; this securities class, in particular, has been roiled in the past week amid rumors that UBS AG dumped more than $24 billion of investment-grade Alt-A RMBS earlier this month.
For more information, visit http://www.indymac.com.
So... what exactly was going on here?
Easy... the markets have frozen solid. There is no value in MBS's because no one knows what they are really worth. The big issue, however, is that banks are out of money. Plain and simple. Margin calls are coming in left and right on leveraged assets with evaporating values. They have lots of toxic paper to sell (paper they've basically fabricated value for) and no takers. None. Zip. Zero. So.... in order to keep the markets liquid, the Fed has agreed to take this paper as collateral for loans to keep cash in the vault, so to speak.
This wasn't a move to stabilize, this was a panic move by the Fed to buy a little more time to see if their failed monetary policy (you know, lower rates and throw gasoline on the inflation fire... almost literally) will work.
And don't you just love the traders excuse to rally the Dow (JUST 30 STOCKS IN THE DOW FOLKS) over 400 points? Nice.
Won't work... liquidity isn't the issue. Insolvency is. They are pouring gasoline on a fire to put it out. Maybe they think they can douse it. That actually happens in the real world. If you have a fire and pour too much of anything on it, you smother it. Trouble is, they don't have enough to pour on it, and the little they do have continues to feed the fire.
They'll have to start issuing more bonds to keep the latest ponzi scheme going, and if they do that, watch out for real interest rates.... can you say SKY HIGH?
This train wreck keeps getting better and better.
Citigroup annonced today that it is issuing a $2.5 Billion 30 year bond issue, 84% of which it is underwriting itself. The yield on this baby is a whopping 6.875%. This is pretty darn close to junk status, folks. They need capital so bad they're willing to take almost all the risk of underwriting the entire issue. Give the state of the credit markets, this is a do or die, in my opinion.
When the chief exectuive of sovereign wealth fund Dubai International Capital says your going to need "a lot more money" to weather the storm... you've got problems. Just what is "a lot more money" to the guy who back in November gave Citigroup $7.5 Billion?
Let's not forget the $12.5 Billion in stock issued and sold to the Kuwait Investment Authority and Prince Alwaleed Bin Talal Alsaud of Saudi Arabia.
They've also slashed their divident by a whopping 41%.
This is a fire sale, and it's not going to do any good. Citigroup is a sinking ship. Sure, they can make the argument that they have lots of business channels and lots of cash flow. Cash flowing right out the door on the heals of the billions of dollars of bad mortgages that leveraged billions more in exotic derivative investments.
Classic train wreck if I ever saw it.
Recently, and I mean as recent as March 1, Wreckonomics stated that we felt that a large bank bailout was coming courtesy of Fannie Mae, Freddie Mac and FHA.
Today Fed Chairman Ben Bernake gave a speach in Orlando urging lenders to do more, like forgiving principal on loans to help ease the burden on homeowners (many of who never deserved the loans they recieved).
"This situation calls for a vigorous response," Bernanke said. "With low or negative equity, as I have mentioned, a stressed borrower has less ability and less financial incentive to try to remain in the home."
Bernanke actually thinks that giving away equity in a home will help the situation. I disagree completely. How much equity do you think a lender is willing to just walk away from? 10%? 20%? And when the values of the homes fall even further and owner's are back to less than 5% and perhaps even upside down again, how long until they walk away?
And let us not forget about the millions of responsible homeowners who qualified for their loans, put a little money down, and have been faithfully making their payments on time since day 1. Some for years and years. Don't they deserve even a little more of this gift?
Honestly... I don't have a PhD from Harvard and I'm not considered the world's foremost economist (yet)... but this is an amazingly insane idea and worse than that, it shows that our chief central banker now has no viable solution in mind. Do you really think this would happen? Lets get serious. They'll never do it because they know it's ludicrous.
The bailout, however nuts, is in the works. Bernanke goes on to say:
"The government-sponsored enterprises (GSEs), Fannie Mae (FNM) and Freddie Mac (FRE), likewise could do a great deal to address the current problems in housing and the mortgage market," Bernanke said. "New capital-raising by the GSEs, together with congressional action to strengthen the supervision of these companies, would allow Fannie and Freddie to expand significantly the number of new mortgages that they securitize."
"I urge the Congress and the GSEs to take the steps necessary to allow more potential homebuyers access to mortgage credit at reasonable terms. "
The groundwork is being laid. The fix is in, and they know it. We are going to pay for this mess, folks. Better get used to the idea.
As for the market itself... they really don't care. The banks are the number 1 priority.
Moody's Economy.com is now using a 20% decline in housing value as the benchmark for it' economic forecasts for the current business year. All the while they are really using a figure of 20% to 40%. According to Moody's:
"Our weaker scenario...is a 25 percent decline in prices," says Celia Chen, Moody's director of housing economics. "That would be in the case of a housing and credit crash and still a moderate recession." There are new worst-case whispers as well. "You want the darkest? Forty percent," she says. "There's your apocalypse."
Hmmm... then aren't you saying that your best case is really 25% and you believe that a 40% drop is not impossible? That's what I read into this. Of course, last year prices declined by about 9% by year end, after climbing in the first part of the year. So another 25% would bring the total to just shy of 35% and if your worst case of 40% hits that it would be darn close to 50% total. Yep. Sounds about right. Oh... and the fact that even the worst "estimates" over the last year have so far been dusted... well... I'm going with the bigger numbers here.
Mind boggling, isn't it? It's been said that a picture is worth a thousand words... so I submit to you the following:
So let's see... Housing starts down by over 50%.... median existing price down by 12.6% ... number of months of unsold homes for sale (based on current home sale volume) up by 180%.
Sound like a 20% decline in value to you? Not a chance in you-know-where.
This sums up the upcoming problem pretty well. No household savings.... incredibly it dips briefly into negative territory right around 2004-2005. Any guess why? You bet... people were using their homes as a savings account. Imagine slowly watching your $10,000 savings account waste away to $8000? Of course, with a savings account doing that you'd pull the money out probably around $9500. When all of your savings is in your home, as the value plunges because of lack of demand for housing, you are forced to ride the wave down unless you can move, and not many people can do that on a dime. So you watch your savings disappear into thin air without much control. Now lets say you were one of the many who used 100% financing or are paying on an interest-only mortgage and, god forbid, and option arm with negative amortization... why any mortgage professional would ever recommend a loan like this is a mystery to me... well... you're in big trouble.
Your savings account isn't leveraged, but your house is. This is clearly one of the biggest "bubbles" ... and one of the most preventable that there has ever been.
SO.... let's all listen to Lawrence Yun, the chief Wreckonomist for the National Association of Realtors and his expert "forecasts". Here's one from 2005.
"The chance of a housing price decline in the DC area is close to zero, in my view. I anticipate that prices in DC will outpace the national average price growth. DC prices will rise at close to a 7 to 10 % rate of appreciation. That's not the 20 to 25% rate we've seen in the past, but it's still very respectful. "
Here's one from last week.
“The only thing I fear,” Yun told the crowd, “and I’m paraphrasing Franklin Delano Roosevelt here, is fear itself.”
This is what the NAR's Wreckonomics guru has to say? This is the best he can come up with? Please. Pinch me. I'm not hearing this.
The facts are plain and simple. The sooner we face them, the sooner we'll all be serious on an individual level about doing what's right. It seems that right now, in this upcoming election season, we hear partisan bickering about the war, taxes, special interst groups... you know, the usual. The Wreckonomy is only now just starting to bleed in... like the subprime crisis. One thing is consistant, however, throughout the McCain, Obama and Clinton camps... they are all for change.... let's hope one of them... the one that wins the Presidency, actually means it.
The OFHEO (Office of Federal Housing Enterprise and Oversight) announced this past week that they will be lifting the capital restrictions (in other words, the 30% extra capital reserve requirement) on both GSEs in an attempt to free up more credit so Fannie and Freddie can help "ease" the unstable housing situation. Funny. No, absolutely hysterical.
Let us summarize...
In 2004 (near the height of housing and mortgage hysteria in this country) the OFHEO instituted higher capital reserve requirements (Fannie and Freddie had to keep 30% more "cash on hand") because it was discovered that there were accounting irregularities on their books. Irregularities that allowed their executives to literally make millions of dollars of profits by overstating earnings to hit basic productivity goals, as we understand it.
Yes, you read that right. Fannie and Freddie were lying about their earnings. Anyone suprised? But wait...
Fast forward to 2008. The United States is in what will become the worst housing crisis of our history and quite possibly the worst recession if not depression we have ever seen.
Both Fannie and Freddie have just posted MULTI-BILLION DOLLAR LOSSES. Losses that were 2-3 times what analysts predicted. They are cash strapped, if not damn near insolvent.
So let's remove any restrictions on the flow of credit from them. Let's increase their ability to take on risk and add even riskier loans to their portfolio. The following graph shows the percentage of subprime loans ALREADY on Freddie's books that are deliquent:
Who's passing out the crack pipe at these "meetings"? These firms are both upside down and insolvent. Their loan pipes are spiraling towards mass foreclosure on the subprime, Alt-A and prime side.
Increasing the loan limits and encouraging them to take more risk is going to help?
Not a chance, folks. This is a big set up for a taxpayer funded bailout, and yet another brilliant example of Wreckonomics.
Fannie was created by the government during the Great Depression, and Freddie was created in 1970. They are both what are know as "Quasi-Governmental" agencies. In other words... semi-private companies. You can buy stock. They report earnings. They have a board of directors, CEO, CFO, etc. BUT... they are basically controlled by the Federal Government. The OFHEO.
The goal here is for these companies to take the bad mortgages off the books of the big banks (that are all teetering on the edge of failure as we speak). Once this happens, it will be much easier for the sheeple to accept a taxpayer funded government bailout.
Once again... the wicked web is weaved, and we are the flies getting the juice sucked out of us.