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Least BadMortgage giants Fannie Mae and Freddie Mac have essentially been taken into receivership, with the federal government deciding at last to intervene in the market by seizing control of the banks. The intent here is to ensure the safety of the entire banking system, not to mention the core foundation of middle class wealth – housing values:
Normally a conservative would have to lament what amounts to the nationalization of a publicly held banking company. But these are neither normal times nor normal companies: Federally constructed to further a common good, they were owned and operated as publicly held companies whose management believed that they were too large – and far too important – to be allowed to fail: As owners of nearly 80% of US mortgages, a failure of these two companies would have led to a collapse in housing prices and an implosion of the broader, consumption-based economy. The companies also believed that their unique status and aggressive currying of favor from Congress protected their flanks politically. This sense of invulnerability allowed managers and stockholders to believe that they could operate outside the boundaries of normal risk, knowing that the taxpayers would be on the hook for their misjudgments. Treasury’s actions today relieve both shareholders and management of that sense of invulnerability – shareholders in particular will be taking a bath – and we are all reminded that when it comes to money, if it sounds to good to be true, it probably is. Since the taxpayer would have been on the hook in any case, at least now the taxpayer exerts proxy ownership through the arms of the state, while the threat to the banking system is greatly ameliorated. The alternative would have been further and continued injections of federally sponsored cash into a failing system. This was the least bad option. 10 comments to Least Bad |
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They were set up to fail. You can’t operate a business with zero concern for profitability and a (supposed or imagined) complete lack of worry that no matter what decisions your company makes your operations will continue.
They were set up as a business with no constraint on how much money they could spend, or even where they could spend that money. The normal risk/reward every other company must deal with was removed due to the unlimited financial backing of the government. It was only a matter of time.
I’d like to feel some rage, a feeling of incensed moral snottyness towards those that let this happen.
But, then I’d have to look inward first.
I twice doubled my profit on homes in San Diego, first in Santee – later in Bay Ho. Made $450K in psuedo-profits in 12 years. Not bad for a newly minted CPO with married-into tax debt starting out with a zero down VA no-no.
So, I’m part of the problem. No matter, it’s all funny money anyway. And it’s all coming home to roost in my current mortgage, as I watch all that profit ride off into the sunset.
What goes around, comes around.
From the You Wonder Why They Have Problems File: Not too long ago Fannie Mae gave a severance check of over $100 million to Howell Raines, its outgoing chairman and CEO, and a Democrat, while investigations then charges were pending seeking over $200 million from Raines and two other officers. The charges were that “Fannie Mae executives ignored internal financial controls and manipulated earnings through questionable “cookie jar” reserves” that manipulated financial reports so that executives cold draw huge bonuses. They ended up paying something like $3 million that was in reality paid by the insurance company for Fannie Mae, and Fannie Mae itself paid $400 million in fines. Don’t you just love how that works? Check it out here and in linked articles: http://www.cwanswers.com/8921/franklin_raines
Gee. Wonder why there are problems there??
Yah, all the above, all the risk to the tax-payers, all the reward to private parties. The tax-payer takes it on the chin twice: One time when their retirement funds take a hit (as the largest share-holders of Fanny and Freddie were/are mutual funds), and then a second time as taxpayers when
additional tax dollars are used to bail them out. Oh, ya, I’m sittin’ here eatin’ that shit with a spoon……
While contemplating a re-fi back a few years ago I remember noticing that there were a lot of “good deals” out there being advertised – 5 year interest only, $500k loans at 2% interest (don’t bother to read the fine print), etc. – and thinking that this all could only end badly.
[rant editor ON]:
I’ve played the housing market straight up – 30 or 20-yr fixed mortgages only; sold a house when I had to and took a $40K loss in the process so I could get on with my life in another state. I didn’t take out any crazy pretend-you’re-rich loans. I have an outstanding credit rating, yet USAA says my new home’s value has plummeted in the year since I bought it and they can no longer allow me to keep a line of credit on my house (so far untouched, but I liked having it there “just in case”).
What pisses me off is that the property tax people suddenly don’t know anything about the values of homes dropping and I haven’t heard anyone scrambling to help me deal with the property tax issue or make up the $40K hit I took on the house I sold last year.
I feel this is a personal-responsibility/greed issue – all these people walking away from stupid $500K interest-only (for the first couple of years) loans – what the hell did they think was going to happen??? And the idiots who were writing the loans with no questions asked – don’t get me started on how far they stuck their heads up their own asses. The whole lot deserve each other and they should all be forced to pay dearly for this crappy situation.
[rant editor OFF]
Sorry…got kinda carried away for a minute. This whole situation just sucks.
Probably I better just stick to commenting on sea stories.
Brian
The so called mortgage mess is a story full of unwarranted assumptions, greed, and bad business practices.
Unwarranted assumptions:
1. Real estate values will only go up.
They never have before, but “This time it’s different.”
2. You can package mortgages into financial instruments that are as good as money in the bank.
3. You can use said Collateralized Mortgage Obligations (CMOs) as collateral to leverage your investments because they are so “safe.”
Greed.
1. In some markets, primarily Florida, Arizona, Nevada, and California housing prices went steadily upward for several years. As a result, many “home buyers” were actually speculators who were buying houses before the foundations were poured and selling them for a profit when the houses were completed. Easy money, yeah. Even more money if you could carry two or three at one time. And some were.
2. Mortgage money was flowing. (A lot of it was coming from the “carry trade:” Borrow for 1% in Japan and lend it for 5-6% in the U.S.) The mortgage brokers were reaping big commissions and with direction from Congress figured out ways to make it very easy for “non-prime” buyers to get into the house of their dreams.
4. CMO bundlers were reaping big fees from selling the CMOs to banks, pension funds, hedge funds, foreign governments, etc.
5. Financial institutions used the CMOs as collateral to borrow more money to lend in the mortgage frenzy.
Bad business practices.
1. When the Fed began raising interest rates and mortgage rates rose as well, many smart people did not see the end of the housing boom coming. Many mortgage bankers opined that it would take 7% rates to slow housing demand. They were wrong.
2. Too many people were put into adjustable rate mortgages without them understanding what would happen when the rate adjusted.
3. Too many financial unstitutions did not foresee that if the mortgages inside the CMOs began to default it would increase the risk of the instruments.
4. A change in accounting procedures for the financial institutions (banks, investment banks, brokers, insurance companies, etc.) called the value of CMOs into question. The rule called for financial institutions to “mark all their investment instruments to market.” CMOs, because they were normally held to maturity, were carried on the books at cost. The new rule required the institutions to value them as if there was a market for them. When the defaults began to rise some institutions started to wonder just how safe the CMOs were. Some attempted to sell them, but since there is no CMO “market” there were no takers. Suddenly, all these instruments were suspect.
And that my friends is how the panic in the credit markets began. 96% of the mortgages in those CMOs are probably sound and performing, but since there is no “market” for them, all the financial institutions have been writing them down as losses of as much as 80-90 cents on the dollar. This whole thing is insane, but the bears love it and the dems love it. The panic is on and it will take time to restore confidence in mortgages.
The Fannie & Freddie takeover is related to all this because it is absolutely necessary to restore confidence in these entities. The way they did business for the last 15 years was wasteful/profligate. The companies were used as political footballs mostly by the dems but also, I’m sure, by Republicans. They overpaid their managers and spent unnecessary money on lobbyists and political favors.
Anyway that’s the way I see it.
What I find amusing about this whole mess is it’s all paper. It’s called a real estate market for a reason — there’s real property backing the investment. Nothing has actually changed except the perception of real estate as a sure-fire money-making venture, and one accounting rule.
If you bought a house as a lifestyle choice and not an investment vehicle, you’re going to be fine.
– Max
If you bought a house as part of a Navy move and then want to sell it, though, you’re hosed.
Got a nice house for sale, nice neighborhood, good location, priced reasonably. What with the tightening of credit (pendulum swing: tougher to get loans for everybody) and the Air Force five year freeze on moves, we’re muuuuch slower to find a good buyer than the guy down the street the year before.
OBTW department: ISTR one of the board members involved here is Jamie Gorelick, she of the pre-9/11 intelligence “wall”. So much value to our country she’s added.
Brian:
I hear ya on that. Our town’s 5 year cycle of property evaluations occurred just before the mortgage crisis. They compensated the supposed 70% increase in housing values by adjusting the mil rate slightly, for now. Within the next 2 years, my property tax bill will likely nearly double over what it was a year ago- while the value of my home will have dropped.
As Max said, my home is a life choice so we’ll be fine either way on the value of the house. And while it is true that it’s all on paper, the paper that pays my tax bill is not fictitious.
Jimmy J. -
I would shift #’s 2 and 3 of the ‘Bad Business Practices’ in the ‘Greed’ category. Especially #2, since those folks signed their names on the mortgage contracts (I’m assuming in ink, and not crayon). “…put into…” may not be the most accurate phrasing. IMHO. As for #3, how could they not?