You Know What I Think

Wall Street "strategists," TV pundits, regulators, economists, and others who claim to know what is going on have been betting on best-case scenarios throughout this crisis, and for the most part, their optimism has been proved wrong

They expected the government would step in and save the housing market and, in reality, they got a third-rate replay of the disastrous Hurricane Katrina "rescue."

They assumed the Fed would wave its magic wand and turn things around like it did during the Greenspan bubble-blowing era; instead, the central bank is now the proud owners of all sorts of worthless derivative securities -- with little to show for it.

Finally, they figured that Wall Street's best and brightest would somehow come up with the answers, and as it turns out, those people don't even understand the problems.

With that in mind, what do you think is the right response to the question posed in an article by the Christian Science Monitor's Mark Trumbull, "Will Taxpayers Be on the Hook for Subprime Crisis?"

I'm assuming you know what I think. But go ahead, read it, and decide for yourself.

Federally linked entities like Fannie Mae now back 98 percent of home loans sold by banks.

With a nationwide housing crisis far from over, the risk of future mortgage losses is rapidly shifting from the private sector toward government – and potentially US taxpayers.

This is occurring partly by choice, as policymakers try to stop a wave of foreclosures.

It is also happening by circumstance, as the crisis has left government-linked entities as the lenders of last resort in a troubled marketplace.

One symbol of rising risks came on Tuesday, as mortgage giant Fannie Mae announced a $2.2 billion loss for the year's first quarter. The Federal National Mortgage Association, the official name that has been shortened to Fannie Mae for convenience, is not officially part of the government.

But its public charter, created in the wake of the Depression, is to help make sure that home loans remain available in bad times as well as good. That mission has helped avoid a total shutdown of mortgage markets over the past year. But it means that Fannie, along with entities with a similar mission, are assuming the risks that come with making loans at a time when house prices continue to fall.

"They are fulfilling their mission ... but concentrating risks on themselves," Edward DeMarco, deputy director of the Office of Federal Housing Enterprise Oversight, told a conference of mortgage bankers this week in Boston.

At the same time, the House of Representatives appeared poised to vote Wednesday on a bill that would expand the already large government role in housing still further, in a bid to stem a record tide of foreclosures.

Among other things, the bill would call for the Federal Housing Administration, a government agency, to let cash-strapped homeowners refinance into more affordable, fixed-rate mortgages. Before the FHA agreed to refinance the loans, the current lenders would have to agree to take substantial losses on the original loans.

The approach might help half a million borrowers keep their homes.

But it would leave the government vulnerable if the borrowers later default on their new loans, insured by FHA.

Fannie and its sibling, Freddie Mac, don't carry official backstopping by US taxpayers. But they are widely seen as institutions too large and important to be allowed to fail if they ever faced bankruptcy.

Those two enterprises, plus the FHA, have long been titanic forces in housing. But today they have become even more important. Without them, new credit for home loans would have virtually dried up. That's because losses on defaulting loans are prompting banks to retrench and investors to stop buying mortgage debts that don't carry a guarantee from Fannie or Freddie, or FHA insurance.

Rather than holding on to home loans, mortgage lenders sell most of them. In 1995, Fannie and Freddie bought the bulk of those loans and then resold them to investors. At the peak of the real estate boom, other investment firms competed for that business, churning out complicated investments laden with subprime loans, where the bulk of defaults and foreclosures are occurring today. Now that competing business has dried up, leaving Fannie and Freddie accounting for the lion's share of current activity.

"It's going to take a long time for volumes to come back" in private mortgage-backed investments, says Timothy Crandall, of US Bank Home Mortgage in Minneapolis. For quite a while, he predicts, the reliance on so-called GSEs (government-sponsored enterprises) will continue.

In a bid to ease the housing crisis, politicians are calling on the GSEs to ramp up lending and refinancing activity. But regulators and lawmakers also hope to limit the downside risks for taxpayers and for the GSE shareholders.

"We want to make sure we're not doing it on the backs of all the taxpayers," Brian Montgomery, the federal housing commissioner overseeing the FHA, told the Boston conference.

Many analysts say the efforts by Fannie, Freddie, and the FHA can be expanded without a large taxpayer tab if carefully managed. Still, the risk is significant.

Economists say that home prices are likely to keep falling. One worry: Many homeowners will default as their loan balances exceed the value of their homes.

Even as prices have fallen by double-digit rates in many metro areas, the inventory of homes for sale remains sky-high.

Fannie and Freddie have been moving to raise new capital, to retain a required cushion as mortgage defaults rise. But some analysts say they have been allowed to operate with capital reserves that are much lower than those of ordinary banks. Between them, the two enterprises have $90 billion in capital, compared to a mortgage business valued at $5 trillion.

Comments

The faster the rate of fiat credit creation, the more taxes are needed to be collected to reel in inflation increases. This is the reason why we have the corrupt income tax system. Without the income tax system, the federal reserve note wouldn't last a year.

Our whole monetary system works like a complex circuit board and economist apply Ohm's law: voltage = current x resitance to model & predict how the economy will respond or is responding to different variables. To maintain a constant voltage or zero inflation, in this case, as current (or fed res notes) increases, resistance (taxes) has to change.

This is why barcodes on products are so necessary. They help economist monitor the 'current' of the economy. An individual consumer is like a transisitor in the circuit board. Together with credit/debit card info, they can better determine how much 'current' needs to be taken out of the system with variable resistance (taxes), and therefore, keep the voltage more or less constant.

yeah, the financial ninja blog had something like this on his blog today

[Al]

"In a bid to ease the housing crisis, politicians are calling on the GSEs to ramp up lending and refinancing activity."

This, of course, requires qualified borrowers who want to buy a house. The GSEs can't increase demand for their product without lowering standards. More useless govt 'help'.

[FB]

Lowering standards? How's this for lowering standards?

http://www.fanniemae.com/media/pdf/newsreleases/q12008_release.pdf

"The initiatives include 1) a new refinancing option for up-to-date but "underwater" borrowers with loans owned by Fannie Mae that will allow for refinancing up to 120 percent of a property's current value."

[Al]

I'd heard about that concept, but I hadn't seen it in writing yet FB. Interesting read. They lose $5.8 billion in the last 2 quarters when they're only $5.1 billion above capital requirements. And they decide this is the time to take on a risky strategy.

Looks like there is a decent chance we'll see if the IMPLIED backing of the government for these companies is real.

[On the losing End]

Question? How are the taxpayers going to foot the bill, when they are some of the very same people who are defaulting on their mortages,credit card debt, and car loans at historic levels, because they don't have the money?

[David]

The coming collapse is worse than even you can imagine.
America is finished unless they start and win ww3.
We all know the US dollar is toast.
American leaders are counting on cheap prices to prevail on products from China,which will see America through ,but the news on this front is not very good.recently over 700,000 Chinese companies that supply Walmart have refused to accept the American dollar .
This will help to feed the coming Inflationary spiral to its culmination.
None of the financial events have been secret to the US govt since at least 2000-2002.
"911 is an inside job"mantra begins to look a lot more plausible now than ever.
the US dollar is going to be worthless soon.
the North American Union will be in effect before 2010 is past.
all this to soften the blow as the world switches to the Euro
as the world currency.
Hiding in gold will not help either ,because the US govt will have no choice but to confiscate it all and outlaw ownership of it in America.
We will see the culmination of the most dire of economic depressions America has ever seen ,making 1929 look like a cake walk .Indeed there is no rock that will not be unturned to
bring America down.for there is only one fate for Americans that is to be called north Americans.
if after starving Americans into
submission fails they will hunt the people that oppose it.
and when the fema concentration camps are too full they will fire up the gas ovens in them to clear the back log.
"We will have world govt whether you want it or not the only question is whether it will be by consensus or by force"
Warburg