Fannie Mae And Freddie Mac – Bear Stearns Redux
I have documented the Fannie Mae and Fredddie Mac sagas on this blog. They have been unfolding for a while and unfolding repetitively.
KPMG, Deloitte and PwC are involved.
In the last week alone, Freddie has lost 45 percent of its value, and Fannie is off 30 percent. Expectations of default at the companies have also risen; it costs three times as much today to buy insurance on a two-year Fannie bond as it did three years ago.
Analysts expect the companies to announce a new round of write-downs and possibly be forced to raise capital by issuing additional shares, which would dilute their value for current shareholders.
Despite repeated assurances from regulators about the financial soundness of the two institutions, financial markets have concluded that by some measures they are deeply troubled.
Freddie, for instance, is technically insolvent under fair value accounting rules, in which the company puts a market value on assets as if it had to sell them now…
Mr. Bernanke said that Fannie and Freddie “are well-capitalized in the regulatory sense” but added that they, and other major financial institutions, needed to raise their capital levels further…
I’m following this story closely and will have a few posts on it after Fannie and Freddy release their next 10-Qs. The story looks ugly. Henry Paulson in there flacking for Fannie and Freddy. Who knows how much Helicopter Ben is prepared to spend to bail out Frannie and Freddy.
Sounds like a pajama party is planned at the Treasury this weekend. I expect more news before the weekend is over.
You’ve inspired me to post this on my blog, with your approval. Thanks for the idea.
THE BALLAD OF FANNIE & FREDDIE
SINGIN’ ABOUT THE CRIME OF THE CENTURY
WHAT I KNEW, AND WHEN I KNEW IT
And We Thought We Had F*ckin’ B*lls Back In The Day
Under normal circumstances, real estate can be a bit dicey. Back when I was selling in the 80’s, all the banks cared about was a complete file folder full of papers with everything filled in: Because that was all FNMA (Federal National Mortgage Association) & FHMC (Federal Home Mortgage Corporation) cared about.
The weak link was always the appraisal, the mortgage broker or bank’s evaluation of the property’s worth in the current market. In a hot market, the realtor had to project into future value to get a realistic “CMA” (competitive market analysis) for the seller. Otherwise, with two or three per cent per month appreciation on a $300,000 home, you’d cost the sellers thirty to fifty thousand dollars over the average three-month time on the market, and three-month closing time.
Of course, if you sold and closed in three months for full price, you were really speeding up the price appreciation. And that became an inflated “comp” (comparable sale) for the bank’s appraisers. It also became a benchmark for realtors’ CMA’s beyond which they would project still further value, until the whole house of cards collapsed; s-l-o-w-l-y, with any luck. If it collapsed quickly, lots of people, and banks, and depositors, and taxpayers got hurt. Voila, the S&L crisis.
See, you try to help somebody out, and look what happens.
In addition to fudging the appraisals, by accepting unclosed and unconfirmed price-inflated sales from realtors as comps, the banks could also be persuaded to overlook certain credit problems, provided you gave them a piece of paper to cover their asses. Everything was cool as long as everything was cool. If there was a problem, oh, man, then you really had a problem.
Still, I never once saw or heard of any Federal regulators coming down on any realtors, or many bankers. We knew they were there; we just never saw them. So we tried to keep it that way: Generally avoiding outright fraud and really egregious behavior.
That was the go-go 80’s. I don’t do R.E. any more, but what I see out there really shocks me. Qualifying a buyer is the professional real estate salesperson’s first responsibility. An unqualified buyer is a waste of the agent’s time, and could cost the seller boo-coo bucks. Debt to earnings ratio is Page One of your Broker’s Bible. Or, it was.
While incomes have not moved all that much since 1980, home prices have skyrocketed. In Hawaii, the average home price is $500,000 to $1,000,000. The average income is $20,000 to $60,000. By the old rules, the price of the house should be 3 to 6 times the annual income, no more. Top price should be $360,000, and that’s a stretch with this income. But most people are paying double that here in Hawaii. Which means that, either Fannie Mae and Freddie Mac themselves have thrown out the debt to income ratios of 28-32% for just the monthly “PITI” (principle, interest, taxes and insurance) payment, and 36-40% for all debt as a percentage of income, or we’re in Super-Duper-Fudgie-Land.
Buyers must be SUPER-fudging now, and the realtors, banks and regulators are letting them get away with it. That means they are counting the income of parents, children, unrelated persons, people not living in the home, rent from tenants legal and illegal, investment income real and imaginary, and God knows what all else, to come up with income figures of more like $175,000 to $300,000 per “household.”
And there’s another fudge: Back in the day, only married couples or really rich people could easily get mortgages with less than 20% down. Unmarried couples, gay or straight, buddies, partners, whatever, no sale without a huge down payment and great credit all around. The banks just looked at it all as inherently unstable, without a marriage contract. Even then, if two incomes were needed to pay the mortgage, a young wife might be required to sign a document agreeing not to have children, or take time off from work, for the first five years or more. Obviously, it would be tough to get all this today, with the percentages of unmarried, never-married, divorced, gays, lesbians, group living, etc, etc, etc. Still, there has to be some standard of stability, or the banks get stuck.
OK, so times have changed. That’s not what shocks me, none of the above. What shocks me is that, given the sh*t we used to pull, and adding in all this other stuff above, these pr*cks went WAY beyond all that, and just threw out all the rules. They’re not only lending to ANYbody, they’re FORCING risky loans down their throats. They’re going out and soliciting business from people they KNOW to be unstable, or credit risks, by their own records. And they’re doing it not with $60-80-100,000 homes. Not even with two, three, four hundred thousand dollar homes. They’re doing it with $500,000 to a MILLION dollar homes. And not just a few: Hundreds of thousands of them, nationwide. That’s the multiplier in all this: it’s a factor of five to ten times as risky, a thousand per cent more exposure, a million bucks a pop instead of a measly hundred grand, all around.
And they’re going to walk away from this with their pockets full of tax-payers’ hard-earned money, Scot-free and no worries about prosecution or jail, lawsuits or judgements: All thanks to their good buddies on both sides of the aisle in that Super Duper Corporate Fudgie Factory known as Congress. Way to go, country-clubbers! Us caddies love ya for it. [doffs cap, brushes forelock aside submissively]
If Fanny and Freddie are allowed to becomee backstopped and are monetized (all $1 TRILLION of those toxic waste dumps) say goodbye to life as we know it.
I hope everyone is saving up, as debt will be unaffordable to many. But now you have to be careful where you stash it. As the question now becomes who is the next Indymac. Maybe a shorter list is who isn’t the next Indymac.
I hate to be so pessimistic but I believe that after all this plays out there will be riots, I’m serious. Not at first, but the effect will slowly hit home for the average person that the US Gov’t bailed out Wall Street at the expense of Main Street.
I agree bsmup we are far from the bottom.
And news today the Bush administration is giving Israel an “amber light” for airstrikes on Iran.
$15/gal gas here we come. The timing couldn’t be worse.