Thursday, July 13, 2006

Fannie and Freddie Sitting In A Tree...

From the Christian Science Monitor:

No safety net for Fannie and Freddie
By David Reiss

It is received wisdom on Wall Street that the federal government would bail out Fannie Mae and Freddie Mac if they could not pay their debts - even though they are for-profit, privately owned mortgage finance companies. That's because they were specially created by the federal government to encourage homeownership.

This is received wisdom notwithstanding required language on Fannie and Freddie securities that they are "not guaranteed by the United States and do not constitute a debt or obligation of the United States," and it allows Fannie and Freddie to borrow money more cheaply than other private companies because they are perceived as low-risk borrowers.

Fannie and Freddie had been the darlings of Wall Street as they reported growth and profits year after year by borrowing money at low rates and using it to purchase residential mortgages that pay interest at higher rates. But the seemingly remote possibility of a bailout has become more likely as wave after wave of accounting scandals involving the misstatement of earnings sweep over the two companies.

The risk that these scandals pose has been compounded by the fact that Fannie and Freddie's hedging strategies expose them to serious risks: If the interest payments that the two companies owe to their lenders become mismatched with the interest payments they receive from homeowners whose mortgages they own, the companies can become insolvent. While only a handful of policy wonks focus on this arcane issue, the cost to taxpayers of a bailout could be hundreds of billions of dollars, easily dwarfing the cost of the Savings and Loan crisis of the 1980s. Hundreds of billions of dollars: That figure should make taxpayers sit up and take notice.
...
Moreover, principled commentators on the right and the left, including American Enterprise Institute scholars and Public Citizen's Ralph Nader, agree that the implicit guarantee is no longer justified in today's sophisticated mortgage market. For the former, the guarantee amounts to the privatization of profits and the socialization of losses. For the latter, it is just another example of corporate welfare. And indeed, in today's world, it is both of those things.

23 Comments:

Blogger Richard said...

"privatization of profits and the socialization of losses

another words a republican led government.

7/13/2006 07:09:00 PM  
Anonymous Anonymous said...

no kidding
--BM

7/13/2006 07:17:00 PM  
Anonymous Anonymous said...

Anyone know the 80/20 default rates for NJ?

SAS

7/13/2006 07:48:00 PM  
Anonymous Anonymous said...

What is a Wonk and how to I get one? I want one now, Daddy!


O.K., can I still moan and groan here about a bailout and the statistical probability of stagflation, or will that make me a Wonk? A couple of weeks ago, I was just one of the "worst offenders." Now, "Wonk?"

Pat

7/13/2006 08:12:00 PM  
Anonymous Anonymous said...

Anyone know the story about this one:

Maplewood, NJ 07040
MLS# 2288809
bedrooms 4
bathrooms 2
list price $359,900
prop tax $5,597

I saw this at the Century 21 website, and I was a little surprized to see something in Mapelwood below 400. I don't know the history, but it just caught my eye.

I know there are some smart whips on this blog who can help me out.

SAS

7/13/2006 08:13:00 PM  
Anonymous Anonymous said...

So Nader's crying foul, no bailout, and the only way to do it is to have Ben make those junkers look like cadillacs to some Asians, right? [or Buicks, if preferred.]

How high does he have to go, and how fast?

Or, is somebody in admin. raking up more muck about Freddie ["Too many loans!] so the rate hikes slide past D.L. without any more whining?

Pat

7/13/2006 08:18:00 PM  
Anonymous Anonymous said...

D.R. Horton Chops Forecast



D.R. Horton (DHI - commentary - Cramer's Take), joining in the recent pain of a raft of homebuilders, posted a drop in third-quarter new-home orders Thursday and slashed its full-year earnings forecast.


After hours TOL down 4% DHI down 9%

7/13/2006 08:35:00 PM  
Anonymous Anonymous said...

I hate republicans, only democrats know how to run things. Just look to the dot-com crash in 2000, or jimmy carter's masterful leadership, or JFK leading us into vietnam, bay of pigs, and watching helplessly as the berlin wall went up. Those were the good old days.

7/13/2006 08:42:00 PM  
Anonymous Anonymous said...


ust look to the dot-com crash in 2000


Yup, 10 million jobs created, a surplus and even after the crash, a huge runup in the Dow and real wages. A true national nightmare!!!

7/13/2006 08:45:00 PM  
Anonymous Anonymous said...

Richard said...
"privatization of profits and the socialization of losses

another words a republican led government.

Richard may I call you Dick?
Fannie and Freddie are known confirmed lefty organizations!

7/13/2006 08:57:00 PM  
Blogger Richard said...

SAS, that part of Maplewood might as well be Irvington. It's south of Route 124 and nowhere near what would be considered Maplewood proper. It looks like a tract house to boot. Drive around the immediate vicinity, you'll see why it's priced such.

7/13/2006 09:09:00 PM  
Blogger X-Underwriter said...

$359 isn't cheap either.
That house 5 years ago would have gone for $159,000

7/13/2006 09:21:00 PM  
Anonymous Anonymous said...

Hi everyone,

My question is regarding lending of money. How do lenders protect themselves from bad loans? If someone goes into foreclosure when the market takes a bad turn, how will the lender cover their loses?

7/13/2006 09:30:00 PM  
Anonymous Anonymous said...

"10 million jobs created"

Based on a dotcom bubble. Time to celebrate!

7/13/2006 09:41:00 PM  
Anonymous Anonymous said...

"a surplus"

It's easy to have a "surplus" (projected) when national security threats are ignored (1993 wtc bombing, uss cole, embassies blown up). It doesn't cost anything to bury one's head in the sand, but to actually address these threats costs money.

7/13/2006 09:45:00 PM  
Anonymous Anonymous said...

Off topic..

Didn't somebody on this blog ask about Hazelton, PA? The following article gives a flavor of the place.

http://tinyurl.com/fnes9

Pennsyltucky...gotta love it.

Pat

7/13/2006 10:06:00 PM  
Anonymous Anonymous said...

D.R. Horton quarterly orders fall, cuts forecast
Thu Jul 13, 2006 6:46 PM ET



By Ilaina Jonas

NEW YORK, July 13 (Reuters) - D.R. Horton Inc. DHI.N>, the largest U.S. home builder, said on Thursday that quarterly orders fell 4.4 percent, prompting the company to slash its forecast as the largest U.S. home builder succumbed to a deteriorating market.

Not even price cuts could save Horton from the forces of higher mortgage rates and a rising inventory of unsold homes.

"It's pretty brutal out there," JMP Securities analyst Jim Wilson said. "The strategy they're trying is to move product no matter what it takes. Their margins are getting clobbered."

The news sent Horton's shares down by nearly 9 percent in after-hours trading on the Inet brokerage system and swept other home builders along with it.

KB Home KBH.N> shares were off 3.5 percent at $40.20 and Toll Brothers Inc. TOL.N> were off 2.4 percent at $23.97

Horton's shares have lost more than half their value since last year.

In the fiscal third quarter ending June 30, orders for new homes fell to 14,316 from 14,980 a year earlier. The value of the new orders fell even more, down 7.4 percent in the quarter ended June 30 to $3.83 billion.

"The current home sales environment is characterized by an increase in both existing and new homes available for sale, higher than normal cancellation rates and an increase in the use of sales incentives in many of our markets," Donald Horton, the company's chairman said.

The company said it sees the third-quarter earnings of 93 cents per share, well below the $1.30 analysts had expected, according to Reuters Estimates. The new outlook includes write-offs totaling 11 cents per share.

Horton also cut its outlook for the fiscal year ending in September to at least $3.65 per share down from its prior forecast of $5.25 to $5.35. Analysts expected Horton to post earnings of $4.96 for the year, according to Reuters Estimates.

Horton, based in Fort Worth Texas, also reduced the forecast for the number of homes it expects to sell in the year to 50,000 down from 58,000.

The Southwest was the only one of Horton's five regions to see orders rise, up 12 percent.

In after-hours trading on Inet brokerage system, Horton shares were at $20.80 down from their close of $22.86 on the New York Stock Exchange.

Since the beginning of the year, Horton shares have lost 33 percent of their value, while the Dow Jones U.S. Home Construction Index .DJUSHB>, a wide barometer of home building stock activity, is off 35 percent.

7/13/2006 11:36:00 PM  
Blogger BergenBuyer said...

10:30 Anon,

Banks bundle and then sell their loans as Mortgage Backed Securities. So the risk gets spread out a little among different groups. I don't know all of the details, maybe someone with some experience in trading such securities could chime in.

7/14/2006 07:09:00 AM  
Anonymous Anonymous said...

The resell these securities in the
after market. Many are oversecured.

Default is rare in the after market
because of the structure of the deal.

They are also insured in case of
default.

Similar to Auto loans resold in the after market.

7/14/2006 07:35:00 AM  
Anonymous Anonymous said...

Based on a dotcom bubble. Time to celebrate!

1) That is a lie. The dotcom bubble did not create most of the jobs.
2) As opposed to the RE bubble now, an d we've still seen very few jobs created even though the RE bubble is much bigger than the dotcom bubble.


It's easy to have a "surplus" (projected) when national security threats are ignored (1993 wtc bombing, uss cole, embassies blown up).


There was a real surplus. It was not merely projected. But I understand you have trouble with math. And all the 1993 plotters were and are in jail.

And how come Bush Sr. or Reagan couldn;t generate a surplus either ?

It doesn't cost anything to bury one's head in the sand, but to actually address these threats costs money.

you betcha --- like spending half a trillion attacking a country that did not attack us on 911 and had no wmd stockpiles or active programs. A smashing success !!

7/14/2006 07:36:00 AM  
Blogger peaknic said...

"Hundreds of billions of dollars: That figure should make taxpayers sit up and take notice."

Why would this make taxpayers notice? We've already blown over $300B on a preemptive undeclared war and latest estimates put the total before it is over at $500B+. Taxpayers in this country don't care about deficits because it hadsn't effected them directly (YET). I lay odds that even when the foreigners who are keeping this country on life support by buying our debt finally see the light and just stop, causing the implosion of our economy, taxpayers still won't put the blame where it should be: congress and our "no pork is too much"/sign-anything President.

7/14/2006 10:09:00 AM  
Anonymous Anonymous said...

http://www.zillowblog.com/

"This is just the beginning – we'll add more financing info as we grow."

For 10 points, and a chance to move on to the lightning round, which companies offering 5 minute mortgages will be the first linked at ZillowFinancing?

Pat

7/14/2006 12:42:00 PM  
Anonymous Anonymous said...

This is an interesting blog. I've never used one before. I'm an agent from Garfield, but I work in JC.

I don't see the big deal with bailing out those companies. Hundreds of billions is still a small percentage of our total debt and who is going to stop Congress anyway? Certainly not the people of this great democrazy. The root of the problem I think is no law capping our debt or how much debt the government can create per year as some percentage of GDP for example.

7/26/2006 12:36:00 AM  

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