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History Suggests the Financial Bottom May Be Near
That would be Kevin Bacon.
10 Financial Entities On the Brink
Do you folks have the same problem with people who are long saying things like "ABK will be double digits by Christmas"?
Greenspan Blasts Housing Bubble He Helped Create
How many loans did Greenspan make to buyers without checking their credit?
How many loans did he make without requiring any significant down payment?
How many houses did he buy expecting them to appreciate in value?
How many houses did he buy that were clearly more than he could afford?
Answers: None, none, none, none. Greenspan's Fed fostered the environment that allowed imprudent decisions to be made by others. How can you hold him accountable for that? By the way, it also was the environment that allowed the economy to grow for a prolonged period of time with low inflation. Is not this the primarygoal of the Fed?
"His concerns about upside-down mortgages are particularly offensive given his consistent praise, when he was Fed chairman, of the ability of home equity extractions to fuel economic growth."
I'd love for you to provide actual references to Greenspan ADVOCATING home equity extractions. Since you haven't, I can easily assume that you are confusing a discussion of movements in the economy, where clearly such moves by individuals were helping to drive the economy, with a position where he was actually encouraging individuals to do this. Where is the harm in this?
Congress Saves Fannie and Freddie: The Cure Will Kill Us
IF the federal government were not to forcefully state that it would back the FNM and FRE loans, the MBS market would have continue its death spiral, and it would have taken down most if not all of the firms which have had writedowns to date. A market-based solution, yes, but one which would have also crippled the financial economy in a way not seen since the early 1930s.
I see, as I hope others do, the government's action as one of providing breathing room. The real solution is not here yet, but there is now time to develop it.
What will it be? Hopefully, we'll see the government drastically reduce the scope of the government-backed mortgage program, putting in very high lending standards for those guarantees (if there are any at all), and pushing FNM and FRE into a logical, risk-based market for mortgage insurance, where the government does NOT guarantee the majority of loan balances.
Could it be done? Overnight, no, but gradually it certainly could. Should it be done? By all means. The mortgage interest deduction does plenty to encourage home ownership; guaranteeing the loans on top of that incentive is unnecessary and, as it turns out, dangerous.
Fannie Mae Trade Idea: For Aggressive Investors Only
The 'Canary in the Coalmine' for Fannie, Freddie
"...where will the Gov credit rating go given the persisting need to bail out all entities in trouble?"
Nowhere, since it hasn't gone anywhere while we added $3T to the debt over the last six years.
"The whole economy is so levered that it can't grow without serious depreciation of the currency to 'support' those asset prices."
Nonsense. The financials are leveraged because that's how they make money. The ones that managed risk poorly are suffering more, and the worst won't survive. Such is life.
"And what happens to governments that dont [sic] pay their debt?"
There have been very few years since 1960 when we didn't increase the national debt. And yet, we've never defaulted. What makes you think we will now?
Disclosure: Long FRE, FNM, UYG.
Are American Companies Now Up For Grabs?
What Kind of Government Support Will Fannie and Freddie Get?
How Will Freddie and Fannie's Lifeline Affect US and Asian Banks?
Not at all. Strictly speaking, no additional support has occurred. The news is that the government is working on changes that would provide greater support IF IT'S NEEDED. It hasn't yet been needed.
"...the last mortgage “up” cycle lasted from September 1999 (when annual growth in mortgage lending contracted by 5%) until November 2005, when it peaked at an annual rate of 44%. Back of the envelope work suggests that “down” cycles last an average of three years, suggesting that the current down-cycle will last until around the middle of 2010."
Um, if the last up cycle ended in 11/05, and down cycles last three years, how do you get to mid-10?
The 'Canary in the Coalmine' for Fannie, Freddie
Fannie Mae Trade Idea: For Aggressive Investors Only
Sheesh. You might as well say that we might want to buy Apple if it touches 150 on Monday.
Fannie and Freddie Waterfalls are Too Big to Bail
The sky is not falling. Here's your worst-case scenario in terms of government losses should it take over FNM and FRE. They insure or own some $5T of mortgages. At this point, more than 98% of mortgages backed by FNM/FRE and current. Let's suppose there's a massive increase in foreclosures from this point going forward, and the percentage reaches 4%. Further, let's assume that the average bad mortgage is twice as big as the average mortgage. So the percentage of loan value that gets foreclosed is 8%, or $400B. But this is not the amount of the loss; the underlying property is not worth zero. Let's continue the doomsday scenario and say that real estate values fall by half. Basically, there's no way, without a depression-like failure of the economy, that the federal government would lose more than $200B.
A lot of money yes, but for perspective: since 2002 FY, we've accumulated more than $3T in debt (including that held by the trust funds). So the worst-case scenario is that an assumption of FNM/FRE would add to the debt no more than 7% of what we've added under the current administration, or about 2% of the overall debt.
Fannie and Freddie: When the GSEs Go, So Goes the Dollar
First off, I questioned his 2012-13 timeframe; 2010-2013 as a target for the bottom is so broad as to be meaningless. I'm going to pick the World Series winner; it will be a team that plays on natural grass.
What makes you think employment will be lower in two years than it is now? Since 1960, there have been only five years when employment declined, and only twice has there been less employment than there was two years earlier (1992, 0.25% less than 1990; 2002, 0.3% less than 2000). Even the 1981-2 recession, which was far worse than either 1992 or 2002, saw employment rise in any relevant two-year timeframe.
Also, the correlation is weak. During the 1990-1992 period, housing prices declined 4.9% (by far the largest drop since 1987); however, during the 2000-2002 period, they increased 24%.
Weekend Thinking: An Agency Recapitalization Proposal
Except, of course, that houses didn't become larger and more luxurious because builders decided it should be thus; demand shifted and the marketplace changed.
Fannie Mae - Or May Not
"The fees, by the way, on these guarantees are miniscule at an average of 22 basis points per year..."
Let's see, $2.2T x .0022 = $4.84B per year. When you're talking about a company with $40B of capital, how can you call this miniscule? In addition, billions of dollars of principal payments are made every month; this reduction in the insured and held portfolios is normally turned over into new loans. If FNM were to suspend lending operations and dividends for one year, it could reduce its leverage on owned loans from about 20 to less than 17.5. How does this compare? I don't know. Goldman's about 24 times leveraged, but they've got a lot of diversity. NLY looks to be about 12x if I'm reading my balance sheets right.
Note, this says nothing about the huge portfolio which they insure.
"With residential mortgage delinquency/foreclosur... rates at something like 4%..."
I challenge you to cite a credible source for a number higher than 2% of all mortgages that are even delinquent.
The key to the continuation of FNM and FRE as they are currently organized is an explicit guarantee by the government of the mortgages insured by them.