Sunday, September 07, 2008

Today is Your Day

As anticipated a couple of years back, Fannie Mae and Freddie Mac have finally failed, are getting bailed out, and we are one big step closer to nationalizing the mortgage market; from here on out, you and I will be supporting the U.S. mortgage market. Welcome to what will likely be revealed to be the (second) largest public bailout in the history of the world (this might have been bigger)!

To those of you who argued that there was no housing bubble, that it was a New Paradigm, that property prices are justified because of blah, blah, blah bogus, mythical, because-my-realtor-said-so, wishful thinking sorts of reasons: your collective work has come to fruition. Aren't you proud to have contributed to it all? Aren't you happy to have been able to ignore all common sense, logic, and data to the contrary so as to so willingly and blindly pay such a patently stupid, ridiculous price for a house? Today is your day! Celebrate.

Generations to come will remember us all as the most callous, profligate, spoiled, narcissistic, and self-entitled generation in the history of America (or maybe even all of mankind). When thinking of their ancestors, your children, your grand children, and your great grand children will look back at you in their dusty old genealogy books and photo albums with hatred and disgust for strapping them with your crushing debt.

But you will be dead; so what do you care? Right?

Update 09/09/08: Here is what Jimmy Rogers had to say about the Fannie & Freddie bailout:
"America is more communist than China is right now. You can see that this [the F&F bailout] is welfare of the rich, it is socialism for the rich... it's just bailing out financial institutions."
You can hear him yourself by watching this video.

37 Comments:

Blogger Lisa said...

As infuriating as this is, will it stop house price declines? No.

There's an 11 month over-hang of inventory, with more to come as PayOption and AltA's try to sell or have to foreclose.

The F&F bailout doesn't bring back bubble financing. Even with small down payments, folks have to actually qualify for those loans. We all know incomes don't support these prices.

Nothing they've done so far has made a bit of difference.

Even the cheerleaders on CNBC are admitting that prices, even though they've declined, are still way off base with regard to income and rents.

And I think it could be the nail in the coffin for expensive counties like Marin. So the gov't takes over F&F, which has the bulk of their portfolio in PRIME mortgages. Prime!! They've basically announced to the world that the housing market here is a disaster requiring gov't intervention.

Think any bank will want to write a mortgage for more than $729K, the GSE cap in expensive markets??

Sep 8, 2008, 11:46:00 AM  
Blogger marin_explorer said...

Does anyone care to elaborate who actually benefits from this GSE bailout? The extreme irony of this move is how socializing losses onto the taxpayer (ie consumer) will only further erode our retail-driven economy. Are those who crafted this bailout so clueless as to believe a short-term market "fix" can possibly jump-start demand, reduce systemic risk, or remotely lead to actual economic growth? At least that's what I see--or am I missing something here?

They've basically announced to the world that the housing market here is a disaster requiring gov't intervention.

And intl. investors are not fools--how does this instill confidence in holding all that once "AAA", now toxic MBS junk? There's no way to re-animate this corpse.

Sep 8, 2008, 11:51:00 AM  
Blogger marinite2 said...

It goes beyond infuriating for me. For one, I do not want to help pay for your or anyone else's mortgage. Further, we live in a country where failure and incompetence is massively rewarded, if you are at a CEO level anyway. Has anyone been arrested for fraud? E.g., has Mozillo? What about Bernanky for bald-faced lying?...Just a few weeks ago he said that F&F were fine and well capitalized.

No, this bail out won't save the housing markets, that is clear enough. It is the absolute, moral wrongness (on so many levels) of these bailouts that disgusts me so.

The conspiricist in me wants to think that Paulson and crew are just trying to keep the ship afloat long enough to get past the elections and then all hell will break loose. We'll see.

Sep 8, 2008, 12:45:00 PM  
Blogger marinite2 said...

Oh, and I should add that I am disgusted with the American public for going along with this all along, from day one. Ultimately, they are the ones who are accountable

Sep 8, 2008, 12:47:00 PM  
Blogger Lisa said...

"Does anyone care to elaborate who actually benefits from this GSE bailout?"

My understanding is it's a huge sigh of relief to foreign central banks & investment pools who own F&F debt. The "implicit" backing of the U.S. Gov't is now actual backing of these securities. It means it's safe for them to continue to buy F&F paper, which keeps the credit markets from seizing up completely as the RE debacle implodes.

This move was done for the benefit of the global finance markets, not Main Street USA.

Sep 8, 2008, 1:27:00 PM  
Blogger marin_explorer said...

"My understanding is it's a huge sigh of relief to foreign central banks & investment pools who own F&F debt."

You're probably right...I've read of several c.banks compromised by this fiasco. So a few light "sighs" for now, then we'll all cross the financial "Bridge of Sighs" together. ;-)

"I am disgusted with the American public for going along with this all along"

I'm beyond describing my disgust. Obviously very few want the credit party to end; CEOs feel entitled to those inflated compensation packages, and the average American has handed over their finances to their Id. Consider the chant overhead at the GOP convention: "Drill Baby, drill!"

Sep 8, 2008, 2:11:00 PM  
Blogger Lisa said...

I'm beyond disgusted, too. But given it's election time, there will be every effort made to keep the shell game going long enough not to spook the sheeple before November.

I still think we will see a major bank fail before then...WAMU or Wachovia come to mind.

And I'm pretty sure I've posted this here before....I have thought for several years now that the economic "recovery" we've had since 9/11 and the dot com bust was a totally false one. Easy credit and massive amounts of consumer debt hid the fact that incomes were flat (or declining) and that good jobs were being shipped overseas. The sheeple had a few years of very comfortable material living (big houses, big cars, big vacations, etc), none of which was based on income and none of which they can afford now that the bill's come due.

Thus, the shell game. And who wants to be the one to tell J6P he is completely f**********? In an election year no less!!

Sep 8, 2008, 2:35:00 PM  
Blogger Jeffrey said...

This is a bailout of the lenders to F & F, not their shareholders. About half those lenders are foreign, mostly Asian central banks and sovereign wealth funds. The fear on Wall Street was that a default on those loans would mean a withdrawal of foreign investment from the U.S. So taxpayers are guaranteeing all F & F lenders, including foreigners, to keep the flow of funds which support the "twin deficits" --- fiscal and trade -- and allow Americans to continue to live beyond their means. In short, to each according to their need (lenders), from each according to their ability to pay (taxpayers). Socialism for lenders, including, ironically, Communist China (just about our largest lender).

I say we stiff them. Yes, credit will dry up and, surprise, prices will fall to the level where people can afford homes based upon 30 years of actual projected income. As interest rates rise, saving will return, allowing Americans to rebuild their capital to finance tomorrow's economy. As long as we can fool ourselves into believing that borrowing from the Chinese is cheaper than borrowing from ourselves, we will continue to slowly enslave our children and mortgage their future to those who do not have our best interests in mind.

Sep 8, 2008, 5:00:00 PM  
Blogger mountainwatcher said...

This is kind of off topic.

I went out house hunting on Sunday in southern Marin.
There was a huge amount of inventory.
Some intersections had 6 to 10 for sale signs with arrows.
It looked like a fire sale.

Most of the properties I looked at were, "price reduced".
In my opinion, the prices were still "way too high".
Reality seems to be surfacing, albeit slowly.

I actually had 3 different RE agents tell me that this is a great time to buy.
I guess it always is.

Sep 9, 2008, 12:08:00 AM  
Blogger mountainwatcher said...

I just had a conversation with a pretty well connected mortgage guy.

He said that the situation reminds him of the last downturn.

It is very hard to get loans now.

The banks are requiring all of the documentation and proof of income etc. The criteria are very stringent.
Obviously, this is how it should have been all along.

I'm thinking this should put downward pressure on prices.

Anybody have an opinion?

Sep 13, 2008, 12:29:00 AM  
Blogger Lisa said...

"The banks are requiring all of the documentation and proof of income etc. The criteria are very stringent."

You cannot have bubble pricing and conventional lending.

But most sellers haven't digested this fact, which is why sales are in the toilet here in Marin.

I haven't seen anything locally, but the national MSM is at least starting to write about the connection between income & home prices, and rent and home prices, and how the bubble completely distorted these relationships.

I think one of the huge (and probably unintended) consequences of the F&F takeover will be that it will be next to impossible to get financing above the $729K limit. With the Feds admitting the market is in such shambles they had to take over the GSE's, what bank will want to touch any loan above the GSE limits? Who on earth would qualify for a $2MM house these days, unless they're paying cash?

Sep 13, 2008, 8:53:00 AM  
Blogger Jeffrey said...

Lisa is absolutely correct: prices will not stabilize until they return to their historical relationship to income, i.e., the median price will be 3 to 5 times the median income, depending on location. Google "median home price median income ration" and you will see all sorts of articles supporting this relationship.

Even the housing bears, however, assume that incomes will continue to rise, eventually supporting higher prices several years down the road. As a bankruptcy attorney, I have a more sanguine view for three reasons:

1. Real wages have been falling for years because Amercians now must compete with Chinese, Russians and Indians in a global market. This trend will likely continue until wages reach an equilibrium, i.e., our wages lower and theirs rise. We are still a far distance from equilibrium.

2. The boomers are now reaching retirement, meaning their incomes will drop significantly. Taking their place is Gen X. In blue collar jobs, Gen X workers are paid lower scale than boomer and have fewer benefits. If you want proof of this and are a boomer, just compare your children's likely starting wage with your own when you entered the workforce. Which is higher after inflation is taken into account (you can use westegg.com to quickly adjust any price for inflation, although keep in mind that its program uses the "official" cpi, which many believe is understated for political reasons);

3. Even if real wages remain flat, wage earners today have much higher costs for health care, education, insurance and retirement than wage earners historically have had to bear. For example, when my parents could afford to pay 300% of their gross income for a home in 1961, their payroll tax obligation was only 6%. Today's worker pays more than 15%. State income taxes, sales taxes, gasoline taxes are are similarly at higher percentages of income today than our parents had to pay. In other words, the average family has less income to devote to mortgage payments today than families did 30 years ago.

I believe the combined effect of these three factors will cause the ratio of price to income to fall to the lower end of the historical range, i.e., 3X or even less.

Sep 13, 2008, 10:49:00 AM  
Blogger Matthew said...

"You cannot have bubble pricing and conventional lending. "

Another astute observation by Lisa... exactly !!

This F&F bailout is vintage (current) America I'm afraid... Say what is needed to be said, facts be damned, to keep all the sheeple in line, but do what is necessary to keep the current party and insiders in power politically and financially... I watch much less news nowadays..

The good news in all of this (to me) is that it was another reminder that I need to worry about my backside, and only my backside, from here on out... Trust nobody... thank you REIC and Wall Street for clarifying this for me...

Thank you REIC and Wall Street for your assistance in building these nice, friendly abd supportive communities all over this country... Thank you for helping secure the financial freedom of so many.. Thank you for making it easier on our children to build a life for themselves in the future. Thank you for helping define the "American Dream". Thank you safeguarding the value of our hard earned dollars and for reinforcing the importance of working hard and saving for the future. Thank you for helping us all remember what really matters in this world.. Thank you for showing us all those higher level human characteristics that distinguish us all from apes and other animals..

Sep 14, 2008, 6:42:00 AM  
Blogger marin_explorer said...

"...it was another reminder that I need to worry about my backside, and only my backside, from here on out."

We might as well do that, since "The Maestro" and gang pumped liquidity for lopsided gains. The irony here is that when these parasites inevitably kill the host, their days of credit-fueled profits end too. Good riddance to the whole food chain that prospered off credit excess.

Matthew, I can only hope the "American Dream" will someday resume—which will necessitate much saner levels of consumerism and credit liquidity. I think we're at the end of an era of rampant consumerism, and it's anybody's guess where we go from here, but I expect a very hard ride.

Sep 14, 2008, 1:13:00 PM  
Blogger Matthew said...

Yes, Monday, Sept 15th, 2008... Another truly joyous and proud day to be an American middle class worker..

To the pea brain on this blog who argued incorrectly and ignorantly about 1.5 years ago that, despite the "pause" in residential real estate, commercial real estate and raw land would continue appreciating forever and ever, take that you nimbwit..

To the NAR / CAR and especially my favorite sleaze, Leslie A-Young, who now has incorrectly called the bottom 1/2 dozen times and recently warned all of us that "there won't be a cow bell at the bottom, ya know" and declared "show me one person who has regretted purchasing real estate in Marin County".. take that you sleazy, over-paid, lying piece of cow dung..

To Sir Alan the self serving, simple minded ex-Fed Chairperson who allowed debt and leverage to grow unabated on his watch, who lowered interest rates to near zero while inflation was raging out of control, who destroyed the US Dollar with his short sighted and failed polices and who even helped push and sell toxic mortgages for the sleazy mortgage industry, please, please, please get the hell off the air and go really retire into a quiet corner somewhere... you're making me really (really) sick to have to see your face on the TV touted as an "expert" on anything to do with financial markets.... yea, right.. paaaleeeze!!

Sep 15, 2008, 8:10:00 PM  
Blogger Matthew said...

Which firm is next ?

Looks like Washington Mutual is not long for this world at less than $2.00 per share after being over $40 less than 10 months ago.. ouch..

Cramer had Wachovia CEO on today, so that company can't be long for this world either.. Actually, I think the guy was just shopping his resume..

What about AIG or Citigroup ? or Bank of America now ? Hell with them, what about the US Government? hmmmm ?

When do you dump all your dollars because the US Gov't is insolvent ?

Do you think the current >$400B deficit is going to get better or worse ?

What about the interest payment on the $9.6T national debt ? How long can we keep that going, especially if the economy starts to shrink ? What will that do to the deficit ? hmmmm

Sep 15, 2008, 8:34:00 PM  
Blogger Jeffrey said...

matthew, let's not forget the Republican Congress of 2005, bought and paid for by MBNA, who closed the bankruptcy doors to debt-strapped middle class renters --- yes, the future homeowners that Leslie A-Young foolishly assumes will start buying homes next year. These poor 30-somethings are now indentured servants for life; their non-dischargeable credit card debt, together with their massive student loans, will keep them from ever saving the 20% down payment that tomorrow's lenders will once again require. I think it far more likely that the median home price over-corrects to the downside, something closer to 2.5x income.

Sep 15, 2008, 9:49:00 PM  
Blogger marin_explorer said...

"show me one person who has regretted purchasing real estate in Marin County"

Hehe...who in Marin would ever admit that--even if they're being crushed by debt? Major faux pas...admitting you really "belong" in an "armpit" area...you poor thing!

Sep 16, 2008, 12:01:00 AM  
Blogger Matthew said...

Jeffrey,

Ah yes, I forgot about the other half of the Wall Street Mafia's plan with the earlier changes to the bankruptcy laws.. thanks for reminding me..

There is no question that I have much, much more respect from the bank robber holding the gun and coming in the front door of the bank and letting everyone know his purpose and aim than I do these thugs and out and out criminals on Wall Street and the Fed.

Tell me that bank robber isn't more honest than the pieces of cr__ that we see each day on Wall Street... Stan O'Neil of Merrill Lynch, Richard Fuld of Lehman Bros, Alan Schwartz of Bears-Sterns, the POS who ran Fannie and Freddie into the ground while reaping millions themselves and all their collective coharts on the Fed and elsewhere on Wall Street have caused more pain and agony for the average middle class worker than 50,000 bank robbers (easily)..

Sep 16, 2008, 5:59:00 AM  
Blogger New Homes in the Carolinas said...

We were in such an unbalanced state before this "bubble burst", I hate to say it, but this was a necissary evil. The price declines will bring home levels down to a more realistic level, in line with historic rental/home price ratios.

Sep 16, 2008, 6:44:00 AM  
Blogger Lisa said...

"These poor 30-somethings are now indentured servants for life; their non-dischargeable credit card debt, together with their massive student loans, will keep them from ever saving the 20% down payment that tomorrow's lenders will once again require."

And it's not just the 30-something crowd...think of how difficult it is for most people to save money these days, given rampant inflation, higher health care costs at work, gas prices, etc.

"Hehe...who in Marin would ever admit that--even if they're being crushed by debt? Major faux pas..."

This may be the best one-sentence summary of Marin County on record. The competitive spend mentality here is just beyond beyond. And if you have to go into debt to maintain the "appropriate" Marin lifestyle, so be it. But with the House ATM shut down, we'll see.

And I saw a great line in one of Ben's article's yesterday, from the Rocky Mountain News but I'm guessing also applies to Marin:

“If you want to buy a $1.5 million home in today’s market, there is no loan program for you, unless you’re practically paying cash.”

Sep 16, 2008, 8:21:00 AM  
Blogger marinite2 said...

Re the F&F bailout:

This 'temporary' government intervention will probably go on for years, if not decades. This move proves that free markets have failed and that our government regulatory system has also utterly failed.

We shouldn't even pretend we have a capitalist society or even a democratic one since only a couple of individuals who are not democratically elected are wielding so much power over the economic lives of everyone in our nation and the world."

-- Ann Lee, adjunct finance professor at Pace University's Lubin School of Business in New York

Sep 16, 2008, 2:04:00 PM  
Blogger marinite2 said...

...And...

The government does not have a plausible exit strategy. Just as the United States has become addicted to artificially low interest rates, unable to raise them without seriously hurting the economy, we now have most likely permanently socialized a good portion of the real estate market and the economy.

-- Michael Pento, senior market strategist, Delta Global Advisors

Sep 16, 2008, 2:07:00 PM  
Blogger marin_explorer said...

...The government does not have a plausible exit strategy. Just as the United States has become addicted to artificially low interest rates

Nor does the American consumer have an exit strategy to a credit-pumped lifestyle. Yet here we are--supporting a nebulous "retail economy" that uses borrowed dollars to acquire baubles made elsewhere. What happens when the cookie jar is taken away--blame China or India for stealing our "quality of life"? I think the joke's on us--we willingly brought ourselves to this financial brink.

Sep 16, 2008, 4:27:00 PM  
Blogger bob said...

My take on it is that for we who want to have lower home prices and thereafter more stable home value and not the crazy see-saw machine of the last 20 years, this is perhaps one of the best thing to happen. Now that the US government is now in charge of not only Freddie and Fannie, but now AIG, a huge chunk ( in fact, a majority) of the home loan industry is now under control of the US government who will more so than the corrupt private sector who ran them before will seek to stabilize the housing market.

This likely means more reductions in home values, particularly in overpriced areas like California. It also means a stabilization or flattening of home values over the next few years. Ultimately, A return to an era of very conservative housing market performance. 3-4% annual appreciation.

Its quite obvious that large corporate financial companies are too risky and greedy to run themselves and the American citizen too stupid to manage their own financial decisions. That's sad but true. Now the Government has to play Mommy so that we don't eat ourselves to death with debt.

So I don't necessarily see it as all bad. had all of these companies been allowed to fail ( which from a moral perspective, they should've) the US economy would have likely fallen into a very serious calamity far worse than allowing the system to become nationalized.

Sep 17, 2008, 10:32:00 AM  
Blogger sf jack said...

Really?

You really think that government control of the US mortgage lending market will reduce house prices?

Some would say that US government involvement to this point has only increased housing prices.

I think I would agree with them.

Below is just an example of what greater government involvement in housing has done for us.

*****

REVIEW & OUTLOOK

SEPTEMBER 17, 2008

Barney's Rubble

Barney Frank didn't like our recent editorial taking him to task for his longtime defense of Fannie Mae and Freddie Mac, and the Congressional baron defends himself in his signature style here. We'd let him have his say without comment except that his "whole story" is, well, far from the whole truth.

Mr. Frank contends that he favored "very strong reform" of Fannie Mae and Freddie Mac, even before Democrats took over Congress after the 2006 elections. To adapt a famous phrase, this depends on what the meaning of "reform" is. Mr. Frank did support a bill that he and others on Capitol Hill described as reform. But on the threshold reform issue -- limiting the size of the portfolios of mortgage-backed securities (MBS) that the two companies could hold -- Mr. Frank was a stalwart opponent.

In fact, Mr. Frank was publicly arguing for an increase in the size of their combined $1.4 trillion portfolios right up to the day they were bailed out. Even now, after he's been proven wrong about a taxpayer guarantee, he opposes Treasury's planned reduction in the size of the portfolios starting in 2010, according to a quote attributed to him in this newspaper last week. "Good luck on that," he reportedly said. Mr. Frank's spokeswoman hung up the phone when we sought confirmation Tuesday.

The MBS portfolios have long been both the chief source of the systemic risk posed by the two mortgage giants and of the profits that so handsomely enriched shareholders and officers alike for decades. Without the extreme leverage inherent in those portfolios -- which the companies borrowed heavily, at taxpayer-subsidized rates, to accumulate -- their federal takeover might never have become necessary.

For years, Mr. Frank and other friends of Fan and Fred opposed not only bills written to limit the size of their portfolios, but any bill that in their view gave an independent regulator too much discretion to order a reduction. This was true of the reform that his House committee passed last year. Only when the White House caved to Mr. Frank and dropped its earlier insistence that a reform bill rein in the portfolios did Mr. Frank move his bill.

In his letter, Mr. Frank also repeats his familiar claim that Fannie and Freddie are vital because they support "affordable housing." This is political smoke. The awful irony of Fan and Fred is that they have done very little to assist affordable housing. Most of the taxpayer subsidy has gone to enrich shareholders and Fannie managers, as a 2003 study by the Federal Reserve shows.

Mr. Frank says he favored the disclosure of Fannie and Freddie compensation -- which is nice, but beside the point. The source of the rich pay packages was the Fannie business model that Mr. Frank fought so hard to protect. Instead of helping the poor, Mr. Frank was enriching Jim Johnson, Frank Raines, Angelo Mozilo and Wall Street.

If Mr. Frank thinks his "affordable housing" goals are so popular, he can always ask Congress to appropriate money for any housing subsidy he desires. But he knows those votes are hard to come by. It's much easier to have Fannie and Freddie take inordinate risks, even at taxpayer expense, so they can pay a political dividend called an "affordable housing trust fund" that politicians will disperse. In opposing genuine reform of Fan and Fred, Mr. Frank wasn't acting like a principled liberal. He was protecting corporate giants while hiding their risks from taxpayers until the middle class got stuck with the bill.

http://online.wsj.com/article/SB122161010874845645.html

Sep 17, 2008, 12:08:00 PM  
Blogger sf jack said...

I found this recent IJ article interesting.

It highlights the NIMYism rampant in Marin, the kind that seeks to preserve house values.

Fundamentally, their myopic greed causes them to ignore that there exist few things able to make their house "values" fade faster than a raging eucalyptus grove fire next to their houses.

Of course, the term "quality of life" is also used as a proxy for "my house value."

Also note that a final solution to replant in the area could certainly involve greater sums of federal, state or county funds, once again proving that nothing works to preserve local house prices like a little social insurance "policy".

*****

"When word spread months ago of a plan to wipe out hundreds of the towering non-native trees - familiar to motorists traveling along a stretch of Highway 1 - some residents of the Mount Tamalpais hillside launched a campaign to halt plans by the National Park Service and Marin County Fire Department.

'We're not saying eucalyptus are great trees,' said Peter Sorcher, whose view from his Erica Road home reaches across the marked valley. 'What people are not taking into account is how it's going to affect the quality of life here. They act as a big wind buffer and the fog gets caught up in there.'

... Rich Weideman, spokesman for the Golden Gate National Recreation Area, said the 22 to 27 acres of federal land were targeted by fire officials in 2006 because the trees pose a high fire risk in an area adjacent to houses. He confirmed that an Oregon contractor had offered to clear the land for free in exchange for the wood, but that logging plans have been put on hold after the community outcry."

From:

Eucalyptus tree removal riles Tamalpais Valley

Jim Staats

Article Launched: 09/13/2008 10:24:03 PM PDT

http://www.marinij.com/marinnews/ci_10459500?IADID

Sep 17, 2008, 12:39:00 PM  
Blogger bob said...

Well, look at it this way. The only way back to a healthy economy is getting the consumer to buy houses again. If that be the case, then obviously they can't afford today's prices without some sort of crazy financing. We see how well that went, with today being another gawd-awful day on wall street as a result of the continued fallout.

So... the most obvious action would be to enable more people to buy. That means either let the housing market wreck itself, initiate a sort of " new GI Bill" where we all can get rinky-dink little houses for cheep, or something more drastic.

Anyhow, that's my guess. What could possibly be the alternative? We have none left.

Housing HAS to become affordable again. Even the government hopefully by now knows this.

Sep 17, 2008, 1:31:00 PM  
Blogger Jeffrey said...

sf jack, I suggest you consider a few facts before believe the anti-Frank diatribe you lifted from the Wall Street Journal, defenders of the "financial innovations" that have bankrupted many companies and individuals to date.

First, F & F have been around for decades. During that time, home prices rose modestly every year and, as late as the early 1990's, were well within reach of most American families. Thus, it is impossible that the mere existence of F & F caused the home price bubble.

Second, home prices exploded after 1996. Take a look at the Case-Schiller stats or even the government stats of median prices and you will see the bubble started then. A logical mind asks "what happened in 1996 that had not existed before?"

1996 was the year that a Republican Congress, with Clinton's approval "reformed" the financial markets (after accepting large contributions from Wall Street banks). After the reform, Wall Street began securitizing home loans in competition with F & F. Its lobbyists also began a campaign designed to drive F & F out of the home lending business altogether so that Wall Street could increase its market.

In 2003, Greenspan, a Republican, drove interest rates to 1% and kept them there for over a year. Investors, looking for higher rates of return, were attracted to Wall Street's home mortgage products which promises rates higher than treasuries but with "implicit" government backing. In other words, the government's "implicit" guarantee allowed Wall Street, mortgage brokers, home builders, home sellers and other players in the home market to profit greatly from the increased liquidity and mortgage demand from investors.

To accommodate this flood of investor demand for home mortgages, Wall Street created all sorts of ludicrous products (ARM's, Option ARM's, 5/1) with teaser rates that everybody knew were temporary. A 2% teaser that increases to 8% in five years results in a mortgage payment increase of 400%. Mortgage brokers, a class of businesses that almost no state regulates at all, were employed to "sell" these products to unsuspecting buyers. "Everybody", meaning everyone in the home selling business (sales agents, lender, brokers, builders, title companies and Wall Street brokers) talked up the "benefits" of homeownership so much that zillow.com was born to help people keep track of their growing "wealth".

As Wall Street competed for investor funds, it created SIVs, CDO's, MBS and structures to increase leverage. This is because the actual profit margin on home loans is small, much like that of a grocery store. A small margin business can produce enormous profits, however, if it is leveraged. So Wall Street slice and diced the mortgages, created multiple tranches, had the ratings companies (who are dependent upon Wall Street for their income) "bless" the tranches with AAA ratings, and then sold them to hedge funds (and even "normal" companies such as AIG) that levered their assets 30 to 1.

Today we are witnessing "deleveraging". It has nothing to do with F & F, Barney Frank or any number of targets you may want to blame. It has to do with greed and corruption (as McCain noted yesterday) that was never regulated by the government (as Obama noted yesterday). Greed, corruption and regulation have always been with us and will always be with us. The pendulum swings from one extreme to the other, and today probably marks the end of unregulated Wall Street mortgage finance.

Sep 17, 2008, 2:09:00 PM  
Blogger sf jack said...

Here's a few facts for you, jeffrey, since you seem either ignorant of them or to have ignored them.

In 1996, Robert Rubin played a leading role in the legislative work you mention.

In the late 1990's, nearly the only region in this country that saw house prices grow dramatically (in bubble-like fashion) was the SF Bay Area. This was primarily due to the dotcom era, which provided funny money gains in equities and through company financing from the venture idiot community.

In 2004, none other than Alan Greenspan warned of the risks to the American economy of soon to be outsized GSE's that refused to accept possible regulation, including limitations of their portfolio size and operational behavior.

In the remaining years, the very top recipients of Fannie & Freddie's lobbying efforts, including Barney Frank and Chris Dodd (again, among others) repeatedly refused efforts by others in Congress to more closely regulate the actions of Fannie & Freddie in the American mortgage markets.

In this manner, millions of housebuyers in this country, a multitude of which could not in reality afford the house they were "buying", were able to "get in" because of affordability products enabled by Wall Street and other organizations, including Fannie & Freddie.

In part because of the GSE's implied government backing and their ability to purchase mortgages created by others, a mania was created that allowed unrestrained bidding for houses by those with little or zero true financial means, leading house prices nearly everywhere in this country to zoom beyond all historical measures of affordability.

*****

Every action the government has undertaken in recent weeks, save perhaps the FOMC's decision not to cave on an interest rate reduction this week, has appeared to focus more on supporting current house prices, rather than allowing a painful but healthy market correction.

As I mentioned earlier, I'm not optimistic this will happen. Unfortunately, supporting prices in any way will mean a longer economic downturn than otherwise.

I suppose time will tell.

Sep 18, 2008, 10:03:00 AM  
Blogger sf jack said...

Will the government continue to try and support house prices?

Perhaps they'll give up locally, for DataQuick has just reported figures for August.

The median house price in Marin dropped 25% year-over-year:

http://www.dqnews.com/News/California/Bay-Area/RRBay080918.aspx

Or:

http://tinyurl.com/4h6emz

Sep 18, 2008, 11:38:00 AM  
Blogger Lisa said...

Not only was the median down 25%, but foreclosures were 13.5% of sales in August, up 23% from the 11% figure in July.

Wow. Just Wow. And we have yet to see the bulk of AltA and Prime resets.

Sep 18, 2008, 12:00:00 PM  
Blogger marinite2 said...

Wow. Just Wow. And we have yet to see the bulk of AltA and Prime resets.

You said it Lisa.

I'll make a brief blog post about it when I get home from work tonight. Please save your comments for that post.

Sep 18, 2008, 12:08:00 PM  
Blogger Lisa said...

Marinite,

Don't forget to include something on Paulson's lovely plan to take on the banks' toxic paper. I'm just beside myself.

It goes to show, though, how close we are to the precipice of GD The Sequel.

Sep 18, 2008, 2:04:00 PM  
Blogger Jeffrey said...

sfjack, the facts you describe are not very relevant to our discussion and none of them controvert my post. To wit:

1. Yes, Rubin helped with the deregulation legislation. So what? Are we going to discuss what we should do about the problem or are you more interested in turning this into another "who lost China" blame game? Both Democrats and Republicans, in many ways and over many decades, contributed to the current crisis.

2. I don't know where you get the idea that home prices did not rise substantially throughout the country after the 1996 deregulation, and not just in the Bay Area. Take a look at this chart: www.swivel.com/graphs/show/28758010. Clearly, something happened in the last half of the 1990's that had nothing to do with F & F, which had been around for decades.

3. If F & F was such an obvious problem to Mr. Greenspan (a Republican), can you explain why he only issued an alleged "warning" but that a Republican Whitehouse and Congress who controlled the legislative and executive branch between 2000 and 2006 did nothing about it? Indeed, most economists now blame Greenspan not only for failing to regulate the mortgage business of banks, but of actually causing the crisis we now face; for example, this from Conde Naste:

"The current turmoil on Wall Street is largely a result of policy decisions he (Greenspan) made during his final years. By keeping interest rates too low for too long, he encouraged a borrowing-fueled speculative binge, which has now given way to a credit squeeze. By failing to crack down on the mortgage industry, he allowed subprime hucksters to peddle dubious loans, which the financial industry’s math whizzes packaged for investors. Coming on top of his role in creating the internet-stock mania a decade ago, the mistakes Greenspan made—now playing out in home foreclosures and hedge fund collapses—will surely color historians’ views of his long tenure, if not his own account of it.

5. If Greenspan was so prescient and aware of the problem he was creating, can you explain why he now says that economists can never see bubbles until after they pop, so it was not his to do anything about them. Doesn't this strike you as just another ass-covering statement of a political hack?

4. If Greenspan knew what was coming, why did he actively encourage Americans at the height of the bubble to switch from fixed mortgages to adjustible mortgages?

5. Your final point is correct because you concede that it was not F & F's loans but Wall Street's products that allowed buyers to pay too much for homes given the historical relationship between income and home values. That relationship was fractured by products that used deceptively low start rates and zero or 3% down payments, thus bringing millions of buyers into the market that otherwise would not have been able to buy a house. None of these products came from F & F because, by definition, "subprime" loans were those that did not meet the requirements of F & F. In short, the subprime crap that started our crisis was not the fault of F & F, Chris Dodd or Barney Frank, which is what your original post suggested.

Sep 18, 2008, 4:31:00 PM  
Blogger sf jack said...

Hey jeffrey -

Since there was so little in your last post I could reply to, and since you've most egregiously misunderstood the GSE's role in enabling the bubble (thereby greatly increasing house prices, an unintended impact of government activity, my original point) and the ensuing crisis, please at least see the below as an educational opportunity.

*****

With much less conjecture than you have managed to summon in order to believe there existed a bubble in US (national) housing in the late 90's due to financial deregulation, it appears you lack some ability to read and/or understand graphs.

The graph you link depicts a late 1990's rate of change in US house prices, according to Case-Shiller, that is not very different from the late 1980's. Note that neither period has ever been characterized as having a "national housing bubble."

To see this, I recommend holding a piece of paper over your screen to the right side of the small tick mark which marks the year 2000.

I also recommend doing the same for the mark at 1990.

Please also feel free to estimate where the year 2002 may be and see the rate of change in house prices in ensuing years, eventually showing a curve that many have ascribed as a "bubble period".

Thanks!

Sep 20, 2008, 4:18:00 PM  
Blogger Jeffrey said...

Hey Jack:

Yes, the bubble really took off after 2001. That is because Phil Gramm's deregulation allowing investments banks to create "innovative" mortgage products took effect as Senate Bill 900 in 1999, not 1996. Greenspan began lowering rates in 2001. And in 2004, the following deregulation took place:

"Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman."

Source: John Maudlin, "Thoughts From the Frontline" September 19, 2008.

Mr. Maudlin's article, by the way, provides a concise and, I believe, very accurate explanation of how the bubble was blown up by excessive leverage through derivatives and credit default swaps. It can be found at frontlinethoughts.com.

In our debate, you seem to want to blame F & F and I want to blame Wall Street. I believe that F & F alone could not have created the bubble because F & F has been around since the 1930's with no bubble. The bubble occurred after Wall Street's "innovative" financial products and leverage were introduced to what previously was a staid mortgage business.

But let's assume both were at fault. To date, the Congressional Budget Office and Paulson believe the F & F bailout will cost taxpayers $25 billion. On the other hand, Paulson is now asking taxpayers for $700 billion to bail out Wall Street's bad mortgages. In addition, he was given $85 billion for AIG and the Fed has been loaning hundreds of billions more to banks in return for pledging their bad mortgage debts.

In short, Wall Street's sins, entirely a creation of the unregulated free market, will cost you and me many times more than the sins of F & F. That is why I originally cautioned you from taking articles from Wall Street's main mouthpiece, the WSJ, to argue public policy. It's like asking a wolf how best to guard the hens.

Sep 21, 2008, 8:01:00 AM  

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