Fannie And Freddie

[jyl]

No discussion about Fannie and Freddie here?

These GSEs are a lot more important, and dangerous, than $200 oil.

If I recall right, FNM/FRE are behind 80% (?) of new mortgages being written now. And 50% of existing mortgages. If they cease functioning, there goes the housing market. So they cannot be permitted to fail.

But supporting FNM/FRE would be potentially a $1.5TR (?) liability to the US govt, if things go south.

BSC experience tells you that, if govt forced to intervene, they will make sure FNM/FRE shareholders are wiped out, management too. As it should be.

I can see why FNM/FRE shareholders are bailing out.

[Rick Lee]

Fannie and Freddie used to be two of the hardest places to get a job. I wonder how that's going now.

[turbo6bar]

You musta been sleeping when I posted.

I read a lot, and this is the one thing that has frightened me big time (housing)

Allowing Fannie and/or Freddie to fail is not an option. The housing market would go into an ice age. Transactions would fall off the cliff and prices would plummet EVERYWHERE. Let's not think about the fallout to the economy.

Let this be a reminder the credit crisis is NOT over. It's far from over, folks.

[Porsche-O-Phile]

Personally I think one or the other of them is going to fail to the point they'll need a bailout, which I'm opposed to.

[jyl]

Pre-market both indicated down almost -50%. Remarkable times we are living in, market-speaking.

[s_wilwerding]

No one seems to grasp what life would have been like without Fannie/Freddie. Without them, we never would have had the runup in prices and the speculation - legit companies kept doing it because they knew that they could sell their mortgages to FF and that they would be government guaranteed (let alone that FF sold a lot of subprime mortgages themselves).

If there were no government support of the housing market, private companies wouldn't have taken the risks that they took, and it's quite likely we wouldn't be in this situation now.

Yet another example of government involvement doing the exact opposite of what it was supposed to do.

[JeremyD]

It's dark times for the housing and the underlying credit markets.

People see the value of their house and think - hey - I don't have as much equity as I thought I did. The bigger repercussions are in the underlying credit markets.

Without credit - the way of life for most individuals and companies cease to exist.

[jyl]

The BSC debate all over again. Is it a "bailout" when shareholders are wiped out and top management are all fired with their options worthless, while lower-level employees remain and the company continues functioning?

Regardless, it doesn't matter if it is "right" or "wrong", it will have to be done. If necessary, the govt will have to step in and keep FNM/FRE going. You can not have 80% of current mortgage lending just stop, and 50% of existing mortgages plunge in value. That way lies depression.

(And not a "mental one", as per Phil Gramm.)

[Porsche-O-Phile]

I disagree.

80% of mortgage lending has ALREADY stopped. Honestly, I wish the gubmint would stop monkeying around in stuff it has no reason to be monkeying around in. Let FF/FM fail. They made their beds, they should lie in them. Fair, honest, simple. If that means that the credit markets go crazy for a while, it's a small price to pay in the grand scheme of things to restore sanity and honesty to a supposedly "free market" system.

The government's ONLY role should be in trying to line up potential buyers to contain losses, if they can find any. If dollar #1 is spent on any sort of bailout, I swear to God I'll vote against any and every incumbent politician in the next five elections just to purge their stupidity from the rosters.

[jyl]

Obviously incorrect.

Existing home sales most recent month appx 480K vs same month 2006 appx 670K (eyeballing chart) so down -30%.

-80% from here would take it to <100K.

Hard to imagine what home prices would then be. And impact of rest of economy including financial system.

You're an architect, right? Your livelihood ultimately depends on bank lending. How do you feel about picking strawberries for a living? :-)

Originally Posted by Porsche-O-Phile

80% of mortgage lending has ALREADY stopped.

[Porsche-O-Phile]

We're involved in commercial (not residential) work. We routinely round-file applications from opportunistic residential "designers" who only did Type V residential work for the last 5 years (and believe me, we see plenty of them). By contrast, the guys that get consideration are the ones with significant commercial building experience.

While commercial lending might take a hit too, a lot of companies are simply going to need services regardless of the price, so there's always work out there in the proper sectors. Retail is a little shaky right now, but health care, civic (schools, libraries, police & fire stations, etc.) and other sectors are much more resilient to economic cycles, so we're probably okay. I'm a little anxious, but not worried. Worst case if the bottom entirely fell out a la 1929, I go overseas for a few years and ride it out in an area that's doing well (Dubai/UAE, Shanghai/China, Doha/Qatar, etc.) I have a LONG list of "Plan B, Plan C, Plan D, Plan E, . . . scenarios).

If you're good at what you do, there's almost always a place at the table to eat. The guys who are getting drilled right now are the ones that "piled on" to the residential bandwagon expecting the gravy train to last forever.

I still oppose the use of public monies to fund/bail out the stupidity that has become the norm in home mortgage lending. Let the free market fix itself. Eventually players will emerge that are willing to take ACCEPTABLE risks and things will turn around. The only people that need suffer in this are the ones who frankly deserve it - the ones that bought way beyond their means and the fools that backed them. I see no reason whatsoever to use our tax dollars to rectify the idiocy they created.

[Aurel]

I say let us bomb Iran, let FF/FM fail and elect Obama. Life is boring right now.

Aurel

[sammyg2]

Originally Posted by Aurel

I say let us bomb Iran, let FF/FM fail and elect Obama. Life is boring right now.

Aurel

If we bomb Iran we won't make to the next election.

[jyl]

In a FNM/FRE worst-case situation, the banks will stop lending for all construction, whether commercial or residential, whether private sector or public sector.

Originally Posted by Porsche-O-Phile

We're involved in commercial (not residential) work.

[jyl]

Weekend stories by WSJ and Times (UK) say that govt considering injecting $15BN capital into FNM/FRE, via issuance of preferred stock. Funding mechanism would be designed to wipe out existing shareholders.

[jyl]

Here is an interesting post on a blog that I read sometimes, by a fixed income pro (I think)

Maybe it's another drill

This is the first time in my career that I truly believe U.S. Treasury bonds sold off on credit concern. By this I mean, the credit of the U.S. Government. Long time readers know I'm not an alarmist type, and I'm sure not saying the United States is going belly up, but credit default swaps on the United States of America moved 11bps wider today (from 9bps to 20bps). The 10-year Treasury moved 15bps higher. All on a day when people are scared ****less and there should have been strong demand for "risk-free" assets.

[jyl]

FNM and FRE bonds are some of the most widely-held fixed income investments. Practically everyone has some. In a "money market" fund, even if nowhere else.

[turbo6bar]

If the world markets shun US treasuries and agency backed securities, we might as well bend over and kiss it goodbye. I'm bearish, but this is apocalyptic.

[MattAlpha]

Wayne,
Thanks for the links. Amazing read...that really goes into the details that I haven't been able to read elsewhere.

When I moved to Monterey back in 2005, my wife and I sold our house in VA and thought we'd have enough money in the bank to allow us to buy a nice house in CA. That was until we started looking in the Monterey area. Our mouths virtually dropped when we saw the prices that relatively crappy houses were selling for, $500k for a 2 bed/1 bath shanty with no yard for an example. So we decided to rent instead. Just so happens that my next door neighbor happened to be a Realtor (pretty successful too). So I asked her about the market and told her that I felt it was very over inflated and I was sure that it was going to collapse in a couple years if not sooner. Her response was there were only so many homes to buy so the price is higher because of the demand (trying to compare it to the precious metals market). I told her what I felt about that in a nice, respectful way (she really nice and living next door). I still stuck to my view of the certain collaspe, she stating that the market would may plateau, but never collaspe. About six months later, early in 2006 I met another Realtor at a PCA AutoX event. He went down that same party line.

I'm fairly well educated, but I really have no business or investment background beside my personal experiences. This collapse seemed obvious to me by applying common sense to the situation that was developing. Is greed really that blinding to the general populace? Scary...

-Matt

[jyl]

Especially because there is no practical way to get clear.

In the typical 401k plan, what is the most risk-averse choice you can make? Usually, a money market fund. What's in most money market funds? Check the prospectus . . .

Originally Posted by turbo6bar

If the world markets shun US treasuries and agency backed securities, we might as well bend over and kiss it goodbye. I'm bearish, but this is apocalyptic.

I previously was not worried about a Fidelity or Schwab money market fund breaking the buck. But if FNM/FRE go south, I would be worried.