Friday, April 29, 2005

Moody's To Examine "Government Related Issuers"

The credit rating firms Moody's and Fitch have had a vague stance regarding the likelyhood that Fannie Mae or Freddie Mac will be bailed out by the US government. "Senior debt ratings...include an assumption of support from the US government that would be provided in the event of severe financial stress".

"If there was a major problem in their ability to issue debt, then the government would have to step in in order to support not just the GSEs but the overall economy as well," Fitch said at the time.

Yesterday, Moody's undertook an effort to formalize the matter and that's a good thing, considering the worlds economy hangs in the balance. "Moody's Investors Service announced today that it plans to examine ratings on various government related issuers (GRIs) by midyear."

"'The Application of Joint Default Analysis to Government Related Issuers,' The guidelines represent an elaboration and systematization of the rating agency's prior approach to rating issuers with full or partial government support. They take explicit account of each GRI's baseline default risk assessment, the supporting government's default risk, an estimate of default dependence between the two entities and the estimated probability of government support."

The list of organizations at the bottom, under US, includes:

Federal National Mortgage Association
Federal Farm Credit Banks
All of the Federal Home Loan Banks
Federal Home Loan Mortgage Corporation
Resolution Funding Corporation..This is what's left of the RTC.


At 7:34 AM, Anonymous Renter in Howard County, MD said...

Ben, I'm a regular reader of your blog, and I appreciate the time and effort you put into it.

Here's an article I just came across about the bubble in the suburbs of Baltimore, MD, where I live (Jay Hancock, "Empty homes might be undoing of speculators," 24 April 2005):,1,600246.column?ctrack=2&cset=true

For reference, here are the home price histories for Howard County, MD, showing that, in less than four years, the median price for single-family homes is up 79% and the median price for condos is up 113%:

My wife and I moved to this area less than a year ago, and I convinced her that we should rent in order to save our money until the ratio of home prices relative to rents decreases to a reasonable level. Needless to say, everyone around us thinks we're crazy to rent because we're "missing out" and because "prices will only go up."

At 8:24 AM, Anonymous Renter in San Diego County said...

It's freinds that think renters are crazy that make this BLOG possible.

How about a bumper sticker, "Friends don't let Friends Rent"

As for any notion of a bailout of the Fannie or Freddie, I kind of feel like us renters are already bailing them out by no being able to deduct rent from our taxable income.

At 8:55 AM, Blogger Ben Jones said...

howard county renter
Do you have a subscription? Maybe you could post some of the article?

SD renter,
Your right, we bail out Fannie everyday.

At 9:01 AM, Anonymous Anonymous said...

I think the big thing about Moodys starting to rate all this debt is to assign ratings to it and I suspect those ratings are going to be less than flattering.

I'd like to know what sort of foreclosure rates it would take to have some debt end up as junk. GM is going to junk status and maybe Ford. Add in some RE debt and you've got a financial crisis.

At 9:13 AM, Anonymous Anonymous said...,1,600246.column?ctrack=2&cset=true
(the article posted above)

Jay Hancock

OK, NOW WE HAVE a housing bubble. How do we know? Real estate professionals, who aren't even allowed to think that homes might be, uh, overpriced, are publicly worried.

Speculators snapping up homes they won't live in and may not be able to rent have given the market a new tier of foam and raised chances it will all end badly, pros say.

There is "a growing presence of investors or speculators or whatever you want to call them, especially in hot housing markets," says David Seiders, chief economist for the National Association of Home Builders. "I don't think we've ever had to deal with something of this magnitude before," he adds, or if they did, it was long ago and unmeasured.

The Home Builders are so concerned they just ordered a survey to try to track "investor activity." The figures aren't yet published, but builders see speculation spikes in places such as Florida, Las Vegas, the Northeast - and Maryland, Seiders said.

The Home Builders Association of Maryland polled 20 contractors for its part of the project. Executive Vice President John Kortecamp saw several surveys before they got sent to the national association, and each one reported investor buyers. One builder said investors made up 20 percent of his sales.

"Everybody's somewhat surprised by it," Kortecamp said. "This very strong market has lasted longer than most strong markets, frankly. There is a great deal of sensitivity as to how long it will last and how long it can last."

Although metropolitan Baltimore home prices have risen 50 percent on average since 2002, Kortecamp thinks Maryland's growing economy and government employment base will keep its housing market "in decent shape for a sustained period" compared with other places.

Not everybody is so sure.

"I have people calling me [saying], 'I want to get into real estate. I have 15 grand,' " said Dan Carpenter, an insurance professional who lives in Ellicott City and owns a handful of townhouses and condos in metro Baltimore. "Everybody is buying, and I don't think they're knowing what they're getting into. And they're buying with minimum money down. It could just explode."

Carpenter is careful to invest in less-crazy areas such as Catonsville or nearby Pennsylvania. He requires prospective rent to cover his mortgage plus 12 percent, and he works hard to keep properties occupied.

But many investor homebuyers appear unconcerned about tenants, cash flow or basic economics. They seem to expect prices to keep rising and the heck with supply, demand or the notion of assets producing income.

Long & Foster home agent Debbie Latona-Adams recalls when professional listing services showed only a few dozen condos, houses and townhouses for rent in Howard County, southwest of Baltimore. Last week she counted more than 200.

"Everybody is buying them for investment," she said. "They're all for rent. You can't hold onto these things [without tenants]. The idea is for the renter to pay for them. But that's not happening. There's too many of them."

Vacancy statistics for rental houses and townhouses are hard to come by, but an increase in Howard County rental houses would suggest that investor exuberance has hit Maryland.

At least the Howard County landlords realize they need occupants. That's apparently an advanced concept for investors in some markets who simply hold onto vacant houses and wait for capital gains, Seiders said.

Sometimes homes aren't even built before they change hands. "It's rampant speculation," said Seiders, who added that in some markets builders are trying to quash speculation by requiring buyers to remit $50,000 of their profits back to the builder if they sell within a year.

Buying homes as investments rather than owner-residences has become big enough that the National Association of Realtors has also started tracking it, reporting that such sales accounted for 23 percent of all homes purchased last year. Vacation homes, another category, were 13 percent.

The association doesn't think there's a speculative bubble, however.

"Speculative activity - the data doesn't support the premise that there's very much of that at all going on," said spokesman Walter Molony, saying the survey showed only 3 percent of homes being resold in less than a year.

But that was last year. This is now, and "we feel more exposed now than ever," says the Home Builders' Seiders.

Speculators can destabilize any market by bidding prices to unsustainable levels. Fed Chairman Alan Greenspan has said a housing bubble is less likely than the 1990s stock bubble because homes are harder to buy and sell than, say, stock, and most people acquire houses to live in, not make quick money.

But if the housing day-traders truly have arrived, look out. With big mortgages, scarce tenants and an eye on net worth, they'll be even more eager to sell on the way down than they were to buy on the way up.

At 9:39 AM, Blogger Ben Jones said...

Thanks Renter in HC,
That's a great article!

At 10:04 AM, Blogger deb said...

"Moody's downgraded its bank financial strength rating on Fannie from A- to B+..."

I don't know much about ratings, but B+ does not seem very high for an entity that supposedly has the backing of the US Gov't. I assume this is a different rating that the rating on Fannie's debt. If anyone knows what their "bank financial strength rating" would be, please explain. Thanks.

At 11:08 AM, Anonymous Anonymous said...

9:13 AM anon,

That's an excellent article... also... everyone, please take note that the rep from the NAR couldn't even acknowledge that speculators are a part of this market... they are in complete denial...

At 12:29 PM, Anonymous Anonymous said...


>"Moody's downgraded its bank financial strength rating on Fannie from A- to B+..." I don't know much about ratings, but B+ does not seem very high for an entity that supposedly has the backing of the US Gov't. I assume this is a different rating that the rating on Fannie's debt. If anyone knows what their "bank financial strength rating" would be, please explain. Thanks.

Scroll to page 38.

I don't know how up-to-date this chart is, because I don't see Moody's A- on there, but you'll have a good laugh over what their B- means.

I'll look around Weiss' site and see if I find a more recent chart.


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