Wednesday, April 20, 2005

Without Government Backing, No One Will Loan?

In congressional testimony the head of Fannie Mae said that without the GSE's bundling of mortgage backed securities, and the "implied" US government backing, the Chinese and other major buyers would likely halt purchases.

"'Fannie Mae "has drawn in billions of dollars from investors abroad to expand the availability and lower the cost of housing for low- and moderate-income Americans,' Mudd said. 'It is not at all clear that those foreign investors would place their money in the U.S. housing market without the predictability and convenience provided by' debt issued by Fannie Mae and smaller rival Freddie Mac."

After months of posturing, we may finally be getting down to brass tacks, which could be why the markets are in trouble.

This line causes one to question who is in charge. "The two companies have for years fended off congressional attempts to crimp their privileges or rein in their operations." It is more probable that congress didn't try too hard as the members enjoyed the easy money.

34 Comments:

At 4:39 PM, Anonymous Anonymous said...

I heard two analysts interviewed today that both said they didn't understand what was holding the market back. They said that yes, there was inflation but the FED rate was low, oil prices have stabilized and earnings were good if not great. They didn't see why the DOW pulled back 100+ points.

They specifically said they figured something was about to happen or something unseen was acting on the market.

My guesses are:

a) consumers are out of cash
b) Fannie Mae risk
c) nobody trusts the bond market and US dollar
d) consumers are worried about their RE investment and have pulled back their stocks.

???

 
At 4:42 PM, Anonymous Don said...

The correct answer is:

e) all of the above.

 
At 5:04 PM, Blogger dryfly said...

If you are going to have the equivalent of 'financial utilities' then you had better have aggressive regulation...

Either that or not mind the occassional financial equivalent of Chernobyl...

 
At 5:45 PM, Blogger John Law said...

Wall Street always cries potential poverty when they are going to be regulated.

 
At 6:26 PM, Anonymous pb said...

I'm thinking MZM/Adjusted Monetary Base, per Gary North

 
At 6:34 PM, Anonymous Anonymous said...

http://globaleconomicanalysis.blogspot.com/2005/04/transaction-value-of-new-and-existing.html

"I'm getting 3-10 contacts a day from people seeking "hard money" loans for their flipping deals. They ask for "hard money" because they have ravaged credit, and zero cash. I have a difficult time explaining to these would be flippers that nobody in their right mind would pay the appraisal price they are shoving at me. Seriously, the only use for some of the absurd appraisals I am seeing is for use as emergency toilet paper if someone runs out of it. The fact is that some of the properties people want to buy with zero% down at full "appraised value" have been sitting for sale without success for 6 months. This does not ring a bell in the heads of these would be flippers.

We are in territory we have never seen before with Jorge," said Ezra Katz, chairman and chief executive of Coconut Grove-based real estate investment firm Aztec Group. "There is no precedent anywhere in the 34 years I have been in real estate. I have never seen anything of this magnitude or production.

Perez said he has socked away loads of cash and carefully selected properties that are either near the water or in a city center. Such sites, he contends, will not dramatically lose value in a downturn. And if need be, he said, he can rent rather than sell units until prices rise to new heights."

 
At 6:38 PM, Anonymous Anonymous said...

http://globaleconomicanalysis.blogspot.com/2005/04/transaction-value-of-new-and-existing.html

"I'm getting 3-10 contacts a day from people seeking "hard money" loans for their flipping deals. They ask for "hard money" because they have ravaged credit, and zero cash. I have a difficult time explaining to these would be flippers that nobody in their right mind would pay the appraisal price they are shoving at me. Seriously, the only use for some of the absurd appraisals I am seeing is for use as emergency toilet paper if someone runs out of it. The fact is that some of the properties people want to buy with zero% down at full "appraised value" have been sitting for sale without success for 6 months. This does not ring a bell in the heads of these would be flippers.

We are in territory we have never seen before with Jorge," said Ezra Katz, chairman and chief executive of Coconut Grove-based real estate investment firm Aztec Group. "There is no precedent anywhere in the 34 years I have been in real estate. I have never seen anything of this magnitude or production.

Perez said he has socked away loads of cash and carefully selected properties that are either near the water or in a city center. Such sites, he contends, will not dramatically lose value in a downturn. And if need be, he said, he can rent rather than sell units until prices rise to new heights."

 
At 6:45 PM, Blogger PunKtilious said...

CPI is .6, which market sees as a sign that inflation is alive and well. The media hype and market makers are doing their best to influence the herd of sheople that the party is still going. Meanwhile, interest rates will continue to rise to levels approx 3.5 - 4.0 by year-end. Ain't nothin anyone can do about that. The market is on edge.
You can feel the tension in the markets everyday, its as if they are reaching for any news which would actually convince the Fed to not raise rates. Anything to help the party continue.
There is nothing anyone can do to save the housing market now. The bell tolls.

 
At 7:00 PM, Anonymous Anonymous said...

http://modbee.com/local/story/10343040p-11148391c.html

Here's a fun little article about housing prices going up 25 cents a minute in Central California, and the real estate folks are getting nervous:

"I remember in 1993 seeing mile after mile of vacant lots in Tracy," said Isbell, recalling the real estate downturn that lasted from about 1992 through 1998.

"It almost feels like a house of cards," Cogdill warned.

She said that since the University of California started building its new Merced campus, investors have poured into the county, buying homes and turning them into rentals. Heller said there are 240 to 260 empty homes waiting to be rented in the county.

Merced County, in fact, has one of the nation's highest percentage of homes purchased by investors, according to the research firm LoanPerformance.

In 2004, 17.5 percent of the homes bought in Merced County were purchased by investors. That's more than double the national average of 8.7 percent.

 
At 7:01 PM, Blogger John Law said...

(CPI is .6)

remember, this number is controlled! it's probably higher.

 
At 7:18 PM, Anonymous Anonymous said...

You are doing a good job. It is so nice to see a blog that is neutral without all the bs.

 
At 7:26 PM, Blogger PunKtilious said...

Will the walls come falling down?

http://www.economist.com/agenda/displayStory.cfm?story_id=3886356

 
At 7:59 PM, Anonymous Insignifcant said...

Once the bubble pops and its clear the gov will not backup Fannie & Fredie, this is an ideal time to roll out a "new" mortgage backed security: With enlistment in the armed forces very low (too low) wouldnt it be quite convienient for the gov to offer (force) huge housing enlistment bonuses to homeowners and speculators stuck with prpoerties that have lost extensive value? With the new bankruptcy bill signed there may be no other way out for some. What else would 320,000 patriotic ex-GM & Ford workers do (those who have spouses working elsewhere and keeping the income up enuff to not qualify for solvency)? They are already skilled and highly regimentated.
Im seeing both motive and opportunity for the gov to create this "new" gov backed mortgage security. Do you think? Maybe thats why it is no problem to loan to any body who has a pulse, especially the new immagrents.
Those guys who say the Fed is doing this on purpose suddenly seem not so outlandish.

 
At 8:47 PM, Blogger Ben Jones said...

(Those guys who say the Fed is doing this on purpose)

Without going into a motive, I think it's kind of obvious the housing bubble is known to the Fed. They know they caused it. I am sure they rationalize it with "we had to save the economy".

Recessions are natural things, they restore balance. That's what should follow.

 
At 9:18 PM, Anonymous Anonymous said...

"Severely reducing the companies' portfolios could hurt the housing finance market and cut off billions of dollars from foreign investors who help make housing more affordable for moderate-income Americans"

http://biz.yahoo.com/ap/050420/mortgage_giants.html?.v=8

So foreigners are buying MBSs. I suspected it but this is the first time I've read it. I wonder how many of those investors know what they are in for ?

Not only will Joe American stop buying foreign products because he is broke, he is going to default on their bonds. Even if he does pay, it will be with a deflated dollar. That cure foreign investors of their US$ appetite for a while.

Foreigners should be able to see this, yet they just keep buying our bonds, extending it further and further. Fools !

Everyone thinks the US dollar is the safe haven. Can't they see what is going on here ? Why in the world would you buy US MBS bonds ? Don't investors read the news ? Don't they watch the spreads ? While we can blame Joe consumer for not having the brains to stop taking on more and more debt, we can also blame foreign investors for being stupid enough to buy US debt instruments at ridiculously low yields and spreads ! I won't feel bad for them either.

The US dollar is not a safe haven. GOLD is a safe haven. Nobody can print GOLD !
Maybe gold won't appreciate by 3% every year, but it also won't depreciate by 25%.

 
At 9:23 PM, Anonymous Anonymous said...

"Foreigners should be able to see this, yet they just keep buying our bonds, extending it further and further. Fools!"

The silver lining of this whole thing is that in the end, all the Asian central banks are going to get the screw job they so richly deserve.

 
At 9:53 PM, Anonymous Billy The Kid said...

Foreigners should be able to see this, yet they just keep buying our bonds, extending it further and further. Fools !

I don't think individual foriegn investors are fools. They are not the buyers. The buyers of the MBS paper are the Asian central banks. They buy it for political reasons to keep unemployment down. If unemployment rises too high then their governments are in for serious problems, they may even collapse. Not to say it couldn't happen here...

I think we are basically in an economic death grip with the Asian central banks. The grip can't be held forever and when somebody let's go we are all falling off a cliff.

 
At 10:07 PM, Anonymous Anonymous said...

When I think about Fannie Mae and Sallie Mae, it makes me laugh all this propaganda that some Americans make about private enterprise as the main motor of the US economy. These two entities finally were just good old state socialism dressed in a more subtle form. It's ironic how things are. State socialism à la USA used to finance wild private speculation. Personnally I think Fannie Mae and Sallie Mae were corporate bums that abused the taxpayers money to do anything. And the whole world will pay an incredible price for a weird and strange socialistic experiment run amuck.

 
At 5:00 AM, Anonymous Anonymous said...

Foreign central banks (particularly China's) have been buying mortgage-backed securities in large quantities for a while. They purchase these securities and Treasury bonds in order to keep their currency exchange rates low relative to the US, making their exports more competitive.

 
At 7:31 AM, Anonymous Anonymous said...

Asian central banks or no, boosting employment or no, keeping their currency low or no, this is an extremely stupid situation. We are running huge deficits. Greenspan, like him or not, is screaming that they must be addressed. Consumer debt capacity is at its limit and the housing market is ready to crash.

WHY DO THE CENTRAL BANKS KEEP BUYING OUR BONDS ?

Are they just stupid or is there some long term master plan that I don't see ? I'm beginning to think that they are trying to get the US to be extremely indebt before they let the Rembi float and move in to buy everything ?

Obviously the US cannot continue like it is, with more and more debt, less and less manufacturing, inflation and no change in sight. Or can it ?

I just don't get it.

 
At 8:06 AM, Blogger Ben Jones said...

(the whole world will pay an incredible price for a weird and strange socialistic experiment run amuck)

A good way to put it. Thanks for the comment.

 
At 8:46 AM, Blogger John Law said...

central banks are buying our bonds

because they have too
because it helps them develop their own internal economies

 
At 9:00 AM, Anonymous Anonymous said...

To top it off, mortgage rates are falling.

http://money.cnn.com/2005/04/21/real_estate/weekly_rates/index.htm

 
At 9:02 AM, Anonymous Anonymous said...

"because it helps them develop their own internal economies"

The problem with that is that it isn't sustainable in the long run. How long can they both give money to their customer and supply them with goods ? At some point the cycle has to break.

 
At 9:02 AM, Anonymous Anonymous said...

Central banks buy for a few reasons:

1. If they didn't buy, their currency would go up. This is particularly an issue for China because they have a currency peg, and if there is too much pressure, bad things happen.

2. If they reduce the amount of credit available to Americans, that will directly reduce their exports.

3. There isn't really anyplace else right now to put their cash, of which they have too much. China already has 50% of GDP coming from internal investment, which is way higher than Japan or Korea had at their peaks. If they leave the money in their own economy, they are going to drive inflation like crazy, and they already have a housing bubble of their own. They could invest in Europe or the rest of the world, but they just take the money and send it back.

 
At 9:44 AM, Anonymous Anonymous said...

I understand reasons #1 and #2. The problem with them is that they are not sustainable. Either they are really stupid or there is a bigger master plan here. I have to think it involves putting the US into bankruptcy.

WRT #3, there is always GOLD.

 
At 9:46 AM, Blogger John Law said...

(The problem with that is that it isn't sustainable in the long run. How long can they both give money to their customer and supply them with goods ? At some point the cycle has to break.)

they steal the manufacturing base from the high-wage countries.

btw- someone told me the other day that clinton and NAFTA were the reasons for job loss, HA! I think even Mexico has been losing jobs to China. I think everyone has.

 
At 9:55 AM, Blogger Ben Jones said...

John,
It's true that Mexico has been losing jobs to Mexico. Hundreds of plants have closed and moved. Nafta isn't helping the US, the WTO is even worse.

 
At 10:19 AM, Anonymous Anonymous said...

Asian banks are buying gold too, but it doesn't do much to accomplish #1 and #2.

What benefit is it to the Chinese Communist party to put the US into bankruptcy? If the US declares bankruptcy, there's a trillion dollars worth of bonds that are worthless. Not only that, but their export economy would tank, leading to a depression. Given that the Chinese Communist Party doesn't believe in communism any more, I don't see why they would go through all of this just to risk a revolution by all the out-of-work factory workers it would produce.

The reason they are still buying is the same reason any lendor keeps lending to a big debtor... they know they will be worse off if they stop, and they are hoping something else will come along to bail them out.

 
At 10:23 AM, Anonymous Anonymous said...

So what is China's end game to all this ? Are they stupid or is there a master plan ?

The only way this continues is for the US to run larger and larger deficits and for China to keep buying US dollars. It can't go on forever, unless it suddenly becomes irrelevant how much debt people have. That only happens if the interest rate goes to zero.

BTW: what happens if China goes into a recession and doesn't have the excess cash to buy US dollars ? What if Chinese citizens lose their zeal to save and start spending and stop buying the US dollar ?

Once again, me thinks China is going to lend to the US until it is broke and then suddenly let the rembi float and then move in to buy US assets. That is the only scenario that works to describe their actions.

 
At 10:30 AM, Anonymous Anonymous said...

"What benefit is it to the Chinese Communist party to put the US into bankruptcy? If the US declares bankruptcy, there's a trillion dollars worth of bonds that are worthless. Not only that, but their export economy would tank, leading to a depression. Given that the Chinese Communist Party doesn't believe in communism any more, I don't see why they would go through all of this just to risk a revolution by all the out-of-work factory workers it would produce.

The reason they are still buying is the same reason any lendor keeps lending to a big debtor... they know they will be worse off if they stop, and they are hoping something else will come along to bail them out."

First of all, the prudent banker won't loan to a customer like that.

Secondly, the bank will keep lending while they think the situation will get better some day. HOWEVER, when the bank doesn't see the situation getting better, it will pull the loan and boom, the customer is done.

China is playing a very, very dangerous game here.

There is no denying that inflation is taking place in China and the US. And the US has no choice but to fight it with higher interest rates. And that is going to kill housing and that will kill everything else in the economy.

The game is over for China. It is just a matter of how swiftly the market reacts. Right now everyone is still sleeping.

 
At 11:19 AM, Anonymous Anonymous said...

This may be a fairly minor point and it doesn't diminish what any of you are saying but Japan is by far a bigger lender to the US than China is. Whatever is true of China is true of Japan multiplied by 5.

 
At 12:03 PM, Anonymous Anonymous said...

This is a great article.

http://wallstreetexaminer.com/?itemid=740

paste begins

The only thing supporting the real economy in the US is construction. Even at that, the break-neck pace of building we have experienced over the last 4 years (spurred primarily by low interest rates morphing into a full blown mania) has had to be supplemented by tax cuts and massive increases in mortgage debt. That fuel has been spent and we're now coasting toward our rendevous with fate. All that fuel failed to get us out of the grasp of gravity. Our coasting seems poised to turn into a flaming re-entry, culminating in a spectacular crash of the charred remains into a Vinyl Blight subdivision somewhere in Iowa.

The Real Estate mania has forced prices so high that now even with interest only ARMs and zero down, the pool of buyers who can afford the most basic houses in most markets has continually shrunk. The market has virtually exhausted what was once viewed as a bottomless barrel.

I knew 5 years ago when the Nasdaq crashed that the Fed would fight the necessary purge with everything they have. I had no idea they would go this far. What might have been a relatively brief V-bottom was not to be allowed. Instead they urged us all up higher on the mountain. We are at the pinacle now and there can be no gentle descent. No parachutes will be provided for the next leap of faith. Only those that refused to climb the mountain will survive, and they will have a tough time avoiding being crushed as the "leapers" come raining down.

Make no mistake, there is no safe place. The Fed's (and the other little Central Banks) credit bubble has fully engulfed our little orb. When the leapers in the US begin piling up on the valley floor, every economy on the planet will succumb. Everything you see around you is a debt induced illusion that will, with a puff of smoke, disappear.

paste ends

 
At 5:52 PM, Blogger deb said...

Great article on renting vs. buying in Sacramento.

http://www.sacbee.com/content/home/real_estate/story/12761886p-13613161c.html

We sold our LA suburb home in July, stashed the money away, and are renting. We pay $2800/mo to rent a house that would sell for over a million. It's a good deal for us, but boy was it hard. The emotion of being out of the market has been almost more than I can take. This blog helps me keep the faith that I am intellectually correct to not dump our money back into this insanity.

I must be one of those "sheeple" at heart, because I feel the herd calling to me every day, telling me I am going the wrong way. I try to remember that, in fact, we are following the smarter path. Harder than I ever imagined!

 

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