Monday, May 02, 2005

GSE's To Congress: It's Your Bubble

Amidst the noise about a new regulator, the discussion in congress turned to the most important question. "William Batz, COO of the Federal Home Loan Bank of Pittsburgh, said any action Congress takes that could weaken the 'implicit guarantee' that Washington would bail the government-sponsored enterprises out in a crisis could ultimately raise housing costs."

The easy money provided by the lenders hasn't raised housing costs? Anyway, without that guarantee, the GSE's doors would close.

"Thomas Lund, interim head of Fannie Mae's single-family mortgage business, said the portfolio is critical to Fannie Mae's ability to ensure liquidity in the secondary market. He said people right now are 'fooled' by the high liquidity of the mortgage market, driven by low borrowing rates and strong buyer demand."

"That will dry up. "We just need to make sure that as we go through this legislative process, people realize that this is not the environment that we're always in."

"Our portfolios and our guarantee business are really there to bring funds from other parts of the world into our housing industry and make sure that we keep this industry liquid in good times and bad."

30 Comments:

At 3:36 PM, Anonymous Anonymous said...

When he says that it would raise housing "costs". Doesn't he really mean that it would raise the cost of borrowing? Or am I reading this wrong.

 
At 3:42 PM, Anonymous Anonymous said...

I've read a lot here about Fannie Mae and Freddie Mac, but nothing about Ginnie Mae. Can anyone explain the differences between these three entities, and whether Ginnie Mae is also at risk right now? I have a lot of money in a Ginnie Mae fund so this is important to me. Thanks.

 
At 3:43 PM, Blogger John Law said...

the GSEs get a break when it loans money from teh gov't. it's like 0.5% or something. I assume he means those higher borrowing costs would go to consumers.

 
At 3:52 PM, Anonymous Anonymous said...

"I assume he means those higher borrowing costs would go to consumers."

If that is the case, then would not higher borrowing costs push down housing costs.

 
At 4:00 PM, Anonymous ChrisH said...

No...

because as we all know -- Real Estate NEVER goes down! ;)

 
At 4:32 PM, Blogger Ben Jones said...

I haven't looked into Ginnie Mae, sorry. I would be cautious about any GSE, even Sallie Mae because they seem to be run so poorly. Good luck.

 
At 4:55 PM, Anonymous Anonymous said...

We'll see whether or not interest rates keep going up. In my personal experience, I know a lot of people living on the edge, it's why I think both the rise in gas prices and the rise in interest rates is having more of an effect than they had before. Less people are buying SUVs and it looks like less people are buying houses.

Interestingly, in my area, everybody is selling (though they're no longer selling right away). Trying to get in on the action while the market is still warm. After that, who knows?

 
At 5:11 PM, Anonymous Anonymous said...

I think hyperinflation is the best way to solve the housing problem, as long as the wages keep up with the inflation, we'll all be fine.

Just create 50% annual inflation for 5 years, everything will be 7.59 times more expensive, except houses, as the FED would then hike rate close to that too, The rate hike will freeze the RE market. as no one will be able to afford any mortgage. Then the next step is pushing 50% annual pay increase for everyone. By doing this for 5 years, everyone can afford a house of $2M, as median family income will be $600K.

The best thing about this is all the debts we owe become insignificant.

We then solve two biggest headaches the FED is facing.

 
At 5:20 PM, Anonymous Anonymous said...

A "bubble" is when somebody willingly buys something that's obviously overpriced, because the price is still rising, and they know that they can sell it even more overpriced tomorrow --- to somebody else who willingly buys it overpriced, who also knows that the price is still rising. It's a self-sustaining system... until...

The "popping" of a bubble is what happens when some external event happens to force the price down a little. Then the price isn't rising any more. Then nobody's willing to buy the overpriced item any more. Then, all of a sudden, the last guy who bought it overpriced is really sorry he did, because now the price is crashing back to its normal level.

 
At 5:20 PM, Anonymous Anonymous said...

Either that or just default by issuing a new currency and declaring the old one null and void, effective immediately. We've already done it twice, in 1933 and 1971...

 
At 5:25 PM, Anonymous Anonymous said...

Since I'm still renting in this overpriced Los Angeles market, I say bring down those housing prices - with all due apologies to Los Angeles who already own their homes. But if housing prices do fall by 30%, I'm buying.

 
At 5:59 PM, Blogger John Law said...

taking silver out of coins entirely in 1964, don't forget that!

the main problem I have with a pure fiat standard is to save yourself from inflation you have to risk you money- like in bonds, stocks or some other investment. if you own gold and silver, you own something. it's not at risk. an ounce of gold is always an ounce of gold.

 
At 6:03 PM, Anonymous Anonymous said...

"people realize that this is not the environment that we're always in."

What is this guy smoking ??? I mean, there isn't anyone anywhere that thinks mortgage rates will ever go above 6% or that houses will appreciate by anything less than 5% per year.

It seems to me that these guys are out of touch with what is actually going on.

 
At 6:08 PM, Anonymous Anonymous said...

The dreaded 'implicit guarantee'. If FNM was a non-GSE, it would have dropped like a stone, with all the recent contraversy. For now, the implication looks pretty solid.

 
At 6:09 PM, Anonymous Anonymous said...

As 4:55 Anon said,,,"A lot of people are living on the edge...rising gas prices...etc."

As Canadian economist John Kenneth Galbraith stated, there is usually a "triggering event" to create a bust. "They don't end with a whimper. They end with a bang."

I believe this may be it.

 
At 6:35 PM, Anonymous Anonymous said...

"It seems to me that these guys are out of touch with what is actually going on."

Yes. I could not agree more with you. But that is the mentality of it all. It one of the biggest self denials I have ever seen!

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

Off their website:

http://www.ginniemae.gov/about/about.asp?Section=About

At Ginnie Mae, we help make affordable housing a reality for millions of low- and moderate-income households across America by channeling global capital into the nation's housing markets. Specifically, the Ginnie Mae guaranty allows mortgage lenders to obtain a better price for their mortgage loans in the secondary market. The lenders can then use the proceeds to make new mortgage loans available.

Ginnie Mae does not buy or sell loans or issue mortgage-backed securities (MBS). Therefore, Ginnie Mae's balance sheet doesn't use derivatives to hedge or carry long term debt'

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

Ginnie Mae Web Site:

http://www.ginniemae.gov/about/about.asp?Section=About

 
At 7:15 PM, Anonymous Anonymous said...

Ginnae Mae is backed by the full faith and credit of the United States Government, just like Treasury bills. There is nothing to worry about, other than rising interest rates. GNMA is not that big and is mainly concerned with low-income housing.

Fannie and Freddie are NOT backed by the full faith and credit of the US Govt, and so there is a good possibility that the government will repudiate there debt. This would not affect the credit rating of the federal government, though it would teach people to read the fine print more carefully. Suckers!!!!

 
At 7:18 PM, Blogger TulipsAllOverAgain said...

Ben, the FDIC report is a truly awesome find. I was a little less bearish after reading the first one (although skeptical that they were truly getting the numbers right). What a difference 3 months (and an extra year of data) make! It will be interesting to see how Greenspan et al word their cautions on the old chestnut that there's no national real estate bubble. I wonder what percentage of the country lives in the 55 "boom" metro markets. Much to pick over in that report, a mandatory read for all drawn to your blog.

P.S. The link to post from the FDIC article doesn't work for me (a first).

 
At 7:24 PM, Anonymous Anonymous said...

"I wonder what percentage of the country lives in the 55 "boom" metro markets"

The 55 boom markets probably account for 60-70% of the nation's population. So much for the crap that there is no national housing bubble.

Ben - I also couldn't post to that link.

 
At 7:44 PM, Blogger Ben Jones said...

Thanks for the note about the link. It works for me but I put up an alternate link to the FDIC main page in the same post.

 
At 7:47 PM, Anonymous Anonymous said...

The link to post comments on the FDIC article is working now.

 
At 8:16 PM, Anonymous Anonymous said...

Just create 50% annual inflation for 5 years

Ahahahahahahahahaha (Falls down laughing).
Ok, so we let the bond market pay for all this Japan and China are going to absolutely love that. Nobody will ever buy Treasuries again. Hyperinflation has been financial suicide everytime its been tried. Bernanke and Greenspan have Hubris but I don't think they're dumb and Hyperinflation is Dumb.

 
At 9:38 PM, Anonymous Anonymous said...

Don't know when it's coming, but everybody who's buying or selling seems to be thinking about it here in New York.

Me, I finally talked my wife into cashing out ... hopefully the check clears before it all comes crashing down. We had no choice, though, considering we're in a 1-bedroom and twins arrived in October. It would take a lot more courage to leave a house that actually worked for us.

For sure, I'll be one of many cheering when the bubble bursts, considering it's the only way we'll ever be able to stay in Manhattan, short of hitting the Mega.

But the rental market's no bargain, no matter what they say. Today, we saw 2 dark 2-bedroom apartments and one extremely noisy one, with rents ranging from $2,550 to $2,775.

Maybe I could commute from Columbus?

 
At 9:52 PM, Anonymous Anonymous said...

The nation's home builders have said it, the Realtors have said it, and Alan Greenspan has said, in no uncertain terms: There is no such thing as a current or impending house-price bubble.

What a relief. Does that mean the stock analysts and CEOs and everyone else who said there was no Internet bubble a few years back were right after all? Y'know, the whole thing where the economy no longer has that whole up and down cycle, but is just stuck on "up" forever? That's a relief!

 
At 10:11 PM, Anonymous Anonymous said...

After the tech and telecom bubble burst:

Greenspan himself weighed in on the matter, claiming that there was no way for the Fed to have deflated the stock market bubble without risking an unnecessary recession, and, moreover, that they weren’t even really sure that there was a bubble until after it burst.

so what are we to believe.....Greenspan claims he can't see a bubble then assures the public that one isn't or hasn't formed in housing....

my experience has been to view the FED and its rhetoric as disinformation rather than information....

1996 Irrational Exuberance = stock boom

1999 New Economy / New Era = stock crash

the only mandate of the FED is to inflate credit period. where that inflated credit goes the fed can't control....stocks, bonds, commodities, housing....

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

"1996 Irrational Exuberance = stock boom

1999 New Economy / New Era = stock crash"

I'd like to add one to the list:

2005 Greenspan's "Conundrum" = housing bubble or bust?

This is the man who insists there is no housing bubble, the Fed couldn't detect one even if there were, and it's not even the job of the Fed to combat asset bubbles.

 
At 10:27 PM, Blogger John Law said...

I've noticed nobody wants to say something is too expensive(meaning a bubble) but every day someone will say a stock or something else is undervalued...

 
At 8:44 AM, Anonymous Anonymous said...

9:38 PM Anon,

Try hoboken... cheaper... more space...

 

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