Most of Fannie’s and Freddie’s loans were of the 80/20% variety or 80% with PMI. The biggest loan that they could have written in California would have been 417K. The 20% down or second would have been 104K. Out here the last 2 years, 521K wouldn’t even get you a house with indoor plumbing. Most of the stuff in this area was going for 600K to 1.2 million at the peak. So there are a lot of interest only loans that Fannie and Freddie couldn’t touch that were sold to "someone."
Add all of the real non GSE loans together and try to give it a name, it won’t be Freddie or Fannie. There is a lot of stuff floating in this swamp; HELOC’s, second trust deeds, interest only loans and other stuff with a bad fish smell. Billions of dollars worth of real estate in foreclosure are managed by local banks for owners unknown, that can’t even follow through on a short sale.
For a joke, assume 9 out of 10 banks in California are insolvent (Ben might snarf his coffee on that one). The FDIC is in no position to fiddle with foreclosures. The Feds look at the banks balance sheet and if it doesn’t pass, they’re toast, the bank will close.
Until the other day, the Fed had no structure in place to process foreclosed real estate loans. What's stopping them from transferring bad home loans at a failed bank to Freddie and Fannie? This is pure conjecture on my part. The Fed could use the GSE’s infrastructure to unwind the bad real estate loans held by failed banks. Guarantee the junk, throw it out and if it comes back, nothing lost, the Fed was already stuck holding the bag. This could add liquidity to the market, oh goodie!
One thing is very apparent. A tremendous number of loans have been written that have nothing to do with Freddie and Fannie. This doesn't even include outright fraud which could double the size of this mess. But yet only 11 banks have failed? Common sense suggests that this is absurd. Two of the biggest real estate conduits have been taken over??? And the banks had no part in it? Then there was Bear Sterns and Countrywide; they are long gone and forgotton. All of these institutions were upright solid pillars of the community one day and bankrupt the next. Do you get the idea that we are being supplied with "very selective" information?
The government guarantee has taken the risk out of mortgage securities. Fannie and Freddie are going to be force fed new loans to “stimulate” the housing market. That’s probably why they were taken over in the first place; they stopped buying the real crap (if the GSE’s don’t buy it, the Fed gets to eat it when they close the banks).
The Fed confiscated Freddie and Fannie and everyone that had a short position got paid 6 dollars a share. Of course if you owned the stock, it was your 6 dollars that got kissed good-bye. After an event like that, why own any bank stock? The rest of the world probably feels the same way towards U S real estate paper. This is their second chance to get out. It didn’t take a hurricane to create this mess, but just look at the damage.
The smell of garbage is real. August 8th I blogged about how Freddie and Fannie faced bankruptcy in the distant future. Now Bloomberg runs an article saying how obvious it was. I contend it wasn't a damn bit obvious until last Friday, plus the article has very little real anchorage in fact. The GSE's have a problem that is in the future. The Banks have a garbage problem that encompasses 70 to 90 percent of the banking complex TODAY. This crap is on their books and it isn't going away. Fannie and Freddie are country bumpkins compared to this crowd named "Slick" and "Double Dip." The banking system is on the verge of imminent collapse.
Of course there is no reason to start a panic; it would just make things worse sooner. The real problem is, foreigners are liberating their capital back to the motherland. (How can that be?)
Here's hoping that your medical plan allows for "Mind expanding drugs." You'll need something to cheer you up as things get worse.
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