Wednesday, September 10, 2008

Where is the Garbage?

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.

Copyright 2008 All rights reserved

22 comments:

Anonymous said...

Jim,

Will the govt. really let any of the "too big to fail" banks fail? Why not just keep loaning them money, forever and ever? Didn't Japan use this method after their late 80's correction? And didn't we criticize them for it? Now it looks like we may end up doing the same as Japan. Hypocracy...

Anonymous said...

11:31pm Anonymous here again:

Let's take it a step further. Why don't we just have the govt. buy all the foreclosed homes?!? Heck, even more brilliant, why not have the govt. buy ALL homes for sale, at the artificially inflated prices we saw at the peak of the bubble! This would keep the housing market healthy, it would keep all of the realtors, mortgage brokers, appraisers, etc working. Gotta get people back to work! It would also allow people to be able to get back on the HELOC express again, leading them to start consuming again (cars, big screen t.v.s, furniture, etc). Plus, we wouldn't have to see all of these unfortunate victims of the housing correction have to sell their homes for a loss (it breaks my heart). I'm going to send this idea along to the experts in congress, the Fed and the treasury. I'm sure that they will love my idea...

Anonymous said...

One thing missing from the mortgage "relief" legislation was relief for honest, hardworking homeowners who are paying their mortgages.

Now if you or I try to refinance, we can't. Either our equity position is worse and now requires PMI or the interest rates are so high that it makes no sense.

Why can't the government provide a low rate 30 year fixed mortgage to people who have demonstrated ability to pay the mortgage on time.

The savings would eventually hit the marketplace and provide a boost and perhaps prevent further foreclosures.

In other words..."Where is my cookie?" Everyone's gettin' a cookie but me...Wall Street, Homeowners that took too much risk, soon to be more...but now me.

Where is my cookie? (and the tax "rebate" doesn't count).

Susan said...

Ugh, I can't take this madness anymore. I'm tired of what's going on in the government right now. They knowingly let all this happen, even after Ameriquest got hit with that huge 'predatory lending' lawsuit a few years ago. Did they probe other lenders for the same? If they did, it was awfully slow. Too little too late.

watchtower said...

Jim
I've read where the Congressional Budget Office says that the Fan/Fred bailout will have to be included in the gross national debt.
In your opinion, if this happens, do you think that it could affect the U.S's AAA credit rating?
Could this be one of those tar baby consequences?

Jim in San Marcos said...

Hi Anon 11:31

To the people in charge, they might just end up doing what you suggest in jest. They have bought everything so far that threatened to tank.

Jim in San Marcos said...

Hi Anon 8:28

I think that the real issue for most of the homeowners in trouble, is that they paid too much for too little. The government can't do much about that.

Probably the homeowner who walks, gets your cookie and then some. Live high on the hog have a party and walk away.

Then we all get to suffer, what a deal.

Thank you for your comments.

Jim in San Marcos said...

Hi Susan

The government is like a baby sitter that turns the kids loose to do whatever they want. After a few become road kill, they figure that they had better do something.

When everyone is making money, the government is kept out of the loop. Once the losses are apparent, the government is expected to do something.

Just don't expect too much from your elected officials, and you won't be dissapointed.

Thank you for your comments

Paco Bell said...

I ain't no conspiray theorist but this might eventually qualify US to become thee most socialist nation on earth if the goverment of the people also owns everything (even the people).

Just sayin...

Jim in San Marcos said...

Hi Watchtower

I think that the real guide to our rating is the interest rate we pay on T-Bills. Its pretty damn low, so it looks like the rest of the world is in worse shape than we are.

I am really befuddled by the current rates, why put money in the bank at 3% with inflation at 10%.

This is how 1929 played out, spend it, it isn't going to grow in a bank. I think what we are noticing is the lag time between perceived interest rates and real rates. People will smarten up when they find out that they have lost most of their money in non insured investments.

Thank you for your comments

Jim in San Marcos said...

Hi Paco

You could be right,that would make us a super Banana Republic.

I tend to think that if they print enough dollars, they can ruin us all (Retirement wise).

The real irritating thing is that we will have two political parties blaming each other for the mess.

Thank you for your comments

Paco Bell said...

Jim-

I just recently turned 51, and so with retirement visible on the horizon that is my main concern (and so far I've controlled the conniption fits): that events will proceed and response will be the dollar will be inflated until it resembles the peso. All of a sudden it'll be holá El Republico Plátano, hasta la vista capitalismo.

Maybe the bankers banker would never do his buds like dat, but if China wants to foreclose on US, there might not be an alternative.

And by the time Joe Six-Pack wakes from his nap/teevee trance and takes a look around to see what's become of the place, it'll be too late.

Worst case scenario: nothing left in my 401(k)'s or IRA's ("stolen"), reduced or no Soc Sec benefits, same- Medicaid.

Ah what the hell, judging by the number of coffin dodgers in the shops during the day, we're all living too long anyway!

I'm Not POTUS said...

Hi Jim,

I just marvel at the confluence of misfortunes. The GSE's carry mortgages under $417k. The vast majority of these are located in the lower priced homes in the fly over states, you know the "Red States". The coastal blue states are at the mercy of everyone except the GSE's.

So this sets up a situation where, if the collapse happens before the election the pain will be biased to the blue states on both coasts.

I wonder what that does to the polling numbers. I would assume it would be in the vested interests of the administration to prioritize the bailing out of their friends in wall street.

djrichard said...

Jim, what would be a "tell" to indicate that what you're extrapolating is indeed happening? I.e. that the Fed starts using the GSEs as a dumping ground for bad debt (in bailing out banks).

If the Fed is going to establish such a precedent, I imagine they would do it with Lehman.
Would the Fed be able to do that under the cover of darkness?

BTW, nice job in pulling the thinking together. I've seen speculation on this in other forums, but nobody was really pulling together the different pieces of it like you have.

Jim in San Marcos said...

Hi Djrichard

It's really hard to say. The Fed is writing the rules as they go. I never thought I'd see them stop short sales in the market and they did.

Guaranteeing the GSEs, upgrades a lot of the paper the Banks hold. That gives them more breathing room.

Using the GSEs as a dumping ground seems very pragmatic. The Fed has a blank check when it comes to Freddie and Fannie. I think if they close a few more banks, the Fed has to ask Congress for more funds.

My line of reasoning was if Congress can use Social Security taxes for the budget, it's only a small step to transfer bad bank loans to the GSEs. Call it creative financing.

Probably the Fed will blackmail one of the bigger banks to "assimilate" Lehman over the weekend.

The real unsettling thing here is that the Fed is rewriting the rules and an investor can lose a lot of money when that happens. You can't go out and "head shoot" a companys prefered stock and legally get away with it. But, there have been no complaints as of yet.

Thank you for the ata-boy. Hope this gives you some insight to my reasoning.

Jim in San Marcos said...

Hi Im not Potus

It could be an interesting election. Once you lose your home to foreclosure, you're no longer a rich Republican, you're now a poor Democrat.

Kidding aside, most of these people that are losing their homes probably haven't re registered to vote.

I don't see the election being held along political lines. This election is more of a popularity contest. Joe Biden (Democrat VP nominee)would look horrible in a dress.

Thank you for your comments

Jim in San Marcos said...

Hi Paco

I see your worst case scenario playing out for real and I'm 10 years older than you. So I'm close enough to touch the SS retirement bennies, but I'm not going to quit my job, I have good Private health insurance.

Joe 6 Pack will lose nothing, he has nothing in the bank.

Right now the Fed is trying everything it can think of to keep this scenario from playing out. I kind of mock them, but they are trying their hearts out to save our bacon. I don't think they have a chance. You need real money for a bail out. Sadly we cannot print our way out of this.

The thing to look at, is that there are 3 problems here. Housing foreclosures, liquidity with financial institutions, and retirement benefits that haven't been funded properly.

Calling this a "Perfect Storm" sounds so nice. In reality it's a damn disaster and we are stuck with front row seats.

Thank you for your comments

Jim in San Marcos said...

FYI

Here is a program I use when blogging other sites that comes in handy called iespell

When you finish typing out your comments, highlight them all and right click and select Check Spelling.

It's free and well worth using. I throw this tip in from time to time, I'm not gigging anyone on spelling.

Paco Bell said...

Lehman might need a life preserver over this weekend, but the elephant in the room is MaMu.

By all the reports I've seen, they're going to need TWICE what the FDIC has in reserve, and make Indy Mac look like a dinghy.

Then what? They'll have to run to Treasury for mo' money.

At some point the gravy train has to end.

& just think, I'll live to see it in my lifetime!

Jim in San Marcos said...

Hi Paco

If Washington Mutual is that big, the Fed will have to ask Congress for more money.

They might be tempted to say no. After all Congress needs to gather votes for the next election. Giving money to the Fed doesn't do that.

Anonymous said...

This is all event driven now. Over the last 25 years the compounding of excess, corruption, ignorance, greed, etc... and over the last almost 100 yrs Keynesian economics, government interference in business, income tax, and pushing problems forward has resulted in this. The government and Fed will do everything possible to avoid BK, and they may be able to manipulate with inflation, credit, bailouts, nationalizing, etc. and keep it all going for a bit longer. We'll have inflation (and maybe hyper-inflation) and then begins the deflationary cycle (heck people, that is what happens when bubbles burst--bursting bubbles are deflationary, and the deflation is just being held off by inflationary measures (a weak attempt). Wait until the Boomers hit social security, medicare and start withdrawing from their 401ks and brokerage accounts... bye bye stock market (the final nail in the coffin). Wait til the govt has to renig on all of its pension and entitlement obligations. Some of you old guys at least had practice with the 1930 depression... us youngin's are wet behind the ears. Get ready, assets will become worthless, cash will be king, businesses that supply staples and necessaries will be what will keep you afloat. I'm liquidating my portfolio for cash to infuse into businesses and fast deals. Gonna make and amass as much cash as possible. When everything bottoms out it will be time to build a new portfolio (apartments, boarding houses, grocery stores, etc.) I'm not gloom and doom, I'm gloom and boom. Am I wrong?

Jim in San Marcos said...

Hi Anon 1:49

If you realize what is happening, you can prepare for it.

I would suggest that cash isn't a bad idea in deflationary times, but if the Fed buys everything is sight, you might want to hold some hard assets like real estate or gold. It's an all or nothing call when they roll the dice if you're 100% in cash. Diversification spreads your risk.