The Continuous Housing Free Fall
Government Bailouts Are Only Stop Gaps
By Charles R. Morris
07/07/2008
| 13 Comments
Financial markets have finally internalized the brutal fact that house prices still have a long way to fall. The full-year price drop in 2007 was 8.5 percent. From January through April of this year, the most recent data available, prices fell by another 8.2 percent -- a remarkable rate of acceleration.
Can they fall further? Unfortunately, yes. By conventional ratios of prices to rental values and prices to incomes, they may still be 20 percent too high.
Falling asset values have a way of turning free-market avatars into raving Socialists. For example, the housing rescue bill currently working its way through the Congress has Bank of America’s fingerprints all over it. But while the rescue bill gets all the attention, much bigger bucks are already in play.
Start with the "Government-Sponsored Entities," or GSEs – Fannie Mae, Freddie Mac and the Federal Home Loan Bank Board. These are private-sector stock companies created by the federal government, and they enjoy certain tax and other privileges. While they have no legal claim to government support, everyone believes that the government is the de facto insurer of their debt.
Fannie Mae and Freddie Mac, which are by far the biggest of the GSEs, are a mess -- both financially and operationally. Freddie is leveraged 50:1, which means that it has two pennies of capital supporting every dollar of risk exposure. It is desperately in need of new capital. Now it claims to have lined up an additional $5.5 billion; but it has been forced to delay the closing, because it hasn’t been able to register the shares with the Securities and Exchange Commission.
Fannie and Freddie had once been exempt from SEC registration. But after a series of early 2000s accounting scandals, Congress insisted that they register. Fannie has done so. The fact that Freddie is still stuck in the process suggests continued accounting issues.
Collectively, Fannie and Freddie lost more than $5 billion in 2007, and Fannie had another blowout $2.5-billion loss in the first quarter. Freddie had a far smaller first-quarter loss, but the improvement is almost all accounting gimmickry. Fannie has completed its capital raise and, though still shaky, it has substantially lowered its leverage ratio. Until Freddie completes its capital raise, it is a pure financial basket case.
Almost as soon as the credit crisis hit last summer, however, Fannie and Freddie were quietly anointed as the twin engines of a bank bailout. The numbers involved are big. In the fourth quarter of last year, the annualized rate of home mortgage borrowing was about $600 billion, a sharp drop from previous years. But the GSEs’ rate of mortgage lending jumped to $1.2 trillion, or twice as much.
The same thing happened in the first quarter of this year. Home mortgage borrowing dropped to only $321 billion annualized, but the GSE lending was again twice as much, $655 billion annualized. Where did all the extra money go? To absorb existing mortgages from banks, of course – a fine example of the charitable works supported by taxpayer dollars.
The Federal Reserve Bank has been doing its part here. Over the past six months, it has created a plethora of lending programs that essentially provide banks with Treasury securities in return for illiquid paper -- like subprime mortgage-backed bonds. A good guess is that of the total of $500 billion in bank assets absorbed by the Fed, about $200 billion, are backed by subprime mortgages.
These are instruments that sell for, at most, 60 cents on the dollar on the open market -- if any buyers can be found. But the Fed takes them off bankers’ hands at 98 cents on the dollar. The silk tie and vintage wine industries need help too.
Or consider the Federal Home Loan Bank of Atlanta, which might be dubbed "Countrywide East." Home loan banks provide liquidity to mortgage lenders by advancing cash in exchange for mortgages. Nearly one-third of the Atlanta bank’s lending, or $46 billion, has been to Countrywide Financial -- perhaps the most notorious of predatory lenders. Since its mortgage portfolio is in a state of collapse, it was recently picked up for peanuts by Bank of America. But the Atlanta bank was sufficiently confident of the integrity of Countrywide that it maintains no loss reserves against its Countrywide loans.
But that’s ok now, since BofA just bought Countrywide, right? Er, no. The merger proxy makes clear that BofA doesn’t accept any liability for Countrywide’s debts.
Which brings us to the Congressional bailout bill (pdf) -- which is set to provide $300 billion in new money so the Federal Housing Admin. can exchange expensive, inflated mortgages for traditional fixed-rate mortgages at more realistic values.
Good idea. But the catch is that the banks will choose the mortgages they want to exchange. Despite some toothless language to prevent "adverse selection," what mortgages do you think the banks will be volunteering? Any bets on the loss rates? 50 percent? 60 percent? Did we mention that the FHA lost $4.6 billion last year, so it is already in Fannie and Freddie red-ink territory?
The final rub-your-nose-in-it charade is the claim, supported by the Congressional Budget Office, that the new bailout program will make money for the taxpayer. How will it manage that feat? By imposing charges on Fannie and Freddie!
In other words, as Fannie and Freddie careen toward insolvency, they are charged with financing a new bailout program, which will just be added to the taxpayer’s final Fannie and Freddie insolvency. If Enron had been as ingenious, they would still be in business.
The sad fact is that all these programs, well-meaning as many are, are hopeless. House prices doubled from 2000 through 2005 – an unheard of 12+ percent per year rate of increase. There were no demographic or economic drivers for the housing boom. It was cooked up entirely by the banks from financial fakery and outright fraud. And they extracted enormous rewards from their misdeeds.
There are many ways to help homeowners without saving the banks -– like forcing the conversion of toxic mortgages into market-value rental contracts in bankruptcy courts. Instead, we could well waste trillions, with no result except to create a zombie industry based on false prices that will delay a true recovery for years.
We did much the same thing in the early 1980s, when the problems in the savings and loan industry first surfaced. A decade later, it all went onto the taxpayer books at 10 times the cost. History repeats itself, as Marx said, the first time as tragedy, the second as farce.
Charles R. Morris, a lawyer and former banker, is the author of "The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash." His other books include "The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould and J.P. Morgan Invented the American Supereconomy" and "Money, Greed, and Risk: Why Financial Crises and Crashes Happen.”
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© 2007 The Washington Independent
Comments:
Posted 07/08/2008 10:52am with
What we have here is a case of blatant fraud (and worse), committed by the Fed and the Banks – and allowed by (Non)Regulators. Is this just a combination of greed and stupidity – or is something more sinister at work? The origins of the present and coming disaster (Grand Depression) can be traced back to the ‘Death by 1000 Cuts’ interest rate policy of the Fed – led by Sir Alan Greenspan and then by his apprentice, Whirly Ben Bernanke (now seeking greater powers for the Fed, so that he can complete the job of complete destruction of the American economy).
The Greenspan & Bernake Demonic Duo are NO DUMMIES when it comes to Depressions – studying them and creating them. These guys are brilliant, not stupid. The Grand Depression they engineered is on its inevitable way to every American – not just Subprime homeowners!
Is there a Gameplan behind these diabolical policies? You betcha! It’s part of the Gameplan that includes PNAC, the ‘War on Terror’, attack and occupation of Iraq, 9/11 and the looming attack on Iran (offering an ideal diversion for Americans caught in the throes of Financial Armageddon).
Cui bono from the above policies of the Bush government, which is willing to shed any amount of American blood and treasure for the benefit of ‘Greater Israel’? Care to guess?
Posted 07/09/2008 02:12am with
What does Ben Bernanke get out of orchestrating the next Depression? I’m not disagreeing with you, I’m just curious. You elude to a smoke a mirrors approach—diversionary tactics to pull the wool over the eyes of the public, but I still don’t see what Bernanke gains from collapsing our economy. Can he just be a pawn? Smart people can also be very stupid.
Posted 07/12/2008 06:06pm with
What is afoot here is beyond the interests of any one individual who is a member of the Cabal. In addition, some who serve the Cabal are coerced or bribed into servitude. If they fall ‘out of line’ a little later on or have 2nd thoughts, there are proven ‘ways and means’ for the Cabal (and its katsas or sayanim) to deal with them. The most prominent examples are JFK, RFK, Arafat and Wellstone. What the Cabal does when they find someone whom they want to ‘press into service’, they find a skeleton in the target’s closet. If there are no skeletons whatsoever (highly unlikely), they have no qualms in creating a phony skeleton. What ‘tools’ do they use, in addition to plain vanilla bribery ($$$) and blackmail? Sex (especially illicit sex or perceived ‘illicit’ sex – like homosexuality and pedophilia) and the promise of the limelight, short-lived though it is. There are too many examples to list here.
Greenspan and Bernanke are both members of this Zionist Cabal. Like Lieberman, they have “loyalties which are greater than their party” (or employer). Their loyalty, voluntary or otherwise, is to the state of Israel and to the Zionist dream of a “Greater Israel”. Their dream is humanity’s nightmare. “1984” – here we come!
How does destruction of the American economy (and society) serve the Zionist goals? Before there can be a NWO (New World Order), there has to be the destruction of the PWO (Present World Order). They expect to find great bargains by sifting through the ashes of America. Any individual sacrifices which further the Gameplan are made gladly. Martyrdom is not unique to Islam (even without the promise of 70 virgins!). Furthermore, the Zionist Cabal is cannibalistic – they eat their own, if it serves their larger purpose.
So, it’s possible that Bernanke is a pawn, but it’s more likely that he and others are willing pawns – IF they are not promised rewards down the line for any sacrifices they may be called on to make for the Cause.
For a full explanation of The Puzzle, visit my Homepage at: http://novalight.org (or SEE! the Trailer at; http://sol-godsend.blogspot.com
Be prepared for ‘Shock and Awe’!
PS Where can you find details about the Gameplan? “The Protocols of the Learned Elders of Zion” (available on-line).
Posted 07/12/2008 06:17pm with
PS Here’s the link to the Protocols (with background information): http://tinyurl.com/akts5
Posted 07/15/2008 06:39pm with
“eternaloptimist” is obviously bigoted neo-nazi conspiracy theory smuck! Using the Protocols of the Elders (a phony document used to blame Jews for all sorts of problems) to explain the state of the ebb and flow of our capitalist economic system – my goodness what mean bigoted hateful crap!
Do not take anything said by him for anything but the hateful mixed up words of a bad person!
Posted 07/12/2008 06:17pm with +0 votes
PS Here’s the link to the Protocols (with background information): http://tinyurl.com/akts5
Posted 07/19/2008 02:36am with
Read the Protocols – and THEN decide if they’re phony!
Posted 07/19/2008 02:39am with
If you prefer a black background and more ‘color’ added, you can read the Protocols here:
http://tinyurl.com/5kewj8
Posted 07/19/2008 02:47am with
Remember what Black Hat Orthodox Jews (Neturei Karta) have been saying about Israel and Zionism since 1948 (and earlier):
“ZIONISM IS NAZISM” (they should know!)
If you want to SEE! the photo of the banner, browse through:
http://sol-godsend.blogspot.com
Posted 07/19/2008 03:12am with
Here’s a revealing article by Jim Willie about where America is headed: Fascism (similar to Nazism):
http://tinyurl.com/6nxnty
Remember that the ‘Hidden Hand’ behind all of the financial shenanigans and corruption is Zionism. Seizing control over the Economy, Media, Academia and Politics comes right out of the Protocols!
Posted 07/21/2008 12:50pm with
SEE! how the Protocols have been implemented in Russia – not just America and Great Britain!
http://tinyurl.com/6maotf
Posted 08/12/2008 12:37pm with
John McCain says irresponsible, undeserving homeowners are loosing their homes.
In his widely panned March 25th address on the economy, John McCain essentially blamed American homeowners teetering on the brink of foreclosure for their plight, insisting any assistance must be temporary and must not reward people who were irresponsible at the expense of those who weren’t. Facing a backlash, McCain just two weeks later on April 11 rolled out new proposals, claiming his priority number one is to keep well meaning, deserving home owners who are facing foreclosure in their homes. As the New York Times concluded: In both tone and substance, Mr. McCain’s remarks were something of a departure from a speech the senator delivered last month in California in which he warned that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.
Posted 08/12/2008 03:47pm with
It’s time for the bailout.
Come on Congress. Let’s do something for our own people for once.
Let’s stop sending money overseas and start helping out in the USA.
I’m certainly FOR the bailout.
Posted 08/14/2008 01:22pm with
McCain and Obama are both Zionist stooges and ass-kissers. Hanky-Panky Paulson is an ‘Auslege’ Goy, assigned by his Zionist masters as the ‘Clean-up Goy’ of the Financial Mess – just like that Zionist Giuliani was appointed as the ‘Clean-up Goy’ of the 9/11 Mess. Congress is “Israeli-Occupied Territory” (Sen. Fulbright). The bailout is nothing more than a transfer of debt from the Zionist Wall St. ‘Boyz’ Rich to the masses of ordinary taxpayers and future generations. “Thank You” – Sir Alan and Whirly Ben (Zionists, what else!)
What the ‘Israeli-Occupied’ Congress is doing is SCREWING ordinary Americans!
EVERY incumbent deserves to be voted out of Office and into Jail this coming November!
Write-in Mickey Mouse for President! (OK – Batman, if you prefer, or your favorite dog)