The Fed and Fannie Mae: Throwing Money Down a Black Hole

It's a policy (according to Barney Frank) to lose money on purpose, right?

Well then, Fannie Mae (FNM) ought to get some sort of award:

Fannie Mae, operating under a federal conservatorship, said it will seek $15 billion in aid from the U.S. Treasury as its ninth straight quarterly loss once again drove the mortgage-finance company’s net worth below zero.

A third-quarter net loss of $18.9 billion, or $3.47 a share, pushed the company to request its fourth draw on a $200 billion lifeline from the government, Washington-based Fannie Mae said in a filing today with the Securities and Exchange Commission.

Let's face it. They're bankrupt. They've been bankrupt. They continue to become more bankrupt, despite being under "conservatorship" for more than a year!

Now let's first and foremost deal with what Fannie IS. From their 10Q:

Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938. Fannie Mae has a public mission to support liquidity and stability in the secondary mortgage market, where existing mortgage loans are purchased and sold. We securitize mortgage loans originated by lenders in the primary mortgage market into mortgage-backed securities that we refer to as Fannie Mae MBS, which can then be bought and sold in the secondary mortgage market. We also participate in the secondary mortgage market by purchasing mortgage loans (often referred to as “whole loans”) and mortgage-related securities, including our own Fannie Mae MBS, for our mortgage portfolio. In addition, we make other investments that increase the supply of affordable housing. Under our charter, we may not lend money directly to consumers in the primary mortgage market. Although we are a corporation chartered by the U.S. Congress, and although our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.

Got that? This will become important later.

We recorded a net loss of $18.9 billion for the third quarter of 2009. Including $883 million in dividends on the senior preferred stock, the net loss attributable to common stockholders was $19.8 billion, or $3.47 per diluted share.

Note that in addition to losing $19 billion through operations, they also had to pay $883 million in dividends for the existing "draw" on their Treasury credit line. They propose to expand that by about 30%, which will of course increase their dividend expense on that draw by an equivalent amount, causing it to reach approximately $1.2 billion dollars next quarter.

The impact of these items more than offset our net revenues of $5.9 billion generated primarily from net interest income and guaranty fee income.

These dividends will reach approximately 20% of their net fee and guarantee income next quarter. This is an enormous (and effectively permanent) expense that will only expand so long as they continue to lose money.

In comparison, we recorded a net loss of $14.8 billion for the second quarter of 2009.

Operating losses are increasing sequentially, not stabilizing or receding.

The "serious delinquency rate" (loans three or more months past due) has continued to accelerate. In the third quarter it accelerated to 4.72% of Fannie's entire book of business (some $3.2 trillion) When one considers that older loans that become delinquent result in the immediate sale of the property and satisfaction of the note (since the home has positive equity) the magnitude of the disaster in play here becomes clear.

To put this in perspective, non-performing loans accelerated by 19.8% in the third quarter. In the second quarter the rate of acceleration was 25%, in the first quarter it was 30%, and in the last quarter of 2008 it was 40%.

This looks like a "better" rate of change but that is only because the original numbers were so small (1.72% originally.) In point of fact the "usual" default rate on their credit book has been around 1%, and was in the first quarter of 2008 (1.15%); as such the catastrophe should be clear in that the "serious delinquency" rate is now some 410% what it was in the first quarter of 2008!

Fannie also likes to keep some of their credit exposure "off balance sheet." Indeed, in the third quarter of 2009 they had almost $164 billion dollars of seriously delinquent loans off balance sheet, as opposed to $33.5 billion that are on the balance sheet formally. They are holding 72,275 foreclosed properties, up about 10,000 from what had been a very stable 62,000ish number since the fourth quarter of 2008.

Now let's talk about these "off-balance sheet" MBS. What does the footnote to that table say on Page 5? This:

Represents unpaid principal balance of nonperforming loans in our outstanding and unconsolidated Fannie Mae MBS held by third parties, including first-lien loans associated with unsecured HomeSaver Advance loans that are not seriously delinquent.

Who are those third parties? Do they include this particular this particular third party?

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities.

Just curious....

Now let's talk about Fannie's problems with their mortgages. I found this paragraph interesting:

We are experiencing increases in delinquency and default rates throughout our guaranty book of business, including on loans with fewer risk layers, such as loans with lower original loan-to-value ratios, higher FICO credit scores and mortgages with fixed rate mortgage terms.

This is bad. Loans that were formerly considered "safe" are defaulting. That is, they're not "safe".

Risk layering is the combination of multiple risk characteristics that could increase the likelihood of default. This general deterioration in our guaranty book of business is a result of the stress on a broader segment of borrowers due to the rise in unemployment and the decline in home prices. Certain loan categories continued to contribute disproportionately to the increase in nonperforming loans and credit losses for the third quarter and first nine months of 2009. These categories include: loans on properties in the Midwest, California, Florida, Arizona and Nevada; loans originated in 2006 and 2007; and loans related to higher-risk product types, such as Alt-A loans. The term “Alt-A loans” generally refers to mortgage loans that can be underwritten with reduced or alternative documentation than that required for a full documentation mortgage loan but may also include other alternative product features. In reporting our credit exposure, we classify mortgage loans as Alt-A if the lenders that delivered the mortgage loans to us classified the loans as Alt-A based on documentation or other product features.

So if a lender didn't classify a loan as "Alt-A" or otherwise risky, according to Fannie, it wasn't. How much attention was paid to whether or not those loans sold to Fannie were properly classified by the sellers? Countrywide Financial anyone? Note that a federal judge has ruled that Countrywide's Mozilo must face securities fraud charges for:

The SEC sued the defendants in June, accusing them of misleading investors about the quality of Countrywide's loans, including tens of billions of dollars of risky subprime and adjustable-rate mortgages.

"The specific allegations of the complaint relied on by the SEC describe in great detail the virtual abandonment of prudent underwriting guidelines and the resulting proliferation of poor quality loans, during the same period Countrywide was touting the superior quality of its underwriting guidelines and its loan portfolio," the judge wrote.

How many of those are (as constituents of MBS) sitting on Fannie's balance sheet (and off) and are in fact a rotting fish instead of the claimed "quality, prime loans"?

Under the senior preferred stock purchase agreement, as amended, Treasury committed to provide us with funds of up to $200 billion under specified conditions. The agreement requires Treasury, upon the request of our conservator, to provide funds to us after any quarter in which we have a negative net worth (that is, our total liabilities exceed our total assets, as reflected on our GAAP balance sheet).

The problem with drawing the entire facility is that it would make it almost impossible for Fannie to turn a profit. Indeed, if you look at the above original statement, multiplying the preferred dividend by five (roughly what would be involved) would result in a quarterly dividend payment that would consume nearly all of the free cash flow of the company.

This presumes zero credit loss. But that is improbable beyond all reason - even in an ordinary economy a 1/2% loss rate is reasonable and expected (1% default rate and recovery of 50 or so on the defaults, after all expenses, or 1.5% default rate and a recovery of 70ish.) On a $3 trillion credit book this implies an annualized $15 billion in credit losses. The firm not only has to post sufficient net earnings to cover this, but also has to cover the dividends that are roughly $5 billion a year (as of now with the new draw); that is, it must post more than $20 billion in earnings a year just to break even, and that doesn't retire any of the debt.

At least they're honest about this:

Our senior preferred stock dividend obligation, combined with potentially substantial commitment fees payable to Treasury starting in 2010 (the amounts of which have not yet been determined) and our effective inability to pay down draws under the senior preferred stock purchase agreement, will have a significant adverse impact on our future financial position and net worth.

My analysis: NO KIDDING!

Now on to The Fed and the intertwined snake pit between it, the Federal Government and Fannie:

In response to the strong demand that we experienced for our debt securities during the first nine months of 2009, we issued a variety of non-callable and callable debt securities in a wide range of maturities to achieve cost-efficient funding and an appropriate debt maturity profile. In particular, we issued a significant amount of long-term debt during this period, which we then used to repay maturing debt and prepay more expensive long-term debt. As a result, as of September 30, 2009, our outstanding short-term debt, based on its original contractual term, decreased as a percentage of our total outstanding debt to 30%, compared with 38% as of December 31, 2008. In addition, the average interest rate on our long-term debt (excluding debt from consolidations), based on its original contractual term, decreased to 3.76% as of September 30, 2009, compared with 4.66% as of December 31, 2008.

The Fed bought all they could get their hands on. Must be nice, eh?

Accordingly, we believe that continued federal government support of our business and the financial markets, as well as our status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the government’s support of us or the markets could lead to an increase in our debt roll-over risk in future periods and have a material adverse effect on our ability to fund our operations. Demand for our debt securities could decline in the future if the government does not extend or replace the Treasury credit facility, which expires on December 31, 2009, as the Federal Reserve concludes its agency debt and MBS purchase programs during the first quarter of 2010, or for other reasons.

Uh, how do they intend to replace those facilities? We're talking about three and six months hence here folks!

Now on to their "help"....

On average, borrowers who refinanced during the quarter through our Refi Plus initiatives reduced their monthly mortgage payments by $154.

Well that's better than nothing, but you might try explaining how someone who has had their payments double - or more - is going to be kept from foreclosure by a $154 decrease in their monthly "nut." While any decrease is better than none, to believe that people are losing their homes over $150 a month is likely a losing bet.

Now let's talk about The Fed and the impact of its programs. Specifically:

The $649.9 billion in new single-family and multifamily business for the first nine months of 2009 consisted of $392.2 billion in Fannie Mae MBS that were issued,

It is rather clear that The Fed is buying more than "the entire market" of new issue thus far, since only $400 billion (roughly) of new issue into the market occurred. The rest was retained on balance sheet, and The Fed has been buying Fannie debt issues that are used to fund that as well.

In other words, The Fed is not a participant in the market, it IS the market.

We expect that our credit losses and credit loss ratio will continue to increase during the remainder of 2009 and during 2010 as a result of the continued high unemployment we have experienced and an expected increase in our charge-offs as we foreclose on seriously delinquent loans for which we are not able to provide a sustainable workout solution.

Fannie sees continued deterioration in the macro economic environment that bears on consumer mortgage performance.

This is in STARK CONTRAST to the media pumpers and pundits, all of whom are claiming that "the worst is behind us" for the economy. Since consumers are 70% of the overall economy, it is simply impossible for both of these views to be correct.

Fannie has more current and more topical information on the performance trends in their book than any of the media folks.

Guess who is more likely to be right, and who has nothing to sell you under the rubric of "hope"?

Fannie also has $47 billion of Alt-A and other "garbage" securities for which there is no market price (under "Level 3".) What are those really worth? Good question - and we also don't know what their acquisition cost was. Surprisingly (pleasantly so) there are few derivatives on their book.

In short, while Fannie has managed to increase its interest and fee income dramatically (some 77% over last year) it hasn't mattered, as credit losses have risen at a stagging 246% over the same time period.

This is an organization that is going to die on its present course. Only extraordinary intervention has kept it from happening thus far, but that intervention has imposed a bone-crushing liability in the form of dividend payments - a liability that will only increase as the line is further drawn down.

It appears that the original $200 billion line was set not with an eye toward what the firm could ultimately sustain and pay down, but rather with the singular goal of assuaging the financial markets at that instant in time. This, as we all know, was an utter failure, as the line was extended in the spring and summer of 2008, yet the market melted in the fall anyway.

Worse, we have now embedded The Federal Reserve in this charade, with them buying debt and MBS that under the black letter of the law appears to be flatly impermissible. I cite Section 14 of The Federal Reserve Act:

Purchase and Sale of Cable Transfers, Bank Acceptances and Bills of Exchange

Any Federal reserve bank may, under rules and regulations prescribed by the Board of Governors of the Federal Reserve System, purchase and sell in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers and bankers' acceptances and bills of exchange of the kinds and maturities by this Act made eligible for rediscount, with or without the indorsement of a member bank.

This paper is not a cable transfer, bankers' acceptance of a bill of exchange. This section thus does not apply.

(a) To deal in gold coin and bullion at home or abroad

They are not gold.

Nor does this paper qualify under:

Purchase and Sale of Bills of Exchange

(c) To purchase from member banks and to sell, with or without its indorsement, bills of exchange arising out of commercial transactions, as hereinbefore defined;

Again, these are not bills of exchange. This leaves us with:

Purchase and Sale of Obligations of United States, States, Counties, etc., and of Foreign Governments

(b)

1. To buy and sell, at home or abroad, bonds and notes of the United States, bonds issued under the provisions of subsection (c) of section 4 of the Home Owners' Loan Act of 1933, as amended, and having maturities from date of purchase of not exceeding six months, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts, and obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof, such purchases to be made in accordance with rules and regulations prescribed by the Board of Governors of the Federal Reserve System. Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to the principal and interest may be bought and sold without regard to maturities but only in the open market.
   
2. To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.

These notes and debt instruments have maturities exceeding the limits specified; therefore, the debt must carry the full faith and credit of the United States as to principal and interest.

But again, according to the 10Q:

Although we are a corporation chartered by the U.S. Congress, and although our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.

Treasury has the authority (under the laws passed by Congress) to prop up Fannie and Freddie in this fashion, ill-advised though it may be, and inextricable though it may be given their credit position, earnings power, and required dividend payments.

THE FED, HOWEVER, HAS NEVER HAD AND STILL DOES NOT HAVE THE AUTHORITY TO BUY EITHER FANNIE'S MBS OR ITS DEBT! THE ENTIRETY OF THAT $1.2 TRILLION DOLLAR PROGRAM CONTINUES TO APPEAR TO BE, AS I HAVE REPEATEDLY ASSERTED, ENTIRELY BEYOND THE LAWFUL CONFINES OF THE FEDERAL RESERVE'S AUTHORITY.

Fannie, by its own disclosure in this 10Q, is surviving ONLY due to the extraordinary acts of Treasury and, I would argue, the blatantly impermissible acts of The Federal Reserve. Fannie has turned into nothing more than a politically-motivated toxic waste receptacle, first abused by Countrywide (and others, assuming the SEC's complaint against Mozilo is valid) and now by the FHA! This is a black hole that has consumed almost $1 trillion dollars of taxpayer money thus far. Worse, there is no viable exit strategy on the table nor can there be under the current course we are on.

THIS CHARADE MUST STOP AND THE GSEs MUST BE RESOLVED.

Comments

[woollyB]

Amen, Mr. Denninger. Do you by any chance feel like you're shouting into a windstorm?

2009 Nov 06 10:09 AM

[Leftfield]

Nice, shows us another facet of how Wall St. got it's hands on upfront funds via fraudulently made loans and went on it's merry way leveraging while the taxpayer is holding the bag. For the original loans, for the ruined housing market and economy as well as for direct assistance to Wall St. Keep those bonuses coming!
Loan adjustments of $150/month will also fail to keep up with property tax increases within a year or two, by the way.
Monumental figures such as this ONE agency of government throws around routinely, with incomprehensible losses, show clearly that government is the problem. They are involved in every facet of American life, hindering and costing good citizens the opportunity to make it on their own while enabling the worst levels of fraud ever seen. They're everywhere, doing the worst job imaginable and still grasping for more.
Obama promised a year or so of expanding deficits, then solvency. Then issued a budget that shows the largest deficits ever, into perpetuity. The Fed will do the same after promising to end it's agency and MBS debt purchasing programs by March. There is not a single promise by US government, down to it's currency, that has a shred of validity.
What the heck, it's not their money.

2009 Nov 06 10:18 AM

[Henry Buttal]

As long as politicians like Mr. Frank continue to deny there is a problem, the problem will not be solved.

As a by-product of the extreme conditions foisted by Mr Mozilo, Mr Frank, and others, I find that, as an independent business person, I can't refinance my mortgage.

Even with 50% equity, and demonstrated household income of six plus figure going back to the late 80's.

If I was a household of a pimp and a crack whore, I am sure that I could qualify for some program, and receive a government insured loan.

2009 Nov 06 10:24 AM

[Gary A]

This realization that "safe" loans are defaulting should make investors, who were burned by MBS before, doubly nervous to ever get into that market again. We have the possibility of much higher interest rates. And if we are irresponsible enough the 30 year mortgage could go away. We are stuffing them under the rug now as it is.

2009 Nov 06 12:47 PM

[John McLeod]

I'd like to draw your attention to this SIFMA press release from January 7th, in the very last days of the Bush administration, and just before the Fed started buying up MBS. It's the guidance that started the Re-Remic recycling of old stuff back into the TBA market.
www.sifma.org/capital_...

From the information you're reviewing in the above post, how in blazes can the OMB still be in denial that agencies **don't** enjoy an explicit US guarantee?

2009 Nov 06 03:59 PM

[Tmnj10]

No help from the government, looking for solutions? There is much to be said about predatory lending and fraudulent loans.... if you need help with either of the two contact me at.....US Loan Auditors Website

2009 Nov 06 07:59 PM

[Foreclosure Hamlet]

Hmmmmmmmmm, let’s see if I get this……..

There’s a big ole’ stick.

I’ve got one end.

The similarly financially ruined investor has the other end.

There’s a bunch of middle men bent over picking up the money that the homeowners and the investors dropped during the shakedown.

Hmmmmmmm……….big stick…………bent over middle men………

I dunno.

What to do seems pretty obvious to me!

Lisa
ForeclosureHamlet.org

2009 Nov 07 01:55 AM

[realitybiter]

Maybe Maxine Waters wants to rescind her accolades for the "highly esteeemed Franklin Raines"

Maybe Franklin would like to give back some of his hundred plus million dollars that he essentially stole from us, via Fannie Mae.

Before you jump on me about the word "stole" consider that Fannie cooked their books and used those numbers to produce Franklin's bonus. I believe there are dotcom CEOs who had to answer to judges for similar crimes. Who severed the long arm of the law?

2009 Nov 07 08:49 AM

[Summer Sea]

1,000,000 plus foreclosures in Florida as of next month. Wait until this hits. Banks are not helping homeowners, especially those with Jumbo loan delinquency. They are stashing their money. Homeowners are in total meltdown. Washington should think of new and unusual ways to help these people, instead of sticking to the current foreclosure rules and regulations.

2009 Nov 07 09:34 AM

[Leonard C.Tekaat]

We know what the problem is. What is the solution? Got ideas? Here is mine. Make comments.

To Secretary Geithner:
US Treasury

To increase employment and lower the deficit and stabilize housing prices, we need to develop a plan to improve our economy and put a stop to its destruction. We need to change the terms of our mortgages so Fannie Mae and Freddie Mac and other government agencies buy mortgages and securitize them with the terms that are outlined in my article.

The currant government deficit spending policies (Keynesian Economics) will lead to another inflation economic cycle. We also know that the currant policies used by the Federal Reserve to control inflation and inflation psychology have always created a recession or price increases, which leads to uncontrollable bubbles and then an economic crisis when they burst. A balanced approach is a better policy.

I am writing this letter today because I feel that you have a good understanding of the primary problem or flaw our economy is experiencing. Enclosed you will find one of many articles that I have written explaining what I believe may be a solution to our economy’s woes. The other articles (The Zero Inflation Taxation Policy, Is President Obama Making A Mistake? Stimulate the Economy Without A Huge Deficit, to name a few.) are at my web site economysflaw.wordpress.../. If you would like to read the Alternative Economic Stimulus Plan that I have written it is also at the web site.

Article

Economic Crisis Is Solvable

Home prices are decreasing all over the country. President Obama foreclosure plan is destine to fail. It does not take into account that most homes in CA .NV. AZ, FL. has decreased in price by 40% or more. The rest of the country’s housing has decreased in price an average of 30%. His plan only allows for homes to be 25% underwater. The real estate market and the economy in general will not recover fully until the consumer’s financial condition improves and all home mortgages that are underwater are modified so these homes and their owners can be included into the economy. The homes that are underwater cannot be sold or brought until they go through a short sale; foreclosure or the banks and servicing companies forgive, in some manner, the excess portion, of the loan.

The economy needs the real estate market because our homes are the backbone of our money supply, just like gold was many years ago. The reality of the modern world is that we no longer barter to exchange our goods and services. We use paper money or credit. They are both based on promises. If it is credit that you use as a means of exchange, the collateral must maintain its value over a long period of time, similar to gold. Our homes have served this purpose for many years, until people and government agencies changed policies to create more credit money. Housing collateral is how we provide credit to consumers and small business. If the housing has no equity the banks will not or cannot make the loan.

On our Federal Reserve notes read IN GOD WE TRUST it should read IN THE FED WE TRUST. When the government with its misguided policies and the Fed with its interest rate policies cause the economy to be guided in the wrong direction, they are responsible. If you divert a stream and it does damage to people, you are responsible for paying for the damages. It is not the responsible homeowner's fault if their mortgage is underwater. A lot of people put 20% or more down and they are in financial trouble today because of the government and the Fed. It is estimated that by the end of 2010 ninety present of the homes in California will be underwater with their mortgages. This problem must be corrected quickly or we will have a major problem in our economy.

When the Republicans want to increase people’s disposable income, they want to lower taxes and reduce regulation. When the Democrats want to increase people's disposable income they want to deficit spend, create jobs, create more government programs and increase regulation. Both of these policies reduce government revenues and increase the national debt and the government's deficit, in the beginning of the recovery process. Lowering interest rates does not cost anything and increases more people's disposable income, by a greater amount, much quicker. This policy puts people back to work faster before the recession gets out of control and changes into a depression. The government's liabilities are decreased. We do not have to increase taxes to pay down the national debt or to decrease the deficit. With the correct policies enacted the chance of another housing bubble occurring is practically nil. Read Alternative Economic Stimulus Plan

On 2-24-09 the Fed Chairman Bernanke, appeared before the Senate Banking Committee. Senator Bob Corker stated during the meeting, “He had not yet heard a definite way out of the economic crisis. That it seems to me that we are continuing to do the same thing as we have been doing. That is, giving large amounts of money to the banks, to capitalize them and nothing happens that benefits the economy.” I agree!
The Fed is currently acting as a bank, regarding commercial paper. In his question and answer session the Chairman stated that, "Because the banks were not confident enough to loan businesses money, the Fed, by paying the banks .25% interest on their deposits, the Fed was borrowing the money from the banks and lending to it to the large corporations. I believe that the solution to the economic crisis is that the same policy should be applied to the housing problem. Banks and financial institutions are not confident enough to loan homeowner’s money to refinance their homes or for new mortgages.

If an adjustable rate mortgage was created with a starting interest rate that is low enough (3%) to jolt the economy back to life, the toxic securities (non-performing mortgages) will become valuable again, when the new refinanced mortgages become performing assets. The interest rate on these new mortgages should increase one-quarter percent per year and cap out at the currant market rate of 5%. We can cap out the mortgages at 5% because we will no longer be relying on the Fed to be the only government agency providing the means of controlling inflation and inflation psychology. (Read Zero Inflation Taxation Policy) To decrease defaults on mortgages, the borrower would have to qualify at the 5% interest rate to obtain the loan. These new mortgages should not be tied to any index. People do not trust indexed mortgages because of the uncertainty of the future. This is why they prefer the fixed rate mortgage. Currently we need lower rates to stimulate the economy. The banks will make huge amounts of money rewriting the mortgages and servicing them. Thereby becoming profitable and help capitalize them. We are currently trying to capitalize the banks by infusing the money directly into them. This policy is wrong because the collateral is losing value. This situation means the banks will need more and more capital to remain viable. The value of the collateral must be stabilized first, for the banks and investors to be confident enough to lend money against it.

What will this stimulus plan do for the economy? When the homeowner refinances their home from a 6% mortgage interest rate to a 3% interest rate their monthly interest payment will decrease by 50%. A $1500.00 monthly mortgage interest payment will decrease to $750.00. That will be like the person receiving a $750.00 stimulus check each month for the first year and thereafter a little less each year for the next seven years. Multiply this by millions of people and you will have a stimulus plan that puts the purchasing power were it should be, with the people. The foreclosed property inventory would be quickly sold and housing prices would stabilize. Banks and investors should be encouraged to modify the underwater mortgages by changing the tax code so that it would be beneficial to them and the borrower when the excess amount of the mortgage is reduced. Loaning money to banks does not create demand in the economy, people do!

If mortgage interest rates were available at a starting rate of 3 or 3.5% and the borrower was qualified at a 5% interest rate, the chance of a foreclosure would be close to zero. The eight years it would take for the interest rate to rise to 5% would allow the economy to heal. Business activity would increase; this would increase the value of commercial properties reducing the coming crisis in that area of the economy. With home values stabilized investors will be willing to invest in mortgage securities again rather than treasuries. With the mortgage interest rate increasing every year, the investor will know that their rate of return will increase for the next seven years unlike treasuries.

I want you to ask yourself three questions?

1. What is the first thing the Fed does to stimulate the economy? Answer: Lower interest rates, this permits people and business to refinance their debt at a lower rate of interest, which in turn lowers their monthly payments, freeing up monthly income, which increases their disposable income. With more disposable income, people have money to spend on other things, other than interest payments.

2. Why did it not work this time? Answer: Collateral prices were going down. Banks or investors cannot refinance people's loans until the price of the collateral stabilizes. When the banks and financial institutions did not, would not or could not follow the Fed's lead, of lowering interest rates, it made deflation and unemployment worse.

3. How do we solve this problem? Answer: The banks cannot lower their interest rates low enough because of the risk factor of the collateral's price going down. They have to make a profit and pay a high enough interest rate to keep their depositors satisfied. The US Treasury, which is a not for profit government agency, can borrow the money on the open market or from the Fed, just like the banks do, and fund the refinanced or new mortgages, at near cost, until the collateral's price stops decreasing and investors start investing in the new mortgage securities. The Treasury would receive the cash flow to fund more mortgages. When the economy is up and running again, the Treasury would sell the mortgages to investors. The banks and other financial institutions would arrange these new loans and mortgages or modification agreements. This stimulus plan would not cost the taxpayer a dime.

It has always been the 90% of the population who spends their money and pays their bills that brings the economy out of the recession. When their disposable income increases and they have the money to spend on household goods and services, big-ticket items, autos and trucks ECT. Improving the confidents and financial condition of the 90% will help the 10% unemployed more than any government program.

This plan should be the second stimulus. I would not fund what is left of the first stimulus and modify it to lower the deficit, which would keep interest rates from rising. The reduction in the deficit would calm the world's fears that we will have inflation in the future and that the dollar will be devalued.

My Plan does not rely on a trillion dollar government deficit. In fact the Alternative Stimulus Plan will not cost the American people anything over time. The Alternative Stimulus Plan also includes a policy that will help those people that owe more on their mortgages than what the house will sell for.

The news has been covering the economic problems. How about a solution?
I present one idea in my ALTERNATIVE ECONOMIC RECOVERY PLAN. You can read it at economysflaw.wordpress.../

Leonard C. Tekaat is a retired economic Analyst, Economic Scholar, Financier, Investor, businessman, author, and a former Candidate for California Congress. He has experience in the financial world of over 40 years.

I am the author of INFLATION THE ECONOMY KILLER (Amazon.com). High inflation and deflation are both economic crisis, which are created when the economy becomes unbalanced. The policies to correct them are opposite of each other. Our concern now is the deflation that is occurring in the real estate market, mainly the housing sector of the economy. The housing sector is so important because it is how we provide credit to consumers and small business. The equity in housing is the collateral for the loan. It is the consumer and household formation that creates 75 to 80% of the economic activity in our economy. I know that some economist say the economy has improved in the last year but it is very possible that we will have a double dip recovery. I believe that if the Alternative Economic Stimulus Plan is put into action we will end the misery much sooner.

Copyright Sept 17, 2009
By Leonard C. Tekaat

2009 Nov 07 09:53 AM

[Tjemme]

You may want to compare your view to that of John Hempton ( brontecapital.blogspot... ).

2009 Nov 07 12:08 PM

[User 6840]

This was not just Wall Street. The banks, with a change in legislation from Frank and Clinton, were allowed to introduce 100% financing back in the mid 90's. There was tremendous greed there but you don't read much about that. Bad loans could not have been made with the banks altering their rules. Banks made money hand over fist during this period. Wall Street did what it was supposed to do and created more product. Now that Banks are bailed out with our money but do not have to pass that money on to us. They are winning again by taking overforclosures and sitting on the cash we gave them. This is a course in advanced stupidity.


On Nov 06 10:09 AM woollyB wrote:

> Amen, Mr. Denninger. Do you by any chance feel like you're shouting
> into a windstorm?

2009 Nov 07 02:12 PM

[BRUCE E. W.]

vanityfair.com/pol... Quote:

"Many believe the government-backed mortgage giants known as Fannie Mae and Freddie Mac were major culprits in the economic meltdown. But, for decades, Fannie Mae had been under siege from powerful enemies, who resented its privileged status, its hard-driving C.E.O.’s, and its huge profits. Surveying Fannie’s deeply dysfunctional relationships with Congress, the White House, and Wall Street, the author tells of the long, vicious war—involving most of Washington’s top players—that helped propel one of the world’s most successful companies off a cliff."
by Bethany McLean February 2009

Ultimately the CREDIBILITY of the US Government and its ability of its trustees to ASSURE THE WORLD that it will, under all circumstances, STAND BY ITS WORD to back these GSEs is the critical question that will stand the test of time in this charade of vested interests. While 80% of all the bailout capitalization (plus the actual currency being pumped into the economy) has been going to the Financial Service sectors, a disproportionate focus remains levied against the GSEs and their holdings. Who stands to gain? Certainly the taxpayer is going to end up paying no matter what!

The Vanity Fair article cited above suggests that the corruptions and distortions are more to do with the private sector's interests over the past decades than with the actual failure of the GSEs. Now the Vultures want it all and they scream about taxpayers money; but not about traxpayer's homes and mortgage security itself.

2009 Nov 07 05:53 PM

[TeresaE]

WDC is the problem.

It is impossible for those that make the problems to fix them - for many reasons.

To continue going to our mommy & daddy gubmint asking for "help" is insanity at its finest.

They DID help us, look around at the stellar results.


On Nov 07 09:34 AM Summer Sea wrote:

> 1,000,000 plus foreclosures in Florida as of next month. Wait until
> this hits. Banks are not helping homeowners, especially those with
> Jumbo loan delinquency. They are stashing their money. Homeowners
> are in total meltdown. Washington should think of new and unusual
> ways to help these people, instead of sticking to the current foreclosure
> rules and regulations.

2009 Nov 07 08:42 PM

[rawhamburger]

This problem will not and can NOT be rectified. The Federal gov is in way over its head already. The smart people in government are just getting ready (positioning) for the GREAT DEFAULT on treasuries and more. China will be left holding a very big part of THE BAG. We citizens will get screwed again and again until the Fed steals enough money to balance the books...

2009 Nov 07 10:20 PM

[ExZonie]

I am willing to bet that a good percentage of the equity the banks had is largely "not there" any more. The more mortgages that go through short sales or refinancing to reduce the principal, the less assets the banks have, and the more dangerous their loan-to-value balance. Over time, they will become technically, if not actually, insolvent. Letting Fannie Mae fail makes the matter worse; banks hold FM stocks and if they become worthless, their asset base will be eroded even more. And as the large banks assets erode, their stock erodes, which other banks hold... it becomes a downward spiral. Adding new high-risk mortgages, which is what's happening right now, will accelerate the process and take the FHA with it, as well as the stock market and the US Treasury, and the Fed.

2009 Nov 08 04:40 AM

[Mark Wallace]

Let's see if we can follow the money on this. Mortgage loans are originated by the private sector and then sold to Fannie and Freddie. Fannie and Freddie finance their purchase of these loans by issuing their own obligations, which are euphemistically and optimistically called "securities." These so-called "securities" are then purchased by the Fed using its electronic printing press. The upshot is that the debt is being monetized, and you have an entire industry, home finance, that is on life support. And, despite that life support, housing prices are continuing to fall in many parts of our nation. My question is this: what would happen to housing prices if Fannie and Freddie were declared bankrupt and shut down? What would a house be worth if you couldn't get a loan and had to pay cash? There is your answer.

2009 Nov 08 12:38 PM

[hooligan]

please stop all this doomsaying. I hate the truth if it means that 15% of the economy has ripped off the 85% of us who have played by the rules. the implication is clear, the Fed is broken, the stimulus is broken and the banks lie (pun intended) right at the core of the problem. looks like we need fraudie and funny to take over fha and the entire federal reserving system if housing is so important to the economy. I dont think housing is that important. I think new mortgage banks are more important, wipe the slate clean and reset everyones mortgage clock with interest rates that are preset and fall as mortgage equity increases/LTV's decrease. Oh and no banks involved in the mortgage market, whatsoever, and no private valuers or private realtors either, since they were and are still part o the scam. switch to housing being adminstered owned or rented by a new state government/non political agency. screw banks, screw valuers, screw estate agents and screw congress!

2009 Nov 08 02:19 PM

[ebworthen]

HUD housing by proxy.

2009 Nov 08 02:49 PM

[Leonard C.Tekaat]

Lets get to the very bottom of this mess. Wall St. was buying and selling debt. Debt created by consumers and investors. Our economy is a consumer based economy not a export based economy. Our primary means of exchanging goods and services is with the use of credit. The financial industry has their finger in almost all of those exchanges. Our income tax system encourages the use of credit and leveraged investing. Without all of the credit use Wall St. would not have as much credit to buy and sell. There is the problem. The solution is do not encourage credit use when the economy does not need more credit use. Enact the ZERO INFLATION TAXATION POLICY. economysflaw.wordpress...

2009 Nov 08 07:35 PM