How I Know Housing Is Dead for a Long Time

Includes: FMCC, FNMA
by: Economic Disconnect

I will lay out the long version below but the short version is:

Housing is dead because the banks do not even want any of the action.

So simple really.

Ok, the long version.

Yesterday's big conference on the future of housing finance was a mix of pure baloney and hints at the future.

First off, the baloney. Tim Geithner opened the show stating such things like Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC) need overhaul and that taxpayers will not support housing in the future. The Treasury head also said the government needs to be smaller in the housing sector, while at the same time, it will guarantee mortgage funds and low rates for all. Try squaring that jumble of mess!

The big dog of the day was PIMCO's Bill Gross who luckily dispensed with the double talk and playing make believe for the children in attendance. How does Mr. Gross see things in the future? You would already know if you have been reading as I have predicted this event for some time. From Yahoo Finance:

Banking execs say gov't needs to back mortgages.
The call from business for less government has a notable exception: the mortgage market.
The Obama administration invited banking executives, Tuesday, to offer advice on changing the government's role in backing the mortgage market. While they disagreed on the exact level of support needed, the group overwhelmingly advocated for the government to maintain a large role in the $11 trillion market.
If the government pulled out, millions of Americans wouldn't be able to convince banks to take the risk of giving them home loans, the executives said. Ending government support could lead to a spike in mortgage rates. That could deter many from buying homes, and banks, mortgage lenders and Realtors would lose money over time.

This is pure disgusting, but at least it is both honest and shows what really matters to the bankers.


Bill Gross, the managing director for bond giant PIMCO, suggested Fannie and Freddie should be formally merged into the government. He also called on the administration to allow millions of homeowners to automatically refinance their loans to help stimulate the economy.

Gross said Fannie and Freddie's function should be consolidated into one government agency that would issue mortgage-backed securities. Without such a solid guarantee, mortgage rates would soar, he warned.

He also told the administration that the economic recovery required more government stimulus, particularly in the housing market. He suggested the administration push for the automatic refinancing of millions of home loans backed by Fannie and Freddie. Without such stimulus in the next six months, Gross said, the economy will move at a "snail's pace."...

So how many times does the biggest bond firm in the known universe have to ask?

The set up here is slick as all get out. The components:

  • Threaten lack of lending for mortgages
  • Scare everyone with tales of higher rates
  • Threaten to step away from lending
  • Government is now "forced" to make a move

Where's my "Easy" button?

You can forget about merging FNM/FRE into the government balance sheet, that is not going to happen. They will instead just keep it in some off the book type of setup. The last line about all this being a crazy Internet rumor will come back to haunt quite a few people later on. This IS the plan as far as the banks are concerned, there is no back up.

What will be interesting to see is how the government will make a mortgage market with rates set at say 4% for the next 10 years, should rates rise outside of the program. Any housing plan will have to figure out a way to skirt the structural issue of so many homes being financed at all time low rates. Any rise, and it is an instant loser for the homeowner. Expand your balance sheet much FED?

Stepping back, what was started Tuesday is the transfer of housing market responsibilities to the US government. The banks made a bundle on the way up, lost a bundle on the way down, got made almost whole via bailouts, and selling bad paper to the FED. Now they are stepping away all together. They do not see a way to make any money in the housing market which is maybe the only smart thing they have done in a while. This will not be good for any of us though.