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Larry Doyle
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Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. Larry was involved in the growth and development of the secondary mortgage market from its near infancy. After close to 7 years at First Boston, Larry joined Bear... More
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  • More Socialized Housing Continues Assault on Capitalism 8 comments
    Sep 28, 2009 9:20 AM

    Is there any doubt that the heart of our economic crisis centered on the mispricing of risk in a wide array of mortgage products? If that is in fact the case — and it is — then why does Uncle Sam continue to go down this road? In so doing, the ‘old man’ will only prolong the current housing crisis and likely promote another one as well. Why? A borrower’s ability to access funding at levels not correlated with that borrower’s ability to repay serves as an enormous incentive for the borrower to take undue risk. Inevitably, these greater risks will lead to greater losses. Who will absorb the losses? Ultimately, you and me. Where do we witness more of this socialized housing? Let’s navigate our way into the world of municipal housing finance.

    Bloomberg details growing developments on this topic in writing, State Housing Agencies in U.S. Said Slated for Treasury Help:

    State housing agencies in the U.S. would get help in providing mortgages to low-income borrowers under a U.S. Treasury Department program to provide new liquidity and purchase mortgage bonds, Treasury officials said.

    The program would provide as much as $15 billion in fresh liquidity for as long as three years and would purchase as much as $20 billion in tax-exempt mortgage bonds issued by state- sponsored housing finance agencies through the end of this year, a person familiar with the matter said. The program may be announced as early as Sept. 30, said the person, who didn’t want to be named because the plans haven’t been made public.

    A few questions, answers, and comments:

    1. Given the enormous rally in the equity and bond markets, where is the private capital to support this initiative? There is plenty of private capital along with excess capital sitting at banks, BUT that capital would only lend itself at rates commensurate with the risks embedded in the value of the real estate and the borrowers.

    2. The housing finance agencies’ inclination to ask Uncle Sam for financing and Uncle Sam’s willingness to provide it is nothing more than a socialization of this segment of the domestic housing market. How do we know? What entities will purchase the debt backing these financings?

    Bloomberg highlights:

    The Treasury effort would be administered by federally controlled mortgage-finance companies Fannie Mae and Freddie Mac, which would also purchase the bonds, the person said. Those purchases would provide enough financing to restart and to fund the state home loan programs through the end of next year, according to the person.

    Oh what fun. Uncle Sam will continue to bury more mispriced debt in the books of the current wards of the state, Freddie and Fannie.

    3. Why would private investors be reluctant to more aggressively provide financing to these municipal housing finance agencies? We only need to revisit the fact that virtually all of these agencies utilized a form of auction-rate security known as a VRD (variable rate debt note), which in layman’s terms is nothing short of a form of Ponzi-type financing. Investors remain stuck with a tremendous amount of this debt.

    If a borrower burned you on a financing, wouldn’t you increase the rate for future borrowings?

    One final comment. Socialized housing finance will certainly dissuade private enterprise from entering any part of this market for a protracted period.

    Capitalism remains under assault.

    LD


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  •  
    Larry - - -

    There is a potential problem that you didn't mention. The government actions constitute a selling forward with low down payments when the price bottom for housing may not be in yet for some markets, maybe many markets.

    If this scenario does play out, a future volume of defaults, that does not now exist, may build. If the housing market bottom is in, the strategy should work. If the bottom is not in, it just makes the problem worse.
    28 Sep 2009, 10:33 AM Reply Like
  •  
    I read the Bloomberg article this morning and shook my head in disgust.

    My takeaway is that Washington and its fifty nieces and cousins (1) are incapable of learning from the past, (2) do not realize we are broke and (3) are incapable of rank ordering priorities.

    Policy makers should ask themselves whether it is more important to expand home ownership among low income families or create jobs and income?

    I happen to think it is the latter and we should be maximizing assistance to the business community to broaden science, exploit technology and develop new industries that will multiply employment and magnify exports.

    This policy will benefit the entire economy and provide employment opportunities for the disadvantaged who can then BUY A HOUSE WHEN THEY CAN AFFORD IT.
    28 Sep 2009, 11:10 AM Reply Like
  •  
    "Home ownership is a right, not a privilege," or so the Left tells us.
    28 Sep 2009, 11:19 AM Reply Like
  •  
    Here's the rest of my "take."

    seekingalpha.com/insta...


    On Sep 28 11:19 AM Graham and Dodd Investor wrote:

    > "Home ownership is a right, not a privilege," or so the Left tells
    > us.
    28 Sep 2009, 11:20 AM Reply Like
  •  
    The funny thing is that this is a drop in the bucket compared to what the socialist system we call the Mae's subsidized housing system has cost the taxpayer already. Most likely the new bailout, which is whay it is, will help paper up more losses for these giant behemoths.

    The loss of vannila mortgage loans proposal is just icing on a cake of bad housing decisions in the last 2 weeks. Vannila loans would go a long way in ending the dominance of the Mae's in the mortgage market which is solely dependent on these socialized entities to determine and finance 90% of the mortgage market. Woe is to those that keep relying on a false pricing system and believing that it can't collapse again.

    The price tag is billions and the powers that be are seeking ways to give them yet billions more of your money. The hungry beast constantly needs feeding. Sadly you are its clow.
    28 Sep 2009, 11:50 AM Reply Like
  •  
    Sometimes it takes more courage to do nothing that to do the wrong thing.

    Hyperactive government counts on appearances for re-election (both parties). Doing nothing looks like ineptitude when sometimes it is just wisdom. Do we want wisdom from our elected officials, or appearances?
    28 Sep 2009, 11:56 AM Reply Like
  •  
    Right on, Michael (and a thumbs up).


    On Sep 28 11:56 AM Michael Clark wrote:

    > Sometimes it takes more courage to do nothing that to do the wrong
    > thing.
    >
    > Hyperactive government counts on appearances for re-election (both
    > parties). Doing nothing looks like ineptitude when sometimes it
    > is just wisdom. Do we want wisdom from our elected officials, or
    > appearances?
    30 Sep 2009, 03:52 PM Reply Like
  •  
    I would much rather spend 15 billion on 150,000 Habitat for Humanity homes. No mortgage. Carefully screened participants. Real results. Real security for the families involved.
    1 Oct 2009, 03:22 PM Reply Like
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