ASG

Low Rates, Big Problems

"Assuming $5 billion in mortgages are refinanced at 4.5% in an environment where the unsubsidized rate would have been 10%. The annual cost to the government in such a scenario would be $275 billion."

$275 billion annual costs on $5 billion in mortgages? And claiming 10% is the "un-subsidized or ,market rate?

For an alleged expert Mr Schiff seems out to linch here ....

First off CURRENT 30 year fixed rate loans are 5.60% - not 10% .... using 10% is nothing more than typcial irrational fear-mongering ...

And while he likely meant $5 TRILLION in loans refinanced, that would be equally silly - as it would represent almost 50% of the appx $10.7 trillion in loans outstanding.

Even IF he is correct - that $5 TRILLION in loans would refi - the difference between the current 5.6% and 4.5% is 1.1% ... which would represent a $55 billion annual interest differential cost ... NOT $275 billion

A more realistic number to many economists seems to be $500 billion in refi's ... which would put the annual interest differential at appx $5.5 billion ....

Today the private market buys these loans at 5.6% - probably around 5% yield .... vs appx 4% yield on the 4.5% rate ...

On 12/5/08 the 30 year TS yields 3.11% ... the 10 year 2.67% and the 7 year 2.09% .... it WOULD be unrealistic to expect buyers for $5 trillion in Treasury Securities, but not for $500 billion - the number the Fed has I believe targeted ...

Sell a mix of 7, 10 and 30 year treasuries - to match the expected weighted average maturity of the pool and the government makes money ...


OR, instead of govt buying the mortgages - instead offer a subsidy to private investors ... if 4% yield on 4.5% notes is too low, then offer a 0.5% subsidy ... on $500 billion that would cost $35 billion over 10 years ... a small part of the proposed $500 billion to $1 trillion in "stimulus" ... this would offer existing owners, not in default, SOMETHING out of the bailouts - and would go very far towards goodwill ....

OR, to still offer an incentive to those folks, but to also limit the costs - make these refi's fixed 4.5% for years 1 thru 7, with a single adjustment to 5.875% for years 8 thru 30 .... 7 years or real, meaningful benefit - with a cap on costs to govt as well ... and the homeowners STILL end up with a very good rate at the nominal adjustment in 7 years ....

There are plenty of ways to provide some support to the housing industry without creating more and larger problems

People too often ignore that it is still a small percentage of the mortgages in the US that are creating the problems - overall, across all mortgages, only 6.9% are in default ... the vast majority of borrowers - including subprime and ALT-A - are paying their loans ...

The Global Insight/Natl City Housing Valuation Index shows nearly all the Country is now undervalued ... and the NAR shows affordability has increased dramatically - the median household income represents something like 140% of that necessary to buy a median priced home ... even in the high cost West if I recall the affordability was at 104%

Even with a 3% down FHA loan, an Orange County Median Income represents 97% of the income needed to buy a median priced Orange County home ... buyers are not stupid, no matter how much some will denigrate them ... and they are buying ... they feel despite the gloom and doom of the media and some industry pundits, that housing prices today, combined with favorable interest rates, represent an excellent value and opportunity --- even IF prices might decline slightly still ....

Housing is an important foundation - and driver - for both the economy and consumer confidence .... if we are going to hand out stimulus checks - whose real purpose in the end is to improve consumer confidence - then spending a small overall portion of the massive proposed "stimulus" to support housing seems a smart investment

Far better than the handout checks - which were shown to be largely used to pay down debt or pay normal expenses in the first round earlier this year ... mostly largely worthless at stimulating

Existing Home Sales Clunk Along Bottom

uhhh Tim .... that "distortion" you talk about is simple math ... backed up by sound pricing studies

A number of studies - Orange County and Mpls/St Paul are two - have shown distressed sales show a significantly higher price decline than non-distressed sales ... in MSP distressed sales were off something like 11% year to year while non-distressed sales were off appx 4%

Distressed sales make up appx half of all sales in even in the worst hit markets (like Orange County) ... which means half or more of all sales are non-distressed, and as such have not seen as significant a poriuce decline

I suggest you spend some time researching and doing some math as well on what "median" price means ... you will find that the NAR comments are perfectly valid and on point ....

Even with NO price decline if the product MIX changes to lower price ranges the median price will drop ... and that is exactly what is happening - and in a very big way in places like Orange County where the shift to lower prices has been large

And with the proven disparity between distressed and non-distressed added to the mix the NAR comments are valid ... that current median prices are temporarily skewed by distressed sales and product mix and do not reflect the underlying market metrics

Point being as foreclosures diminish, which they are (and will improve further with all the modifications) the median price will see a significant jump

And as the markets recover and we see a more normal product mix we will also see a jump in median price

Median prices ARE correct as of today - but they also include temporary influences that cause a distortion

ROI, Paulson's Plan, and the Rise of Neo-Mercantilism

And same to you bitterboy - well said - a more succinct version of my comments

ROI, Paulson's Plan, and the Rise of Neo-Mercantilism

Invest - your comments are excellent as is your take - there are too many wildly inaccurate comments out there, and its worse when we have someone like here that comes across as knowledgeable

The comment "Instead, we are being asked to subsidize the losses of major financial institutions without receiving any of the benefits. " shows a complete misunderstanding of the plan ... this is NOT an investment in supporting a company, as with AIG or others - this is the Fed purchasing the assets

And it is not making the selling entity whole or giving them a windfall - they will take haircuts, and likely big haircuts on the sale of these assets

The claim the taxpayers get none of the benefits is simply false - the taxpayers will own these assets and when the assets are sold - or if they are held to maturity - the TAXPAYERS - the government - will receive 100% of the profits

Many in congress and most of the public, including alleged experts, simply haven't a clue what this plan is intended to and NEEDS to, accomplish - and it is much more than taking these assets off the books

... it is to recapitalize, increase solvency, increase liquidity and increase confidence in these entities - to allow them to be able to lend and to encourage other they are worth doing business with

.... more importantly this plan si intended to stop the death spiral created by the ridiculous mark to market rules - which have caused perfectly good, non impaired in any way, assets to be written down to fire sale prices ...which write downs casue liquidations at fire sale prices - which then become the new "value" for mark to market forcing a whole new round

This plan - brilliantly IMO - addresses this massive problem.

The Fed is not a vulture buyer - if there was credit available these assets would be purchased today for fair values based on their cash flows and performance, both historic and projected ... there is no credit however and the only buyers today are the vultures ... the Fed has no pressures and plenty of access to cash - they can easily afford to hold these assets and collect the cash flow and other distributions.

And by doing that - paying the fair discounted present value these assets are worth based on their performance - they address many important goals ... as noted it provides liquidity, it also however establishes a real market value that will then be used by all company's to value their remaining assets - it allows assets to be written up to current fair value greatly enhancing balance sheets that were unfairly impacted by the ridiculous fire sale values on non-impaired assets - it eliminates the "paper" insolvency - allowing them to accurately reflect values on their books

AIG has said the forced mark to market write downs on their assets were more than 4 times the actual losses expected if they hold the assets - as planned - to maturity ... this plan addresses that

Some say we should let the market collapse - that we should let the vultures buy these assets - which is ridiculous in many ways ... especially considering the majority of these vulture buyers are foreign ... corporations, country's, sovereign wealth funds ...

If we allow that we have done oursleves what Osama and AL Qeada couldn't - we;ve given away our country to the Chinese, Arab Emirates, Koreans etc - and we've given it to them for 25 cents or so on teh dollar

The author talks about ROI ... but ignores the huge benefits - the ROI - this plan provides ...

Buffet, BlackRock, the CBO and many, many others have said the taxpayers and govt will<b> profit</b> in the purchase of these assets

Add to that restoring solvency, liquidity and most importantly confidence in the markets and the players - and preventing the collapse of the financial markets and Americas position as a leader ... THAT is ROI ....

China has already begun promoting the idea in the media that there should be a new world financial order - without the US at the center ... how do you think all the folks whining and compalining about this plan will feel then ...??

Freddie Chief: House Price Declines Only Halfway Done [Housing Tracker]

Another example of the media not seemingly reading and trying to understand the quote before commenting?

He said: "Previously we said house prices would fall at least 15% nationally <b>peak-to-troug...

he continued: "We now believe that national home prices will fall 18%-20% <b>peak-to-troug...

and then said "... we now think we’re about halfway through the overall <b>peak-to-troug... decline.”

we originally though the TOTAL peak to trough decline would be 15% and now we think the TOTAL peak to trough decline is more likely to be 18-20% peak to trough

yet the author seems to miss that above statement pretty clearly refers to the timing - the duration - not the amount of the decline

John Hussman: Can the Emergency Housing Bill Be Fixed?

The author makes the claim:

"One shortfall of the bill is that it doesn't appear to impose sufficient costs on Fannie Mae and Freddie Mac, <b>given that those institutions bought so many bad loans originated by careless lenders"</b>

We hear this claim repeatedly made about Fannie Mae but curiously there is NEVER any factual support offered to prove it ....

The reality and reason is that there is not factual support for this claim ... a review of Fannie Maes loan portfolio shows a tiny fraction of their portfolio in subprime loans - a fraction of 1% - and likewise their ALT-A exposure is similarly limited at appx 10% of their total portfolio

A similar review of default and more importantly actual foreclosure rates shows that Fannies portfolio is performing very well - with both default and foreclosure rates far below industry standards

Additionally, a legitimate honest review would show that they have stopped entirely buying subprime, and almost eliminated ALT-A purchases as well

Again - a simple review of Fannie Maes real numbers would show a strong portfolio performing well above industry standards - it would show very good avg credit scores - 721 FICO - and 90+% fixed rate (not ARM) loans

It would also show, despite its low default and foreclsoure rates, support for a decreasing direction in both

And as such that Fannie Mae, rather than the albatross it is claimed to be is actually an excellent steward of the trust placed in it

An honest review would show, absent the ridiculous "mark to market "fair value" write downs (which really mean "mark your perfectly good fully performing assets down to fire sale liquidation prices"), Fannie Mae is making very good money ... $3.4 billion in interest and guarantee income in Q1 2008 alone ....

Fannie Mae is not in any way, other than if you use accounting rule forced "paper" losses not supported by real world performance, insolvent or in trouble - at least not in their assets - their loan portfolio ....

That does not seem to prevent ignorant investors - who apparently aren't smart enough to do their own research, from riding the wave of media hype right into the ground ...

Historic Financial Collapse Underway?

As I posted in another thread - it simply is not that hard to come up with the facts - and as to Fannie Mae the facts absolutely do not support the ridiculous claims like made here ....

======================...
Why is it that every one of these type stories - that trumpet the dangers of Freddie, Fannie - here the FHA - or even ones like Countrywide and IndyMac etc never bother to talk about teh details

All we hear is how much risk there is - how poorly they are supposedly doing - how likely they are to fail and/or need rescue

Yet - none of these predictions are supported by facts.

The strength of Fannie. Freddie, FHA and even IndyMac and Countrywide are in the underlying assets - the loans themselves.

So just how are these loan portfolios doing?

Even a nominal effort at research yields the broad facts.

Fannie Mae has appx $5 trillion in mortgages - appx 1/2 of all mortgages in the US.

Some are claiming they don't have enough capital - but once again these claims are the result of "fair value" accounting of their assets - which means pricing them at liquidation value - irregardless of the real value

Yet the delinquency rate on the FNMA portfolio - the 90 day late rate - is just 1.15% as of March 2008 ... the foreclosure rate is usually a bit less than half of the delinquency rate

tinyurl.com/FNMA-FC-RA...

So on ALL FNMA Loans almost 99% are not delinquent


FNMA Loan breakdown Q1 2008:

tinyurl.com/FNMA-LoanD...

A tiny fraction of all FNMA loans are subprime - and just over 10% are ALT-A ....

A total of 93% of all new business in Q1 2008 was fixed rate loans - and a total of 89% of all mortgages in their portfolio are fixed rate loans

Estimated average Loan to Value is 62% (38% down payment/equity)

Estimated average FICO score - 721 (generally considered in the very good to excellent range)

Fannie Mae Delinquency Rates Q1 2008 (only appx 50% will actually end up foreclosed):

tinyurl.com/FNMA-Delin...

In Q1 2008 just 1.15% of all loans were 90+ days delinquent - appx 50% of these will end up foreclosures

Majority of delinquencies are in CA, AZ, FL and NV ...

90+ day delinq rates on ALT-A was 2.96% in Q1 200 vs 2.15% in Q1 2007

90+ day delinq rates on Subprime was 7.42% in Q1 200 vs 5.76% in Q1 2007

Many of these higher risk loans were originated in 2007 and prior - with our tightened standards newly acquired loans will have lower credit risk

The delinquency rate overall is just over 1% - just under 99% of all FNMA loans are NOT delinquent - are performing as agreed

Fannie Mae Q1 2008 Foreclosure stats:

tinyurl.com/FNMA-FCsta...

AZ, CA, FL, and NV accounted for 17% of foreclosures in Q1 2008 vs 4% in Q1 2007

The Midwest accounted for 36% of foreclosures in Q1 2008 vs 44% of the foreclosures in Q1 2007

ALT-A loans accounted for 29% of foreclosures in Q1 2008 vs 17% of the foreclosures in Q1 2007

Total foreclosed homes rate was 0.1% of all mortages in Q1 2008 and Q1 2007

Out of ALL Fannie Mae loans 99.9% are not foreclosed on ....

At the end of Q1 2008 Fannie Mae had $2.723 trillion in mortgages on their books and $2.625 trillion in mortgage guarantees on their books - total appx $5.35 trillion .... up from 2007 which saw $2.65 trillion in loans and $2.55 trillion in guarantees for a total of $5.2 trillion

Fannie Mae has $4.53 billion - out of $5.35 trillion in total loans in foreclosed homes on their books a total actual foreclsoure rate of 0.085% of current book

... and they will recover appx 60 - 65% of that $4.53 billion as these properties are sold - leaving a net loss of appx $1.812 billion - or appx 0.034% of the total $5.35 trillion current book

Total "non-accruing&quo.... (delinquent) loans are appx $8.723 billion - which makes the delinquency vs foreclosed rate on the $4.53 billion equal to appx 51.9%

Yep that portfolio is in terrible shape ....

Net interest income for Q1 2008 was $1.69 billion ... net guarntee income Q1 200 8 was $1.752 billion

Total income/loss before taxes was a loss of $5.113 billion for Q1 2008 however $4.377 billion of this was a "paper" mark to market "fair value" accounting loss - and there was another $3.073 billion provision for credit losses in Q1 2008 in this $5.113 billion Q1 loss

The $5.113 billion Q1 2008 loss provided a tax benefit of $2.928 billion - which reduced the net loss to $2.186 billion after taxes

According to one report:

"As of March 31, 2008, Fannie Mae had $42.7 billion in core capital, which represented a $5.1 billion surplus over the requirements of its regulator ... If we add together their statutory surplus, current loss reserve and estimated revenues, total “claims paying resources” for FNM are $56-92 billion ... If we tax effect these numbers, we see that FNM can sustain losses of $85-141 billion over 3-5 years

What is happening is that Fannie and Freddie are required, by accounting rule, to record paper losses because the immediate trading value of the assets on their books -- and in this case assets means mortgage loans that it holds--are going down. It probably has no intention of selling those now, so that is a somewhat theoretical problem. But that's what the accounting rules require, and as a result, it must record a "loss" for those on its quarterly income statement. That loss is then deducted from the value of shareholder equity on its balance sheet, thereby reducing the "capital" it has to serve as a cushion against further losses. That's basically what all the fuss is about."

Total losses in Q1 2008 = $2.186 billion (or which $4.377 billion was a paper mark to market loss which will come back as profit as the financial markets stabilize) ... and total reserves and surplus etc $56-$92 billion ...

Yep - they are in terrible shape all right ....

-steady and increasing revenue

-increasing market share with limited competition
loss reserves sufficient to handle years of losses at
current levels

-billions in unencumbered loans they can borrow
against

-improving loan credit quality on new loans
very small exposure to riskier subprime and ALT-A
loans

-far below "market" delinquency and foreclosure rates

FHA's numbers are even better than Fannie's in most metrics - the loans in their portfolios have some of the lowest default rates of all loans according to MBA's numbers

Yet we constantly hear from "traders" like this one how terrible these institutions are doing - and never with a review of the real details - the status of the assets....

Why is that?

What are all these commentators afraid of?

Historic Financial Collapse Underway?

yet another mindless "sky is falling - the end is near" commentary wholly unsupported by facts

It is clear this author - like most others - asn has been noted by several in this thread - pretty much made up his claims out of thin air - with no basis in fact

as usual with virtually every author these days of similar doom and gloom stories - he offers ZERO factual support for his claims of worthless paper and $1 trillion in losses

Why is it so many people today are sheep - blindly following completely undocumented and un-sourced alarmist comments like this? Why is it so many refuse to take the simple step - before rushing to judgment - of doing the simplest research and looking at the actual financial numbers?

clearly this author like so many others has not bothered ....

Housing Data: Crybabies and Deceivers

Originally tried to post this May 04 03:03 PM ...


This "commentary" is pretty much what it complains about - crybabying ...

He complains about median price comments now and says these people should ignore the real world stats unless they also acknowledged the differences early on - who the heck cares?

Facts are facts .... the fact is the median price was higher earlier on due to the mix including more expensive homes, more jumbos, and the median now is being drawn down by the increasing numbers of
lower priced foreclosures.

This is an important point - one the author could have commented on more instead of focusing on/about the past. The important point is that the early run up in median prices coupled with the current lower median
due to skewing from lower priced homes has inflated the home price drop. True statistical analysis would throw out outliers. That isn't overall possible here, but what is possible is
what has been done - to start breaking out into price tiers to see more reliable numbers.

Bottom line - for majority of homes - the reported drops are not accurate - the reported overall drop in values is greater than the real world for most homes in most areas.

Second is the implication that current values reflect ongoing future values. This is equally silly. Certainly there is an overall drop in values. That said there is also a large share of current market that is distress
sales.

Lenders and as significantly builders, who are liquidating properties in a significantly constricted "down" market, are selling properties for grossly unrealistic values in many areas simply to get them off their books
as fast as possible. They do not reflect "market" sales - and even most buyers realize that.

This glut of distressed inventory - new and existing - is being liquidated - and as it is consumed we will move back to a more realistic market. There will be a relatively immediate median price spike as we move
out of liquidation mode to a more normal market with an adjusted more normal inventory. And then a more gradual return to normal market conditions and appreciation.
Housing is as affordable as in a long time. Interest rates are low and likely to remain so. New programs, like FHA and increased loan limits mean more people CAN own homes.
Right now they aren't buying - in large part because of the severe negativity and fear mongering in media.

Consumer confidence is currently low but positive news is gradually starting to outweigh negative. The credit/investment market is stabilizing.We see more and more medoa stories with glimmers of positive. Soon the media will reach the bandwagon tipping point - one of them in their silly rush to "be first" will make the decision we've hit the bottom and are turning corner and the rest of the media lemmings will then follow.

Sales have dropped far below the level of investor and speculator buyers - meaning a lot of real buyers have been putting off purchases sitting on the sidelines. They are real buyers who need homes - and when
the market confidence turns they will jump in to try and catch the bottom.

And then success will breed success - sales will breed sales.

And when that happens - when the distress starts moving out of the market - the investment bank side also moves out of distress and fire sales and having to " mark to market" and take all those billions in ridiculous
writedowns - which bore zero relation to any semblance of the real values of their portfolios/investments .... and when that dustress goes out of the investment/credit side those same investments will need to
experience "write ups" ... suddenly there will be tens, or more like hundreds, of billions in value added back to the balance sheets of these entities.

Which will generate even more positive news and momentum.

The simple fact is housing values were not grossly inflated in most markets - in reality it was a small number of areas across the US. The biggest decreases were in markets with biggest increases - and even
those markets still show, after big declines, significant overall gains.

The OFHEO data shows exactly this. It is a much more representative sample of values as its based on FNMA sales and appraisal data - AND it covers close to 300 markets not just 20 as with Case-Schiller. The OFHEO data shows overall home prices have barely declined over last year. And over last 5 years home prices across all markets are still up 40% when looking at entire country.

Certainly a small number of buyers who purchased in last few years are suffering with current conditions. But home ownership still remains an overall good value and investment.

Not to mention that in too many of these discussions the fact that a house has another value - it is also a home is too often forgotten.

It is easy to whine and complain - as this story seemed to be focused on.

It is much harder to look at, try to understand, and then write about the real facts - to try to offer comment that adds value or perspective to the discussion ....

Blame Realtors, Brokers and Bankers - Not Greenspan

What a load of ridiculous rubbish. Little correct factual information and a demonstrated complete lack of understanding of the topic.

Even the repotrt listed as reference on commission rates indicated that the fact the 6% fee is relatively standard and has been for many years indicates a fair and balanced fee for service rendered.

It also touches on the important differences between US and other conutries - and that is risk the Realtor assume in a US listing. In the US the Realtor assumes risk of ALL costs - advetising, marketing, fees ... all expenses are borne by the agent or company and none by Sellers.

If the home does not sell the agent and company receive nothing. Try that with you doctor or attorney - tell them you aren't paying unless the cure you or win your case.

You pay them for their knowledge and experience - and you pay them on an hourly basis. Realtors have equally valuable knowledge and experience, yet are expected to take full risk.

That is why commissions are 6% - to reflect the assumption of costs and risk.

Additionally, in yet another show of ignorance, the author shows a lack of understanding of market valuation of real estate. In the US, because of the long history and consensus that the fee is fair, home prices have that 6% factored into the home price. This is evidenced by buyers who will generally try to reduce the price paid if property is offered by owner.

If the real estate industry were to reduce rates significantly the home prices in the US would drop by a commensurate amount.

Clearly this alleged "author" was more interested in attacking - than in presenting a well researched, ACCURATE, story. Had they done even the most basic research they could have found these answers ... this info is well documented.

In the end this story is nothing more than mindless finger-pointing iwth little rational thought or basis in fact.