Wisdom-Seeker

Credit Woes, "Ceaseless Talk," Fannie Mae and Toll Brothers

The question you need to ask about your thesis Re: TMA is: who's going to supply the capital to back the new loan issuance? The banks haven't got the money anymore, which is why jumbo interest rates are so high. FNM and FRE were getting away with lower rates because people were buying their securities. But now no one wants those securities. So those rates are going up. The OFHEO now says FNM and FRE can lend as much as they like -- good, right? -- except whoops, they have to have plenty of reserve capital on hand. Now, I can see why FNM and FRE would see +10% share price jumps on that news, but it appears that all those gains went away by the end of the day! What a ride for those traders... Anyway, I guess the upshot is that FNM and FRE haven't got enough unimpaired reserve capital to benefit from the higher limits. So, no lower rates from them either.

Higher rates -> no refinancings -> fewer purchases -> lower home prices. The situation will not improve until someone with capital decides it's worth lending to the American homeowners and would-be homeowners. But why would anyone do that, especially now? The value of the underlying collateral (U.S. housing, and, for foreign investors, the U.S. dollar on top of that) is in free-fall, and the entire U.S. financial system is riddled with varying combinations of total incompetence and outright fraud. The mortgage brokers, issuers, securitizers, ratings agencies and insurers have all made it abundantly clear that it's up to the actual investors (the real lenders) to manage the real risks, because they don't think they have any financial incentives of their own to do so. And in the short term, they don't. So the investors have gone on strike, demanding a better risk/reward scenario. And the screwed-up mortgage securitization food chain businesses are going to watch their businesses go into near-collapse due to sheer lack of moral integrity.