djsunshine

Fannie and Freddie Did Not Cause This Crisis

US Sovereign Fund
You can say 700 billion is US Sovereign Fund.
Created to support US housing industry.
It some level it is government’s job (and public policy) to help people have neighborhoods with home ownership. That is what makes our nation strong and our future generation competitive. This homeownership and home equity afforded by this safety net is the only retirement nest egg most common citizens have.

If you wake up and think about it you will end up paying more in taxes to get equivalent result. Inflation caused by this 700 billion is also a kind of tax that you and I will have to pay but in different form. In conclusion ‘Expansion required (not just inflation protection) portion of fed’s mandate’ is what put us apart from our friends in Europe.

Thank god for that.

Doing a surgery by a chainsaw

Basic requirement was house be a home and a shelter. To the extent there is no monthly payment shock home owner have to live and pay rent or a mortgage. This was a fundamental assumption. As long as they can afford monthly payment they will stay. That is why home ownership is different kind of investment.

Even this bail out has this assumption. To the extent home owner can afford to make monthly payment lenders with HUD’s co-operation can do loan modification so, people can stay in home.

Unfortunately insensitive consistent prolonged reduction in interest rate and after that prolonged increase in interest rated created dramatic inflated home prices and now deflated home prices.* Just now feds have understood that old fashion monetary policies (raising and reducing interest rate) do not have precise effect. Remember conundrum? Long rates were cheaper than short and world kept on throwing money at leveraged hedge funds. In this global financial market that is loaded by sovereign funds is a different animal. It took so long to have an effect that it damaged the entire credit market. It is like doing a surgery by a chainsaw where you need a laser beam. Now our economy patient is in critical condition. This collateral damage caused by lack of leadership can cost our country a super power status.

Fierce competition and outdated regulations created a disconnect between borrower and lender. Prolonged lower interest rate and inflated home prices created a feeling of have and have-nots home owners. Toward the end 2005-2006 most of the houses were bought by these have-nots who felt left out. To make it affordable they were given teaser rate payments assuming prolonged lower rates.
The real problem was marking to market and it is still a marking to market. SEC is a sleep on the wheel hoping that two wrong will make one right. First when problem started risk pricing was done based on ‘marked to market’, based on previous five years’ experiences. Ignoring the imminent increase in market risk. That caused disaster to investors. Now second time same thing is being done ignoring ‘there is no market CDOs’ there for requiring ‘balance sheet’ and ‘Capital’. Common sense should prevail.
Two wrongs does not make on right.

No market does not mean no value it is a short term assessment bookkeeping problem. There could be a one year ‘suspense account’ valuation or a gray area valuation lead by SEC. Book-keeping should reflect the market and not amplify… either way positive or negative…
Instead SEC, vested interests and politics are creating shotgun weddings and winners and losers of the centuries. This is lead ‘wagon circling’ by the same people who were supposed to help. No wonder banks and lenders do not trust each other and refuse to help. They have vested interest in not helping.

Now decentralized localized negotiated loan modifications with home owners is the only meaningful solution. Each individual mortgage has a home owner and each home owner has a family, neighborhood, township, school and communities that make this nation. Big time games on Wall Street and Washington should not ignore that.


* No one is talking about replacement cost of these houses. Material costs have gone up. These deflated prices of homes will cause another inflated response in future.