surferdude808

No Money Down Mortgages Continue (Unfortunately)

smalltown banker you need to do your homework. your comment "Your commentary is not only inaccurate it is without substance. First of all the $8,000 tax credit is not received prior to the sale so it is not replacing down payment. FHA down payment requirements were increased from 3.00% to 3.5% and the ability to finance part of closing costs was eliminated at the same time. One must file for the tax credit after closing on a home so the funds are not used for down payment unless a loan is made against that anticipated tax credit. That is a very uncommon practice."

guess what, the use of the tax credit as the downpayment is a very common practice. go to fha website FAQs (federalhousingtaxcredi...) see question #19.
"...some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment..."

this mechanism of using a 2nd to fund the downpayment via a housing agency is why the adminstration recently provided $35 billion to housing authorities and allowed fannie and freddie to buy up to $20 billion in housing agency bonds.

fha is taking substantially risks with taxpayer monies, which are fully endorsed by the chairman frank of the house financial services committee as quoted in the NY Times on october 9th:

Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it. “I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

smalltownbanker, you may live long enough to regret this quote
"The FHA program has historically performed well and its insurance fund has adequately covered its losses. The same goes for VA and USDA Rural Housing programs. Comparing these to the programs that led to failure in the marketplace is ridiculous and unsubstantiated."

the best thing about this is that time will tell if your view is correct.

John Geanakoplos on Solving the Crisis - No Paradigm Shift Here

"I don't see any metric here one can use to identify these situations, which makes sense because it implies an absence of arbitrage that implies people are leaving $20 bills on the ground."

although i do agree there is no definitive metric like a share price that could be readily looked at for easy credit, but one could have looked at many factors and determined that credit was very easy. the most explicit, which was measurable, was the expilicit price -- in this case the interest rate. here rates on subprime, while higher than prime, were not high enough to compensate for the credit risk.

more interesting signs of lax lending were in non-price terms. as an example, LTVs just exploded higher. also, the piggy-back structures which circumvented the additional protection of PMI to the lender. credit being extended to low fico borrowers. i suppose one could take these non-price terms and convert them into a quantative ranking system, which when added to the explicit price terms, could create the singular metric representing credit laxity or tightness.

Were Fannie and Freddie the Real Enablers of the Housing Bubble?

looking at their pls holdings at 2009 as a share of their total book is an apple/orange analysis. what is more relevant is the share of pls to the flow of total mortgage assets acquired during the bubble years, which is way more than 3%. in general, prices are set at the margin. since the enterprises were buying pls at the margins, this contributed to the run-up in housing prices, which fueled the need for "innovative" mortgages so that buyers could purchase homes with higher prices. the enterprises played a very large and direct role in the housing bubble.


On Oct 28 02:56 PM Mark Alexander wrote:

> surferdude,
>
> "Loading up their books" is an overstatement. Based on 10-K’s, Fannie’s
> holding of subprime and Alt-A peaked at around $75B at year-end 2009
> – around 3% of Fannie’s mortgage credit portfolio, and around 3%
> of the balance of these mortgages outstanding at the time.

Were Fannie and Freddie the Real Enablers of the Housing Bubble?

while the GSEs share of origination fell in this period does not mean they were not contributing to the bubble. you mistakenly do not add their holdings of private label securities to their originations. while the enterprises had a smaller share of the origination pie, which was a good thing, they were loading up their books with private label securities. this provided an outlet for the subprime, non-traditional mortgages, which did add fuel to the fire.

The FDIC's Deposit Insurance Fund: Adequately Capitalized

the $31b at q2 has been by many failures since june 30th. there have been 47 failures at an fdic estiamted cost of $13.2b. thus, the contingent loss reserve is down to $17.8b. when the fdic held it q2 news conference in late august and fdic officials were interviewed for the american banker article they were aware of the subsequent failures yet they touted the $31b figure. if a publicly traded company made those statements one would hope the sec would come calling. also, some observers are are raising serious questions about the fdic loss estimates. if they are understated, then the $17.8b contingent loss reserve is much smaller. this us nothing more than a confidence game being run by the fdic as they are doing everything to prevent the fund falling below zero. since losses are running at 25% of a failed institution's assets (according to fdic); then the fund and contingent loss reserve of ~$27b could only absorb failed bank assets of $108b. based on this, it is hard to conclude the insurance fund is sufficiently capitalized.

Why Is John Dugan Being Rewarded for Failure?

it seems the ots is the only agency getting kicked. the occ (self-proclaimed as a "world class regulator") is/was the primary supervisory for institutions on a far larger scale than ots. both C and BAC have received open-bank assistance (they need to be counted as failures in the fdic numbers, but that is another subject); and WB was going to fail if not for the manipulated merger with WFC. these failures far exceed WM, IMB and DSL. how about the FRB, which supervises these bank holding companies and now they will be rewarded as the "systemic risk" regulator in the upcoming reform proposed by representative frank. but let's not forget the fdic as they sat back and did nothing while unprecented exposures to risky assets (c&d, cre, etc.) were put on the balance sheet. all of the regulators need to be called on the carpet and held accountable for their failings.

What's the Point of the FHLBs? Lots of Risk, Few Beneficiaries

" To resolve the company, the FDIC had to pay prepayment fees of $341 million to one FHLB and repaid $6.3 billion in advances, a substantial proportion of the total $8.5 billion to $9.4 billion estimated cost."

first, the fdic did not pay a pre-payment fee as the advance will be assumed by the acquirers. moreover, if the fee was going to be paid, feet dragging by the fdic caused it to rise. at the time IMB failed, the fee was less than half of the $341 million. the fdic did not pay back the advance at that time because they did not have the cash. as interest rates fell, the fee rose; hence, it was the fdic actions that were contributing to the cost.

it is a red herring to compare the size of the advance ($6.3b) to the resolution cost of IMB ($8.5b to $9.4b). Advances, deposits, or other borrowings do not cause losses. the losses at IMB came from the crappy construction and residential mortgage loans on the other side of the balance sheet. your inaccurate comparison of the advance to resolution cost shows you have a fundamental lack of understanding of financial intermediaries. stick to writing about something you actually know.

Ginnie Mae Extension Risk - Well, Assume Me!

extension risk is huge in this environment and much greater for portfolio lenders. newly originated low coupon mortgages are going to stay on balance sheets for a very long time; therefore, you better love these loans. this is also an issue with loan mods, particularly anyone following the fdic "mod in a box" program, which calls for lowering the coupon to 3% and maturities up to 40 years. if anyone knows how a portfolio lender can effectively fund these mortgages please let us know. btw, the cost of this funding for portfolio is not even considered in the fdic test to determine if the mod should be performed. low coupon, long duration mortgages were what killed the thrift industry when intrest rates exploded in the 1970s. if the majority of outstanding mortgage loans get re-written at low coupons, then the seeds of the next crisis are being sown as this rate environment will not last forever.

Lenders, Loan Modifications and Coming 'Cram-Downs'

bailout bair's modification criteria (do mod when pv mod > fc) fails to fully represent the decision facing portfolio lenders. how does an intermediary fund a portfolio of mortgage loans with a 3% or 4% coupon for 40 years? where is this market risk captured in bailout bair's proposal?

Let's Clarify "The Worst Economy Since...." Debate

this time series is not valid as the methodologies for computing the UER have changed several times over the past 80 years. some observers trying to compare the UER historically say it is better to use the U-6 series instead of the U-3 that is plotted. currently, the monthly U-6 is over 11%, the highest it has been since 1982. the UER like inflation has undergone many changes because of politics. while some are fixated on the level of UE, more importantly however, is the change in the UER from the trough. the change at the margin is very large and is set to increase. this sea change will have a profund impact on consumer spending behavior. fasten your seatbelt as it is going to be a very bumpy ride.