What's Up With The $700+ Bail Out....

Federal Bureau of Investigation is overwhelmed..

More happy news from the economic front: it is possible that the perpetrators of the mortgage mess, the stock market nose dive, and a whole bunch of other peripheral crimes might just get away with it. The New York Times and the Associated Press are both reporting that the Federal Bureau of Investigation is overwhelmed by reports of possible criminal activity arising out of recent events, and, unless they can increase staffing in some of its divisions, might have to raise its own hands in surrender. At the root of the problem is a recent refocusing of Bureau resources on international terrorism rather than white collar crime. After 9/11 it shifted more than 1,800 agents from various criminal investigative activities to its terrorism and intelligence departments. This is nearly one-third of those agents previously working in the criminal divisions. Now the FBI is confronted with the need to investigate the collapse of Fannie Mae and Freddie Mac, possible [?]misbehavior leading to the demise of Lehman Brothers and the near-death of AIG, various suspected incidents of security fraud, and an ongoing concentration on homegrown mortgage fraud and the subprime market. In response, according to the NYT, the Bureau is planning to double the number of agents working financial crimes by another shuffle of personnel. The prosecution of non-terrorist related crime was already suffering before the recent problems emerged. The Times says that the F.B.I. has disclosed that the number of crimes they have turned over to prosecutors in areas such as drug trafficking and violent crimes has dropped from an annual rate of 11,029 to 8,187 in the last seven years, a decrease of 26 percent. Justice Department prosecutions (including cases referred from other agencies such as the Postal Service) dropped 48 percent from 2000 to 2007; insurance fraud cases were down 75 percent and securities fraud 17 percent.
Statistics from a research group at Syracuse University, the Transactional Records Access Clearinghouse, using somewhat different methodology and looking only at the F.B.I., show an even steeper decline of nearly 50 percent in overall white-collar crime prosecutions in the same period. The article quoted John Miller, an assistant director at the F.B.I as saying, "In white-collar crime, while we initiated fewer cases over all, we targeted the areas where we could have the biggest impact. We focused on multimillion-dollar corporate fraud, where we could make arrests but also recover money for the fraud victims."
According to the F.B.I.'s website, corporate fraud remains the highest priority of the Financial Crimes Section and, as of the end of Fiscal Year 2007, 529 corporate fraud cases were being pursued by FBI field offices throughout the U.S., several of which involve losses to public investors that individually exceed $1 billion. Even before the extent of the subprime situation became apparent, the FBI was concerned about it and other forms of mortgage fraud and, according to the Times, "repeatedly" requested the Bush administration to provide it with more money to hire additional agents. The Bureau says it currently has 42 mortgage fraud task forces and working groups in operation and, as of August, 1,569 pending mortgage fraud investigations. There were 523 indictments or "informations" in Fiscal 2008 with 282 convictions. The Bureau estimates that $4 bill to $6 billion is lost every year to mortgage fraud and the states with the most fraud activity in 2008 were Florida, Nevada, Michigan, California, and Utah.
The Bureau also states as publicly traded subprime lenders have suffered financial difficulties due to rising defaults investigations have determined that many of these bankrupt subprime lenders manipulated their reported loan portfolio risks and used various accounting schemes to inflate their financial reports. In addition, before these sub prime lenders' stocks rapidly declined in value, executives with insider information sold their stocks and profited illegally.
A legal consultant and former prosecutor working for MSNBC said that any delay in investigating some of the alleged financial misdeeds can only work in favor of the dishonest and the criminally greedy as they will have the time to destroy such evidence as emails and otherwise cover their tracks. The Bureau, according to the NYT, is also concerned that its current shortage of personnel will make it possible for crooks to turn the $700 billion rescue package into another opportunity for profiteering.

Some Good Reading......

-Southern California home sales shot up by an unprecedented 65 percent last month from the dismal, record lows of a year ago, when a credit crunch slammed the brakes on home financing. September sales also posted a rare gain over August as price cuts lured more buyers. Foreclosure resales rose to half of all transactions.
A total of 20,497 new and resale houses and condos closed escrow in the six-county Southland in September, up 5.8 percent from 19,366 in August and up 64.6 percent from 12,455 in September 2007, according to San Diego-based MDA DataQuick, a real estate information service.
Last month's sales were the highest for any month since December 2006 and the year-over-year gain was the highest for any month in DataQuick's statistics, which go back to 1988. However, last month's sales were still the second-lowest for any September since 1996 and were 17 percent below the 20-year sales average for that month.
This September's huge annual sales increase stems from the extraordinarily weak activity in September 2007, when sales were at a record low for that month. The year-ago sales plunged after the credit crunch that struck in August 2007 made "jumbo" mortgages for higher-end homes more expensive and harder to obtain. Sales were already hurting from the subprime mortgage industry meltdown earlier in 2007, which undermined demand for entry-level homes.
"The pitifully low September 2007 sales numbers weren't tough to beat. More impressive was that this September's sales volume bucked the seasonal norm and rose above August. Steep price declines, especially inland, have improved housing affordability quite a bit and may keep sales levels well above the record lows we saw late last year and early this year. It will depend on the severity of this economic downturn," said John Walsh, MDA DataQuick president.
"You have to view last month's sales in the proper context," he cautioned. "They represent escrow closings, which reflect purchase decisions made in mid-to-late summer. That was before the dramatic worsening of the nation's economic crisis in recent weeks. Over the next few weeks our sales data will begin to show how the meltdown in financial markets this fall has impacted housing demand."
Bargain shopping continued to fuel the Southland market last month, with sales typically rising the most in areas where prices have dived and foreclosures have soared.
Fifty percent of all existing homes that closed escrow in September had been foreclosed on at some point in the prior year. That's up from 45.5 percent in August and 12.6 percent in September last year.
At the county level, such foreclosure resales ranged from 36.8 percent of September resales in Orange County to 68.9 percent in Riverside County. In Los Angeles County foreclosure resales were 39.1 percent of all resales; in San Diego 47.3 percent; San Bernardino 63.1 percent and in Ventura County 44.0 percent.
The high level of foreclosure resales helped push the Southland's median sale price down to $308,500 in September, the lowest since it was $305,000 in May 2003. Last month's median was 6.5 percent lower than $330,000 in August and 33.2 percent lower than $462,000 in September 2007. The September median stood 38.9 percent below the peak $505,000 median reached in spring and summer of last year.
Several factors explain the sharp drop in the median price: Regionwide home price depreciation, relatively slow high-end sales, and the rising market share of foreclosure resales, which tend to sell at a discount.
Problems in the jumbo mortgage market continue to undermine high-end home sales. Before the credit crunch hit last August, 40 percent of sales were financed with jumbos, then defined as over $417,000. Last month just 13.2 percent of purchase loans were over $417,000.
MDA DataQuick is a division of MDA Lending Solutions, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. MDA DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.
The typical monthly mortgage payment that Southern California buyers committed themselves to paying was $1,458 last month, down from $1,566 the previous month, and down from $2,198 a year ago. Adjusted for inflation, current payments are 31.9 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 44.4 percent below the current cycle's peak in June 2006.
Indicators of market distress continue to move in different directions. Foreclosure activity is at or near record levels, financing with adjustable-rate mortgages is near the all-time low, as is financing with multiple mortgages. Down payment sizes and flipping rates are stable, non-owner occupied buying activity appears flat but might be emerging, MDA DataQuick reported.
An estimated 37,988 new and resale houses and condos were sold statewide last month. That was down 3.8 percent from 39,507 in July and up 13.6 percent from 33,429 for August last year. California sales for the month of August have varied from 29,764 in 1992 to 73,285 in 2005, the average is 49,927. MDA DataQuick's statistics go back to 1988.
Of the homes sold in August, 46.9 percent were foreclosure resales, up from a revised 44.9 percent in July and 9.4 percent in August a year ago.
The median price paid for a home last month was $301,000, down 5.3 percent from $318,000 for the month before, and down 35.3 percent from $465,000 for August a year ago. Around half the drop in median is due to depreciation, the other half due to shifts in the types of homes selling, and how those homes are financed.
The typical mortgage payment that home buyers committed themselves to paying last month was $1,428. That was down from $1,501 in July, and down from $2,251 for August a year ago. Adjusted for inflation, mortgage payments are back to where they were in late 2001. They are 31.0 percent below the spring 1989 peak of the prior real estate cycle. They are 44.2 percent below the current cycle's peak in June 2006.

2009 CONFORMING LOAN LIMITS

(10/17/2008) The Federal Housing Finance Agency (FHFA) expects to announce 2009 conforming loan limits for Fannie Mae and Freddie Mac by November 7. The limits define the maximum loan size of mortgages that can be purchased by the Enterprises.
Under the Housing and Economic Recovery Act of 2008 (HERA) passed in July, FHFA was directed to set conforming loan limits each year for the nation as a whole as well as for high-cost areas. The rules governing how the loan limits are established differ from the rules set forth in the Economic Stimulus Act of 2008 (ESA), which applies to loans originated in 2008. For example, under ESA, loan limits for high-cost areas were set at 125 percent of local house price medians and the maximum high-cost limit was 175 percent of the national conforming limit ($729,750 in the continental U.S.) Under HERA, the high-cost area loan limits are 115 percent of local price medians up to a maximum of 150 percent of the national limit. In 2009, if the national limit remains at $417,000 for one-unit properties, the maximum limit in high-cost areas would be $625,500 for the continental U.S. To determine high-cost area limits under HERA for 2009, FHFA will use median home values estimated by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD). The FHA median prices will be calculated in the coming weeks by FHA for the purpose of determining its 2009 loan limits. Information concerning its process and calculations can be found in the attached addendum.

A Few Good Men.....Plus My Answer To The Crisis - in part....

If you by error come up short at work you'd been fired long ago for much less. Don't be fooled, lots of this is criminal - on all sides of the ball. Consumers, Bankers, CEO etc.

Not all BIG BRASS are oblivious and absent minded leaders. Here is a mish mash of the good, bad and the ugly.

``There are three reasons why companies go out of business and individuals go out of business: No. 1 is arrogance, No. 2 is arrogance and No. 3 is arrogance,'' said Harvey Mackay, chairman and CEO of Minneapolis-based MackayMitchell Envelope Co. Harvey goes on to add, "They all have chapped lips from kissing the mirror too much.'' Warren Bennis from USC adds, "``They need to man up and take responsibility,'' - founder of the Leadership Institute at the University of Southern California and author of books including ``Leaders'' and ``On Becoming a Leader.'' ``They kept winning, believing in their own omniscience and thinking they can get away with anything.''

Boards bring CEOs aboard to maximize company profits not CEO compensation -

I find this quote to be very interesting.

Richard Fauld - CEO Leham Brothers, " ``horrible about what happened'' and that management did everything we could to protect the firm.''

Did everything to protect the firm? Really?

I have no objection to making big compensation, but should it not be performance based?

Fuld, whose compensation for his last eight years totaled $484.8 million, said Lehman had to seek bankruptcy protection Sept. 15 because of a ``financial tsunami'' that was ``bigger than any one firm or industry.'' -

$484+ million in pay should make you accountable to something - should it not?

What ever happen to taking some responsibility? What ever happen to - "We made some bad decisions" or "As The Leader I take Full responsibility"

A Responsible CEO (Jeff Gault) of Los Angeles-based LandCap Partners, which bought $40 million of land and construction loans from Wachovia Corp. in August. ``You're either the boss or you're not the boss. The CEO is the owner of the deal.''

In closing -

Anyone notice how no body is claiming any sort of error in judgement. Its as if this ALL JUST HAPPENED.

*** Here is a rank and file idea - NO CAPITAL GAINS ON THOSE THAT PURCHASE THESE ASSET BACK SECURITIES? This would be so good on so many differant levels for so many people.

Not All Sub Prime Operations Are Drowing in Red Ink

How can you not like Warren. He lives in the same home he grew up in, makes a ton of money (#1 Richest Man In The World) - fiscal conservative social liberal and

Open your ears for this one and listen real good - NOT EVERY SUB PRIME LENDER DROWING in bad loans. In 2003, Warren Buffett bought a family-run business based in Maryville, Tenn called Claytn. 45% of the loans for the Clayton homes were made to sub prime borrowers. Here's the brass tax. The sub prime home loans Warren's company has been involved with have 1/2 the delinquency rate of the national stick bulit homes. Here is the cherry on top - THE FORECLOSURE RATES FOR CLAYTON HOMES IS DOWN. Clayton is more careful about lending because it keeps all loans on its own books rather than offloading them to others by means of securitization. Imagine that. Holding your own paper. Clayton has banked on homebuyers who can afford their monthly payments and who purchased their houses owner occupied, not for speculation. Clayton also avoided the mortgage industry practice of enticing buyers with low initial payments, followed by much higher payments a few years down the road. Most notably, Clayton's customers aren't likely to walk away from a house simply because it has lost value. "If people purchased a house with the idea that it would appreciate substantially in the next few years, they may elect not to make their payment," Buffett wrote. "Since our borrowers did not come in with those expectations, they will quit making payments only when they can't make the payment."

Libor Libor Libor Libor Libor Libor Libor Libor Libor

The average subprime borrower facing an adjustable payment for the first time next month would face a monthly payment increase of about 18 percent based on Libor rates as of Sept. 30, rather than the 10 percent that would have occurred based on the rates on Sept. 15. Libor rates have soared since the bankruptcy of Lehman Brothers Holdings Inc. last month as financial companies hoard cash.

About 121,000 mortgages will reset for the first time next month, according to the Citigroup report, which looked at only securitized mortgages. About 1.8 million loans have already begun adjusting based on benchmark rates, the report said, while 3.7 million face resets scheduled for after next month.

LIBOR is the interest rate that banks charge each other for one-month, three-month, six-month and one-year loans. LIBOR is an acronym for London InterBank Offered Rate. This rate is that which is charged by London banks, and is then published and used as the benchmark for banks rates all over the world.
LIBOR is compiled by the British Bankers Association (BBA), and is published 11 am each day in conjunction with Reuters. It is comprised from a panel of banks representing countries in each currency.
LIBOR is also used to guides banks in setting rates for adjustable-rate loan, including interest-only mortgages and credit card debt. Lenders typically add a point or two, which is their margin.
What It Means to YouIf you have an adjustable-rate loan, when your rate resets, it is usually based on the LIBOR rate. Even if you have a fixed-rate loan and pay off your credit cards each month, an increasing LIBOR will affect you by making all types of consumer and business loans more expensive. This reduces liquidity, which slows economic growth.

Down Goes Frazier! Down Goes Frazier!

In This little E-Mail Box Of Mine .........

Michael:
Insuring lenders won't help if they don't have the capital to make loans!
Keep in mind, the assets that are currently hurting us so badly have been mostly written down to levels that are blind to any fundamentals. I'm seeing AAA-rated mortgage backed bonds (Alt A) trading at 40-50 cents on the dollar. For one particular issue I looked at today, 5% of the underlying loans are delinquent and there are no option-ARMs in the portfolio.
You can buy this today and not lose a penny of your investment, even if over 80% of the loans eventually default and you only collect 50% on the defaulted loans. On top of that, you get a 15%+ yield. (the numbers are all approximate because there is no real market for these assets, regardless of their intrinsic value)
These are the kinds of assets that the government would be purchasing. Unless you see the end of the world coming, the taxpayer would make money on credits like these, especially if the government is not permitted to buy these at a premium to their current marks (which I believe the bill would have required)
This just highlights the extreme levels of fear in the market. No one is buying. If the government doesn't intervene, this only gets worse.
Panic isn't stopped by panicked investors. Panic is stopped by an entity with a long time horizon and a big balance sheet. Right now, the government is the only player who fits that profile.

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I have been in the camp that believed that the government had not sufficiently made the case for such a massive bailout. The events of the last several days have changed my mind. I read today that banks across Europe are collapsing.
That said, the original bailout plan was conceived too quickly, was too favorable to the finance companies and gave too much power to one person. The revised plan was an improvement but was still insufficient.
There is no doubt that a bailout/rescue bill of some type will be passed before Congress leaves town. However, the odds have improved that we will see a plan that gives taxpayers a better shake.
As much as I hate the idea of a bailout, the alternative would likely be very painful for most of us who read this blog. Very few of us will enjoy Schadenfreude if the economy takes an excessively hard landing.
This isn't about propping-up the housing market...that's probably toast for the next 2 to 3 years at least. Home prices are going to have to reach an equilibrium level and this bailout plan is not designed to keep that from happening

--------------------------------------------------------------------------------------------------"Credit should remain available unless the Chinese change their mind about investing their huge surpluses in the US."
It's not as easy as that, unfortunately. As the world economy downshifts dramatically, much of the "surpluses" that China has been running will disappear. I think we will discover in short order that it really wasn't Chinese "savings". They are a growing economy, with a limited system of financial intermediation and tremendous poverty still, and they have been going flat out investing in their own country.
Much of the "savings" has been an illusion. They are the flip side of our trade balance. We borrow dollars against our houses and assets. We then ue those dollars to buy Vhinese goods. Chinese exporters give those dollars to their central bank. Their central bank "prints" yuan to give to the exporters, who then spend those yuan in domestic investment and consumption. This leads to price inflation in China (because the central bank is printing) and credit inflation in the US. The price inflation in China ultimately destabilizes their economy because of the pressure on profits and on the population. The credit inflation in the US leads to asset bubbles that are unsustainable in that the credit used to elevate the price cannot be repaid out of income. And around it goes.
When the lenders fear they will not be repaid (whether in the US or in China), and the producers cannot profitably run their businesses and/or the population cannot afford to eat (this is starting to be the case in China), the system collapses. All ponzi schemes end, and the fact that this one is collapsing at record low real interest rate levels should tell us volumes about what a mess the Fed has created by consistently trying to force real interest rates below their equilibrium level for so long. Those who on this blog used to argue that the Fed is so much smarter now than in the 1930s should really think about where we have arrived after all this "smart tinkering".
Any attempt to seriously "inflate" away the problem spooks the lenders and they stop lending. Deflation assures that the creditors are at least partially repaid with valuable currency, but it is extraordinarily painful to those leveraged buyers who were counting on "inflation" to bail them out, and iof course certain creditors will be out of luck anyway.
And so, we are at a macroeconomic impasse. I firmly believe that the guys who got us into this mess are not going to be able to get us out. But they sure will try!

Thoughts On The Bail Out

We're just rewarding bad behavior and punishing good. The responsible folks, who don't borrow beyond their means and make all their payments, have to bail out the irresponsible borrowers who took loans they couldn't pay back, and the unscrupulous banks that lent money to irresponsible borrowers.
People and institutions that make bad financial decisions should pay for those decisions. Where's my interest rate reduction, or my loan principal write-down? Oh, that's right, I don't get any breaks, because I pay my bills, so I get punished for my financial responsibility. I just have to pay for your bail out.

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Actually, I wouldn't say it is rewarding the bad behavior.
The owners (stock holders) of those banks already lost almost all their money.
And if there is no bailout, everyone will be punished, in term of economy and jobs. With bailout, at least we won't get into Great Depression 2.
Without bailout, the chance of anyone getting any mortgage is close to nil for the next year or so. It won't matter whether the price tanks...because it will because nobody can buy it. The renters will be locked out of the market, not by price, but by financing (or lack of).
With bailout, the price will still tank. However, buyers will hopefully get reasonable financing options, so we can actually take advantage of the situation.
I hope some people like to see others suffering.... to me, I don't care whether others suffer. I only care if I can take advantage of the situation.

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If the bailout works, it will work because it re-instills confidence in the current economic system. Economists, even today, only really can explain about half of all economic activity.The neoclassical model is particularly bad at modeling actual human behavior because humans don't tend to act like the "rational man" of their theories.
The overwhelming majority of economists agree that the New Deal lessened the effect of the Great Depression, the main problem is that the stimulus was not sufficient enough. This was proven when we entered WWII and government spending rose to 50% of the economy and full employment followed. Even during the period before the war, the economy grew at an average of 9-11%, the fastest economic growth period we have ever seen outside of wartime.

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The overwhelming majority of economists didn't think there was a housing bubble either. In truth, the overwhelming majority of economists are fools

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If we're going to have a socialized mortgage market then let's at least make sure to socialize the profits as well as the losses.

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and the band plays in......

Its getting very interesting.....

"The housing correction poses the biggest risk to our economy," Paulson said the day he announced the Fannie and Freddie seizure. "Our economy and our markets will not recover until the bulk of this housing correction is behind us."

Some experts even argue that the steps being taken to rescue firms like AIG could make a recovery in housing and the broader economy more difficult, as financial firms and investors become more reluctant to lend money.

"We are certainly taking credit and squeezing it tighter and tighter," said Kevin Giddis, managing director of investment bank Morgan Keegan. "Housing needs buyers. Buyers need credit."

1 Year price differance Aug 2007-Aug 2008

ATL -8.5%
Boston -5.5%
CLT -1%
CHI -9.5%
Cleveland -7.3
Dallas -3.2
Denver -4.7
Det -16.3
Vegas -28.6%
L.A -23.3% (Southern Cal)
Miami -28.3%
Minn -13.8%
NY -7.3%
PHX -27.9%
PTL -5.8%
San Diego -24.2%
SF -23.7%
Seattle -7.1%
Tampa -20.1%
Washington DC area -15.7%

A Little Light In This E-Mail Box Of Mine

Cycles: Seen them before, we'll see them again.
We have been through the cycles of the real estate market before , and we will go through them again. Right? We have seen the rise and the fall of the stock market many times, gold, oil ,copper, coal and any number of other markets and will see them again. Right?

When I trained traders on how to handle markets, the lesson was that nothing goes straight up, and nothing goes straight down, but we move and pull back, move and pull back. Everything is cyclical. Right? We have seen the meteoric rise of real estate, and at least in the residential markets a sizable decline. By my reckoning we are now due for a rise. Is that right?

Past Cycles and Fear

We saw it in the late 1980's and early 1990's, when the market pulled back, provided a buying opportunity, and then took off again. Lesson two that I would teach is that you would need to be a buyer when the lump in the pit of your stomach made it the hardest. When fear was the greatest and you were rushing in to buy as the sellers were running past you in the opposite direction. You need to buy when no one else is willing to buy. Is that where we are now?

The Present and The Future

There are some differences this time, primarily that it is not the asset itself that is the problem, but the financing mechanism. In the other real estate recessions we had supply and demand problems: that is to many properties and not enough buyers (although in some geographic areas like Florida and Las Vegas they have both problems). Now what we have is a crisis in the mortgage markets, that have caused even the most credit worthy borrowers to have an extremely diifcult time getting a loan.

We also now have huge institutional investors sitting on the sidelines with a ton of cash at the ready to jump in and buy, when they determine that the time is right. That is a good thing. We are in an extremely news driven environment, where at least at this point in time the news could not be darker. We have financial institutions like Washington Mutual and Lehman Brothers among what will probably be others that are trading as if they appear to be the next in line for a Federal bailout. Is this that time when the bold will jump in? Some may, while other may wait.

The smart money will be buyers, at a time when hindsight says it was the perfect time. Others will get in after they are sure it was a market bottom, while others will be last to the new party and be left holding the bag in this new cycle.

The Moral of the Story

One thing is for certain. We are in the downside of the cycle, that will ultimately bottom at some point, the news cycle will turn suddenly bright, and many "smart" and "bold" people will make a great deal of money. When that is going to be is for smarter minds than me to determine, but one lesson from the past is true.

Real estate is not only location, location, location, but now more than ever it is going to be timing, timing, timing. And "those that cannot remember the past are destined to repeat it."

The shoe has fell.....

After weeks of anticipation and speculation, Treasury Secretary Henry Paulson announced that the federal government had taken over Freddie Mac and Fannie Mae.
Most of the day both before and after the seizure was announced television and Internet news sites were filled with comments and reactions from business writers, financial analysts, and presidential and vice presidential candidates. The general theme was that the takeover had to be done; that the two corporations were in critical condition and would probably continue to decline thus increasing the ultimate rescue costs; and that they were "too big to fail." There were, however, a lot of experts who questioned the method and scope of the action.
No one is really sure what the takeover will cost - estimates range as high as $200 billion - but it is clear that taxpayers and some stockholders are going to take a bath. It is also questionable just how much the drastic federal move will impact the housing slump, foreclosures, interest rates, or lots of other things that were given as reasons for the action.


Here is what we do know.


The two mortgage giants are now operating in a government conservatorship that will be administered by the new Federal Housing Finance Agency (created under the same Congressional authority that authorized the Treasury Department to shore up Freddie and Fannie. James Lockhart, former director of the Office of Federal Housing Enterprise Oversight which had responsibility for the two government sponsored entities (GSEs) is the new director of the Finance Agency.
The Conservator will control and direct the operation of the Company and will have all the powers formerly held by the shareholders, directors, and the officers of the Company and conduct all business, collect all money due to the company, preserve the assets and property of the company, and contract for any assistance necessary.
In return for providing funds to guarantee their debt the Treasury Department will immediately receive $2 billion in preferred stock that will pay a 10 percent dividend. $1 billion of the stock will come from each of the two companies and the Conservatorship will purchase additional stock, perhaps as much as $100 billion worth, if the GSE's capital reserves fall below an agreed upon level. This preferred stock will take president over any claims by holders of common or the existing preferred stock.
According to Secretary Paulson, the GSEs will modestly increase their mortgage backed securities portfolios through the end of next year "through prudent mortgage purchases" and will then reduce those holdings by 10 percent per year after 2009. The portfolios shall not exceed $850 billion for each company. An Associated Press article quoted Mark Zandi, chief economist for Moody's Economy.com, as saying this will effectively make the federal government the nation's mortgage lender.
It appears that Treasury is primarily interested in protecting holders of GSE debt. This class of creditors includes many large investment companies and a number of foreign governments.
The Treasury Department is establishing a new secured lending credit facility which will be available to the two GSEs and to Federal Home Loan banks.
Both CEOs - Fannie's Daniel Mudd and Freddie's Richard Syron - have lost their executive positions and mammoth salaries although it appears that each has agreed to stay on to assist in an orderly transition.
The conservatorship is open-ended in terms of time. The conservator alone will make the determination that the companies have returned to a safe and solvent condition.
There is much about the effects of Sunday's actions that is not known at this time and some who commented on television and print on Sunday seemed shell-shocked by the extent of the action. Several financial reporters commented that Treasury had acted far more broadly than anyone had expected.

Among the current imponderables:


What is this whole thing going to cost? As stated above, the number $200 billion is being bandied about as a direct cost, but it is impossible to measure the losses that will spread throughout the economy. The common and preferred stock is widely held by individuals, entities such as pension funds, and other financial institutions of all sizes. While these stockholders have already watched their investments plummet in value over the last 18 months, will they lose everything? Several of Paulson's statements on Sunday seem to indicate that possible losses to stockholders in the financial sector may determine the treatment of all stockholders. Pardon the cynicism, but this apparently means that big business interests will be protected.
How great will be the impact on the housing market? There seems to be a consensus that there will be little impact on the numbers of houses for sale and that home prices will continue to fall; less conviction than hope that mortgage rates will come down. Optimists say the takeover will increase the stability of and confidence in the credit market and could result in a reduction of as much as one quarter to one percent in rates.
Have lending standards already been tightened sufficiently since the subprime crisis began or are borrowers and lenders in for another round of rules that will make it tougher to obtain or grant financing?
It appears likely if not certain that fees charged banks for loan securitization services may be reduced which could lower the costs of obtaining loans.
What will happen to homeowners who are already in trouble with their mortgages? In the case of the recent closing of IndyMac Bank the FDIC almost immediately announced a program to assist these borrowers and it is clear that the government has no desire to own hundreds of thousands of foreclosed homes. Some commentators mentioned an expansion of the Hope Now program, but the sheer magnitude of the problem could be overwhelming.
Immediate reactions to Paulson's announcement on Sunday were mixed although most reactors seemed to feel it was appropriate and inevitable. Some questions were raised as to whether the takeover was too radical or did not go far enough. The presidential candidates expressed a range of support for the Conservatorship. Barack Obama commented on ABC's This Week that he felt no class of investors or debtors should carry more of the burden than others. The Republican candidates both applauded the action.
The impact on the stock market cannot yet be determined although the Asian markets were reacting favorably as was the futures market. It will be an interesting day on Wall Street.
The Conservatorship will obviously be big news for many months. We will periodically update the reactions and the effects as they become known.

Tid Bits For Friday

The two firms (Fannie Mae / Freddie Mac), which were set up by the government, own or back about $5 trillion worth of home debt - half the mortgage debt in the country. Since last summer, they have suffered about $12 billion in losses. Fannie and Freddie have become virtually the only source of funding for banks and other home lenders looking to make home loans. Their ability to do so is crucial to the recovery of the battered home market and the broader U.S. economy. The two firms buy loans, attach a guarantee, then sell securities backed by the loans' income stream. They have been badly hurt in the last year by the sharp decline in home prices and the rise in mortgage delinquencies and foreclosures. Shares of the two troubled mortgage giants have plummeted more than 80% this year on fears about their financial health in the wake of the housing crisis. Saving Fannie Mae and Freddie Mac could [will] cost the U.S. taxpayer. But so could letting the two mortgage giants collapse. A rescue plan that uses federal dollars would risk increasing the deficit and possibly lowering the U.S. debt rating, making it more expensive for the government to borrow in the future. A decision not to intervene could lead to deep pain in the mortgage market and the parts of the economy tied to it. Presidential Cannidates also have their own views on the housing market. Some advocate letting the free markets play themselves out with little government intervention. Ron Paul is the biggest supporter of this. Paul does not support the increase in relaxation of guidelines in such programs such as the FHA programs and Fannie Mae guidelines. As you may be aware, President Bush has been pushing for increases in FHA and Fannie Mae loan limits as well as proposing a freeze on current ARM rates for buyers who have been making their payments on time at the introductory rate, but may have difficulties once their rates reset. Barrack Obama sees a much different root problem and solution to it. His answer is for more accountability in the real estate industry itself. Obama plans to go after the lenders, banks, loan officers and realtors who may have misled buyers as far as the programs that they were getting themselves into. He proposes increased penalties and tightening of guidelines for predatory lending, and does not necessarily believe that direct government intervention other than tax breaks for middle-class homeowners is necessary. While this is a great idea in and of itself, I do not believe that Obama has gotten to the root of the problem in his solution. Those who believe in free-market economics obviously are in support of letting the markets work themselves out. I would consider myself to lean more in this direction, although I do believe that some government protection of the industry must happen as there is plenty of room for fraud and manipulation of fees and buyers as the current guidelines now stand. We are seeing some of this happen already, specifically in Nevada and other states as loan officers are becoming directly responsible for making sure that stated income or non-verified income loans are reasonable and justified. This shifts the responsibility more on to the lending institutions and less on the borrowers. High on McCain's to-do list is something almost no Democrat or Republican leader has advocated: Raising, not lowering, minimum mortgage downpayments for the rapidly-growing FHA program. Pending bipartisan legislation on Capitol Hill would CUT FHA's downpayments from the current three percent minimum to as low as zero -- favored by the House -- or to 1.5 percent -- favored by the Senate. "So many homeowners," he told a California audience, "have found themselves owing more than their home is worth because they never had much equity in the house to begin with." He said he opposes bailouts of lenders who made bad loans, which would in effect be rewarding them for their own poor underwriting decisions. But short of that sort of collapse, he thinks lenders today ought to modify borrowers' loans, reduce principal debt and interest rates -- taking the hits to the bottom line themselves -- rather than looking to the federal government. He said when there are no good measures of the true value of mortgage bonds -- when no investors want to buy them and no index tracks them -- current accounting rules may make lenders' balance sheets look far worse than they really are.

Recover in 2011

In contrast to expectations that the U.S. housing market could see a turnaround in the first half of 2009, the monthly housing price index report for June from Radar Logic suggests that recovery won't occur until 2011. According to Radar Logic's Residential Property Index (RPX), 23 of the 25 metropolitan areas surveyed saw year-over-year price declines as of June 2008.
"Not surprisingly, June 2008 year-over-year RPX values continue to show weakness," said Michael Feder, CEO of Radar Logic. Feder said a close examination shows a mix of strength as well as absorption of distressed inventory, but added that "it is too soon to call this a bottom."
The RPX is a relatively new market that enables real estate to be traded as a liquid asset, via property derivatives marketed by major financial institutions. In the June report, trading in forwards on RPX was said to be gaining momentum.
"While it is still a new market, daily contract pricing is producing a forward curve," the report said. "That curve suggests weakness through 2009, stability in 2010 and a recovery in 2011. This is in contrast to some industry economists who are calling for a bottom in 2009."

Trash City - I know.

Being in this business I see many bank repos. I visit (for business) many of these repos prior and post move out and from first hand experience I can say - for some its a very somber time as they clean and others - its like Animal House Version Dump 12.6 This morning I was reading an article I thought you might find amusing on a friday. Never thought I see this headline on a CNN web site - the piece is called - These homes for sale suck - Never before have there been so many squalid, dilapidated homes on the market - and they're helping to exaggerate already-plummeting home prices.
NEW YORK (CNNMoney.com) -- Mold, maggots and piles of festering trash - no wonder home prices are in freefall.
It's not just the subprime mortgage crisis that's to blame for plummeting home prices. A flood of squalid properties on the market is helping to exaggerate the post-bubble price declines.
"Part of the reason home prices are declining is a fundamental deterioration in the housing stock," said Glenn Kelman, CEO of the online, discount broker Redfin. "During the boom, nine out of 10 houses for sale in many markets were in prime condition. Now, for every 10 houses, at least three are dogs."

"..... been permitted to fall into disrepair by lenders overwhelmed with thousands of vacant homes. If these houses sell at all, they're going for bargain basement prices that are hurting home values throughout the neighborhood.

"I've never seen so many houses in this condition before," said Ray Anderson of Buyer's Advantage Real Estate in Auburn Calif., near Sacramento. "And I've been in the business 20 years. I've seen bank-owned properties in the past. They were never like this."


The article goes on and presents other ramifications for these rat holes. Click her to read full article.

Foreclosure / Public Health Concerns / and if the bank owns it who's to blame...?

It seems hard to believe, but there appears to be yet one more thing for which we can blame the mortgage crisis. And this is not a financial problem; it is a public health concern.
Several cable networks have reported over the last few weeks that the hundreds of foreclosed houses covering suburban neighborhoods may be contributing to the spread of the West Nile virus.
This is particularly true in warmer areas such as California, Arizona, Florida, and Nevada where homeowners tend to have a lot of outdoor playthings, chiefly swimming pools.
The pools, even if they had been drained for the winter, are collection spots for rainwater. The pools are not used, the water is not treated, and, instead of refreshing, cool aqua spots in which kids splash and where adults gather for cookouts, they are now dirty, brackish, maybe even bright green with algae. But these pools are prime breeding spots for the West Nile transmitting mosquito.
The West Nile virus does not make most people very sick, but several dozen have died in the few years it has been reported as a threat, and there have been incidents recorded of paralysis and other permanent disabilities.
CNN reports that Orange County, California alone may have as many at 1,500 pools located on properties that have been foreclosed, and while public health authorities are not sure to what extent they are encouraging the growth of the mosquito population, it only stands to reason that there is some impact, at least from a nuisance standpoint.
Banks and real estate agents who have not utilized the energy to secure the houses or mow the lawns are certainly not going to spend time and money to drain and cover pools and, even if the West Nile threat is insignificant, the increase in shear numbers of insects will make for a miserable fall and spring.
In addition to the pools, abandoned and neglected property has other water hazards; a kiddie pool left in the backyard, fish ponds, bird baths, a vertically hung tire swing, all have the capacity to catch and hold sufficient water to cause concern.
Cities and towns that fear a possible epidemic say they have little choice but to clear and/or treat the source at taxpayer expense even though it is the responsibility of the banks. This will not be as easy as it once was, as many of the effective mosquitos and larva sides are now prohibited for use because of their own possible public health problems or will stir up such protests from the community that municipalities dare not use them.
In the 1990s when banks and the FDIC stonewalled condo associations over HOA fees on foreclosed houses, affected states did not hesitate to pass super lien laws that gave the association the ability to levy senior liens for unpaid fees on the units. These liens took precedent over all others except taxes and the financial institutions shaped up pretty quickly. It is past time that legislation is passed to allow senior liens for the costs of securing property, keeping it from further deterioration, clearing out squatters and drug dealers and so forth. If the banks do not pay the bills the towns can foreclose, wipe out the banks' mortgages, and sell the homes to residents or investors at whatever price the market will bear sufficient to recoup taxpayer's losses and get the properties up and running again.

Saved By The Bell - Trump steps up and helps a friend & gets a good deal

Things were so dire that McMahon’s listing agent flew to New York over the weekend to make a personal appeal to Trump. Ed (85 years old). Donald Trump reportedly has agreed to purchase Ed McMahon’s 7,013-square-foot mansion in the gated Summit neighborhood in the Beverly Hills, Calif. postal area, which has been in foreclosure as it has been on the market most recently for $4,600,000. The Donald made the purchase through a unit of Countrywide Financial. If you recall this home was initially listed @ $7+ million. Ed was in massive $$$ straights. Upon The Donald purchase - ED (the ailing Johnny Crason side kick) and his wife are going ot be allowed toremain in the home. We all knew someone was going to step up and help this once American Icon. The Donald owns $100,000 of millions if not close a billion dollars in real estate holdings. This appears to be a major - "with a little help form from friends."
The home is located @ inside the Beverly Hills postal area. McMahon purchased the house in 1990 for $2.6 million, according to public records, but was unable to keep the home out of foreclosure due to major $$$ hardship. Click Here

Mortgage interest rates remain FLAT.

Mortgage interest rates remain flat according to the weekly Primary Mortgage Market Survey released by Freddie Mac. The 30-year fixed-rate mortgage (FRM) averaged 6.5 percent with 0.7 point, unchanged from the previous week. The 15-year FRM averaged 6.10 percent, up 3 basis points from one week earlier. Fees and point increased from 0.6 point to 0.7 point.
Short-term rates also remained relatively unchanged. The five-year Treasury-indexed hybrid adjustable rate mortgage moved from 6.05 percent from an average 6.07 percent. Fees and points were static at 0.6 point. The one-year Treasury-indexed ARM averaged 5.22 percent compared to 5.27 percent a week earlier. Fees and points averaged 0.6 both weeks.

The one-year Treasury-indexed ARM averaged 5.22 percent compared to 5.27 percent a week earlier. Fees and points averaged 0.6 both weeks.
"The housing market is continuing to act as a drag on the economy," said Frank Nothaft, Freddie Mac vice president and chief economist. "Residential fixed investment subtracted 0.6 percentage points off second quarter growth in real GDP.
"More recently, mortgage applications for home purchases in the past few weeks fell to the slowest pace since the week ending February 21, 2003, according to the Mortgage Bankers Association. Finally, although showing some initial signs of improvement, the inventory of unsold homes remains at historically high levels."
The Mortgage Bankers Association (MBA) in results from its Weekly Mortgage Applications Survey reported substantially more movement in long term loans but the single ARM it tracks was virtually unchanged.
The average rate for 30-year FRMs increased to 6.57 percent from 6.41 percent with points, including the origination fee nudging up from 1.13 to 1.14.
The 15-year FRM (fixed rate mortgage) rate increased to 6.17 percent from 6.02 percent while points increased to 1.06 from 1.02.
The average contract interest rate for one-year ARMs decreased to 7.15 percent from 7.17 percent, with points increasing to 0.38 from 0.36.
Mortgage applications were down 1.5 percent on a seasonally adjusted basis from the previous week and 2.2 percent unadjusted. The volume was down 36.9 percent from the same week in 2007.
Refinancing as a share of all applications decrease to 35.2 percent from 35.9 percent a week earlier and the market share of ARMs increased slightly to 7.3 percent from 6.9 percent the previous week.

Canadians Top List of Foreign Buyers of U.S. Property, NAR Says

Canadians are flocking to snatch up property in the U.S. as a result of affordable house prices and attractive exchange rates, the National Association of Realtors says.
Since May 2007, NAR estimates that between 150,000 and 190,000 homes in the U.S. were bought by foreign nationals.
This year, Canada replaced Mexico as the country with the largest share of foreign buyers in the U.S., with the percentage of Canadian buyers doubling to 23.5% from 11% last year, NAR said in its 2008 Profile of International Home Buying Activity survey. The UK came in behind Canada, followed by Mexico, China, India and Germany.
"Many international buyers recognize that real estate is an excellent investment and are drawn today by abundant inventory, low interest rates and a softer dollar," said NAR president Richard F. Gaylord. "These conditions allow them to own their own piece of the American dream."
Gaylord said foreign exchange rates have helped make U.S. homes more affordable for foreigners, particularly in Florida and Arizona. He noted that the euro has surged in value 24% against the U.S. dollar over the past two years.
Single-family vacation homes at an average price of $297,400 were the most popular purchase for international buyers. The most popular states for purchases were Florida, California, Texas, New York, Washington and Nevada, NAR said.
The NAR survey found four in 10 foreign buyers paid for their purchases in cash, compared to 7% of domestic U.S. buyers. It also found that the average international buyer stayed at their U.S. property for 2.6 months during the year.
Purchases by international buyers also tended to be more expensive, with 14% of properties sold valued at $750,000 or more.
The 2008 NAR Profile of International Home Buying Activity survey is based on responses from approximately 4,000 Realtors who serve foreign buyers.