IndyMac, Freddie, Fannie…Oh My…Discuss Here
As Kenworthey posted in another thread, IndyMac has been shutdown and will be taken over by FDIC.
It is the second largest bank failure in U.S. history, second only to the failure in in 1984 of Continental Bank which was $40 billion.
From Marketwatch:
U.S. banking regulators said Friday they have closed IndyMac Banorp Inc., the biggest retail bank to succumb to the ongoing U.S. subprime mortgage crisis. The Federal Deposit Insurance Corp. said in a statement it will take over operations of IndyMac (IMB) which had total assets of $33.01 billion and total deposits of $19.06 billion as of March 31.
If you have deposits in the bank, you can still withdraw money from the ATMs. The bank will re-open on Monday as IndyMac Federal Bank.
As for Freddie and Fannie:
According to analysts, Freddie Mac and Fannie Mae appear to have adequate capitalization. Or do they? Also from Marketwatch:
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, the Office of Federal Housing Enterprise Oversight, according to Barclays. Freddie Mac also raised $7.4 billion in May, bringing its aggregate surplus capital to roughly $15.6 billion by the third quarter.
How will these developments affect Chicago’s Housing Market (if at all)?
IndyMac, before it shutdown its mortgage division, was among the largest mortgage companies and one of the largest issuers of Alt-A mortgages in the country.
The FDIC is reporting that about $1 billion in deposits are above the $100,000 FDIC limit and “uninsured”.
Indy’s Alt-A was basically no doc and stated with a crappy credit score. They deserve to be out of business. Again, how many people in the better neighborhoods in Chicago used ALT-A financing for their purchase?
On Fannie & Freddie – Let’s not forget that Bush Admin FORCED Fannie & Freddie to take on greater risk back in 2002. They were very concervative prior to this regulation change. The Gov will be forced to back them with no disruption in business. That is the word on the street.
Those uninsured deposits show just how stupid some people are. They had four business days to withdraw their money after it became apparent shutdown was imminent. The FDIC is offering them a payout of 50 cents on the dollar for those.
IndyMac deserves to go under. Someone else asked why the FDIC created a new company, simple: noone wanted to buy them that could.
Sabrina – Click on my link to read a great study (by DePaul University) on neighborhood diversification in Chicago. The study also looks to the transition Chicago has experienced over the past 15 years and expectations for the future. I think the report is very relative to supply and demand in real estate in the coming years.
I don’t know the rules on posting something like this but it is a great read on Chicago
“They had four business days to withdraw their money after it became apparent shutdown was imminent.”
In recent shutdowns, most of the over-limit accounts have been small businesses and IRAs. IRAs, even with the $250K limit, are not particularly movable. Businesses should know better, but often don’t. Similarly, someone who didn’t plan ahead may have the money tied up in CDs and might not calculate that the surrender fee is less than 50%.
I get the impression that most individuals with well over $100K in bank assets are sophisticated enough to know the FDIC limits and structure their accounts. (Of course, most of my banks offer a premium rate for accounts over $100K. Joint accounts are great for exploiting that.)
“Again, how many people in the better neighborhoods in Chicago used ALT-A financing for their purchase?”
Wow- I can’t believe you’re even asking this. It’s a pretty sizable percentage- even in the “good” neighborhoods.
The problem with IndyMac now going under is that the vise is tightening across ALL credit levels. It doesn’t matter where you live if you can’t get the loan.
If Freddie and Fannie go under, no more of the jumbo loans (as it is they’re not backing as many of them anyway.)
It’s so interesting that everyone so easily assumes the government can just “back” Freddie and Fannie and that is that. The country doesn’t have the $5 trillion to do it. We’re already broke.
in response to dan pope — somewhat interesting read, lots of conclusions drawn about future development and gentrification based upon assumptions about the higher income bracket growing based on past statistics.
I believe they are correct in predicting gentrification of all lakefront neighborhoods north of the lake — but incorrect in assuming that property values west of the river and past 1800 or so west anywhere significantly in the city are likely to increase as gentrification further and further west is unlikely.
The fact remains that in the current boom (and now bust) many buildings have been built and continue to be built — many of them remain unoccupied at an alarmingly low rate — also those in over built previously undesirable areas (south loop, bucktown, wicker park, logan square) are falling and will continue to fall just as fast as they rose.
When we find the bottom what will be left is a continued move towards the city center (loop) and to the lakefront (jobs, views activity and shopping — what continues to create and sustain neighborhoods) into many of the same neighborhoods that were popular before (lp, lakeview, gold coast, lake shore east, loop, streeterville, river north) some newcomers that i believe will be big bc of lake access and diversity (rogers park, uptown, edgewater, south loop) and relatively (because of taxes amongst other things) the same diversity make ups.
Unless Chicago somehow manages to put itself on the desirability of the scale of a NY, London or Dubai — there simply is not the market to support infinite gentrification (i.e. NY) and high rises and luxury buildings being built out everywhere thus the predictions they make about all this gentrification west just seems unreasonable.
Though I do think the Olympics, the spire and the CME/CBOT could aid in changing all of that. SHould that happen i could definitely see a rent control program or a hosing lottery to preserve neighborhood diversity(as they do in new york) — here is an interesting example of what i am talking about i.e. this http://www.nytimes.com/2008/02/15/nyregion/15bigcity.html.
what are your thoughts on the predictions made in relation to the market in the article?
There will always be banks willing to lend money to buyers with a down payment, verifiable income and good credit scores. Indymac’s demise is no surprise given the crappy quality Alt-A’s they were giving out. I had some experience with a few of their foreclosures and the borrowers had no business whatsoever buying. These borrowers were destined for foreclosure from the onset and the properties were pieces of garbage. I don’t know in the hell these deals made it through underwriting. Don’t forget that Indymac is the spawn of Countrywide and the quality of their underwriting shows it.
Payday loan customers have extraordinarily high default rates. Lenders charge usurious interest rates to everyone to make up for the losses. The customers who pay their loans cover the losses for the customers who don’t pay.
In a way, Indymac was also doing high risk lending but instead of charing usurious interest rates, they assumed the value of the collateral would cover the losses after default. When the RE sales market tanked and the REO’s started to build, the business model failed, and we have the situation at hand.
We just went through the whole mortgage app process. 800+ credit scores, no debt, 25% down with a 28-36% DIR on what they’re now calling a “super jumbo” loan. It was amazing how many lazy mortgage brokers wouldn’t even bother since the loan amount was > $417K. We must have heard a dozen times how “if this was a few months ago it wouldn’t be a problem”. According to them, no one will touch jumbo or better loans.
The key to getting it done was to go to a small, local bank who holds their mortgages and avoided the crap of the last few years. Once they saw the goods, it sailed through. In other words, it’s starting to go back to the way it used to be.
who’s next? I am betting WAMU and Wachovia. More importantly, when will FDIC run out of money? (they took a 4-8b hit today and have 53b total to play with)
..today I saw a woman crying on the bus, overhearing her cell phone conversation, she was getting laid off….This is the second time this has happened in 2 months, the last time it was an ATA employee. Everyone can have their own opinions but I would suggest keeping atleast 12 months of living expenses in hard cash, staying below fdic limits and staying the hell out of the equity market no matter what CNBC says.
..also, I understand that if fdic runs out of funds, treasury will step in and I hope we never see that day.
Where is the bottom of all this? I don’t want to be neither overly optimistic nor pessimistic but we will not recover from this downturn for next few years at least. I am not going to call for depression but it sure feels like one.
Its worse than the dotcom crash. People didn’t lose their homes in the last bubble but its different this time around. Also, with the weaker dollar, higher commodities prices, inflation threat, frozen credit markets… the list goes on.
I am scared and now cutting down my expenses, where I can.
You guys are awfully negative. It is not the end of the world. If housing crashes the way your predicting we are ALL out of jobs. Things are not as bad as the news…
“and staying the hell out of the equity market no matter what CNBC says.”
-Good thinking. Wait until the market has recovered, and then buy! By the way, I watch about 3 hours of CNBC a day, and like all other media outlets, they are leaning towards “sell.” I would assume most Americans are selling now – so I definitely would (and am) buying equities. Face it, this country is full of idiots – whatever they’re doing, I’m not doing (like buying RE in 2005).
Who is really losing their homes? It is those who commitited fraud that are being foreclosed on. Those damn banks having been over charging us for years. Now it is their turn…
There is no doubt in my mind that things are going to get worse before they get better. I’m not saying this is the great depression II (maybe for the real estate industry) but all you have to do is look around you everyday to see things aren’t good. Bankruptcies are up, foreclosures are up, all the auto makers are hurting – not just Detriot, banks are bleeding money, we just had the second largest bank failure in history, unemployment is up. Two members of my extended family lost their jobs recently, one was in construction and the other was corporate HVAC for WaMu and Circuit City – those companies are hurting big time. Credit card defaults are up, food has gone up substantially, gas is over $4.00 a gallon headed for probably $6.00 by this time next year (at $200 a barrel). I could go on and on. I’m not encouraging anyone to keep their powder dry or buy gold, but I think it’s safe to say that there will be some economic malaise for a few years to come.
I am not a doom and gloom person, but realistic. I don’t know how anyone can say this feels like a depression unless they are a Realtor® or mortgage broker in one of the bubble markets. Clearly people do not understand what an economic depression really is. We aren’t even in a recession yet…for the economy as a whole. Unlike the funny money of the dot com stock era, homes and real estate are tangible and not some make believe marketing logo on a piece of paper. So, the house is worth 50% of what it was 2-3 years ago? If you’re not moving then it just a number on a piece of paper for now…unless of course you wanted to do a HELOC or drain out the built up equity and not actually pay off your housing purchase. For some reason even people who bough their home 15 years ago are fretting about the lower value of their home as if it were actually worth the “Zestimate” of two years ago…we’re talking about very illiquid assets that don’t have a readily determinable market value on a day to day basis anyway. They still own the asset, it hasn’t changed….it’s the same d*mn house.
With that said, the IndyMac take over was obvious and completely foreseeable. I just had a discussion with my parents about the pending IndyMac implosion 3 days ago (my mom said is that an Indianapolis bank? Too funny but not an unreasonable query.). Plenty of people in Chicago did use IndyMac for their mortgages. Low doc mortgages were just asking for fraud and IndyMac was in the thick of it. homedelete’s posts are very accurate. No one was willing to step in buy IndyMac, unlike Countrywide or Bear Sterns. Some people had thought some banks were “too big” to fail, but the truth in this banking climate is there are bunch of banks out looking to buy distressed banks but none that I am aware of that can buy such a large operation, rather it is the local and regional banks that these strong banks are on the hunt for. I had one bank president tell me they are looking to acquire banks but have had a hard time finding ones so far. His prediction is that there will be few bank failures since there are so many banks out looking to buy. The OTS will act more like a match maker then cleanup crew. Remember, one third rent, one third own with no mortgage, and the other third own with mortgage.
I for one have to have a whole bunch of bank accounts and POD accounts to make sure my deposits are FDIC insured. I had some money in IndyMac but closed the account a few months back since I didn’t want the hassle later when they went under even if the deposits were FDIC insured, I just wanted to avoid any such entanglements. If only the FDIC would have adjusted the limits for inflation, a lot of us wouldn’t have to spend so much time and effort dealing with so many banks.
What is known, as Jamie Dimon of JP Morgan Chase stated earlier in the week, we have returned to the 20% down 30 year fixed mortgage with 3 times income standard and there is no chance the no-doc, negative amort, and other toxic mortgages will return anytime soon. So, for now, many people will be staying in their current residences or quite some time.
P.S. There are some that would welcome the demise of Fannie and Feddie. I don’t see why the government would need to bail out these two entities when simply a backstop would do.
Yeah!! Let the US collapse. Can’t wait and agree with guys that we must all go down… If you bought a home you bought nothing but air. Suckers! Wachovia, wells, WAMU are all done and so are you. What does your company sell? Cars, batteries, software??? It does not matter as you all are screwed. Inclusing HomeDelete, the real estate attorney who hates real estate, you are fucked!!
Please pardon my ignorance during this posting, but by my understanding, what has been happening is:
the few banks where the subprime mortgages are concentrated are either swallowed by a bigger bank that can take the hit (Countrywide) or taken over by the FDIC (IndyMac). Then the banks who aren’t holding enough bad mortgages to be a heavy liability are left to perish with their account holders.
Either way, the honest people are left holding the bag, and the speculators can churn their debt around until they’re able to find some fool to buy their problem from them.
Does this mean that as a BofA customer and a tax payer, I am paying through both ends so the economy (read greedy speculators) can be bailed out?
Hindsight is 20/20… when I was making 22k living in Miami (as an ’05 grad student), I should have taken advantage of the Flip During/Before Closing Hysteria that was sweeping the city. Now that I’m realizing how lax the standards were, back then I probably would have been approved to buy Shaq’s house for a quick flip.
Another thing to realize with regard to the stock market and equity values, is the “Obama Effect”. He is up in the polls and he has promised to raise taxes including capital gains taxes substantially. Hence, cash out and take the tax hit this year. We’re going to see net investment in the U.S. decline substantially if that guy is elected…it has already begun. You simply can’t promise to raise taxes like that, promise a ton more transfer payments to those already sucking on the public tete, and promise to tax Americans to combat global poverty and not have a huge negative impact on wealth. I know of several people who are already taking defensive action to protect their hard earned wealth from an Obama presidency and others who are in the planning stages. I don’t mean to make a political post, but it is a simple connection that you promise to substantially increase taxes and you’re going to see less investment in it. Just like when you eliminate taxes on housing gains you saw inflows into housing (and to be nonpartisan that is the Bush presidency to blame for distorting the tax treatment of housing gains versus other investments). Where is our much needed simplified tax / flat tax candidate!!! LOL
Sabrina, the government will rescue Fannie and Freddie. It won’t take $5 Trillion. That’s the amount of mortgages they’ve insured. Even if the government chose to fully cover those (and they don’t have to) they only have to cover the shortfall. If Fannie and Freddie went down it would really freeze up the mortgage market. Yeah, eventually other money would step in but a new infrastructure would take time to develop.
As for Chicago…I’ve never seen people owning such expensive homes with so little income before. The income to home price ratio is out of whack in large parts of the city. That is not sustainable.
John, I too worry about an Obama presidency. You can buy Obama contracts for $.65 on the dollar on Intrade. If he wins they settle at $1.00. If he loses they settle worthless. a) that means the markets think the has a 65% chance of him winning b) you can buy Obama insurance!
Hey John – Let’s elect McCain and have us continue to implode they way we currently are. Bush destroyed this county and MCcain will continue it to satisfy the religious right. Let’s all give everything up for a shot at the old Israel/Palestine conflict.
The fact that you would say things would get worse (as though they could) with Obama is pathetic. We just lived through 8 years of right winged politics and it may be the ultimate demise of our country.
Are you saying you want 8 more years of this??? Where do you think we will be??? Very curious???
I have to chime in and say “John, are you serious?” Wake up!!
I’m realistic about the real estate industry and the economic malaise it is in right now. A return to affordability is the best economic medicine. The industry gave me some income on the way up and it’s providing even more on the way down. Real estate isn’t just about buying and selling you which unfortunately is the only aspect of real estate that realtors do.
John – You are giving Obama a bad rap when our country is in the worst shape it has ever experienced?? How can “change” be wrong at this point???
I think you may be a fucking idiot! Or, just a religious freak. which is it?
Oh you silly guys, you have no idea how bad it will get with Obama. You will get what you deserve that’s for sure, unfortunately I will be forced to share in that pain too. The guy hasn’t done one single thing and has demonstrated no achievements in any leadership position whatsoever. The attempts to paint McCain as Bush are pathetic. Although McCain is not the ideal candidate, he is ideal compared to the clueless Obama who would end up being 10 times worse than Jimmy Carter. Did you know his campaign staffers earlier in the year when he first got USSS protection wanted to have hybrid cars for his motorcade! Too funny…like there are ANY car makers out there that produce an engine large enough to power an armored vehicle…plus it is a 12 month lead time just to armor one in the first place!!! These people are clueless. Oh you silly liberals and you’re all “show” as if it makes a difference. Like the pathetic Ed Bageley Jr. guy who is supposedly environmental as they gush over mansion renovations that use florescent light bulbs. Why not just a build a smaller house that you don’t have to heat and cool so much space instead. So silly. I guess we’ll have to agree to disagree and let it play out.
Steven Heitman – I’ll take that as a compliment coming from you. LOL Anyway, you must not have lived through the late 1970’s with Jimmy Carter. Mortgage rates at 18%? You have no clue I guess…but looks like you will soon with the Jummy Carter sequel that we might just get soon.
As long as we’re blasting politicians here, don’t forget that Democratic Senator and House Banking Committee Chairman Christopher Dodd was a “Friend of Angelo” who saved $75,000 on his Countrywide mortgage…wink wink nod nod
John – You are a moron… and I actually feel sorry for you! I hope you do not have kids!!
HomeDelete – And McCains guy who was repleased? He saved a lot as well…
Finally! Steven calls someone else a moron besides me! It was lonely being the only ‘moron’ on the board.
Oh and Obama got a special mortgage rate too once he became a U.S. Senator. My oh my, Obama is a product of the Chicago political machine.
I think Steve Heitman must not realize the economic malaise has happened under a horrible Democratic congress these last few years. Gosh, what have they accomplished? We’ll just have to disagree I suppose, or resort to calling me names! LOL
John – Again I will ask you if things can get any worse than the curent situation? Are things good under Bush? Yes or no??? 8 years or bush domination has put us in our current position. Is it good or bad? Never mind the canidates, are we in a good place or are we fucked? Be a man and tell the truth…
John – I would love to hear an asnwer to Steve’s question. How much worse can it get? Bush obviously was NOT the asnser. What makes you think McCain is?
It is an honest question?
Wasn’t Obama the one who wrote about his extensive drug use including cocaine….he is pretty lean isn’t he? And a nicotine addict which is what most drug addicts revert to. Those drugs warp minds forever.
We were doing well until the Democrats took over congress. I remember the 1970’s, enormous inflation, high mortgage rates, very high marginal tax rates, shortages of stuff, leisure suits with vests, oh the horror of it all. I know let’s elect a former drug addict as president.
Okay John – You are dismissed!
Dear Senator Obama, What is proper etiquette…do you pass the drug pipe to the left or to the right?
John – There should be a minimum education level on this blog. My god are you a moron. No offense or anything but you are a tool! I am neither a dem or republican but come on already… see the light already.
John – How many lines did Bush do? He is a recovering Alcoholic right? You are funny?
Wasn’t Michelle the crazy lady on The Apprentice?
Someone please chime in on this john guy.
Chime. He’s the greatest. Chime.
John – hopefully you will say goodbye the same day as Bush… Maybe a heart attach for you…
Steve – The choice of words that are used are quite disdainful and distasteful. You can skillfully send your message across without resorting to foul language. Freedom of choice is up to you but use it wisely.
John – None of us here on the forum has gone through a depression, so we do not know what depression truly feels like. However, I would like to refute that we are not in a recession. Recession and depression is ultimately the state of the mind of the participants in the economy. The data might show flat or menial growth nominally, but realistically, our economy has not shown real growth due to devaluation of the dollar and rising commodities prices. My issue is how can our economy come out of this rut. The debate over inflation vs. growth wages on among the academics, and realistically, I think the Fed do not have an acute solution to tackle the problem. The weak dollar coupled with higher commodities prices contribute to the inflation that is knocking on our door. Last bubble, we had relatively stronger dollar and low prices, so growth was possible through increasing the money supply. This time around, that solution is nullified by potential dangers of stagflation. If the commodities prices were normal, then we can manufacture and sell goods and services to strengthen the dollar per Ricardo. When the prices of basic materials are up, this may not be the solution.
Ultimately, this problem was started by the people who lived beyond their means by using too much leverage. Unwinding of the leverage is painful as I have seen through the hedge fund industry. Likewise, the public needs to pay up the debt that they have racked up since the 80’s and finally, this game of ponzi is up. I do not have sympathy for those who were reckless with their spending, but the overall macroeconomic effects caused by the irresponsible cannot be ignored and it will hurt me also. The fact that inflation does not alleviate the situation but aggravates it. I remember Warren Buffet saying couple years back that Americans were overspending and one day it will come back to haunt them. He was right on. The ghost of subprime past is here now and hiding under the sheets will not help at all.
I agree with you that the losses are paper losses in reality but the banks that use the mortgages as asset collateral are having issues with the accounting technicalities. Due to the feature called mark to market, all assets must be valued at the market price. This caused the banks to shore up necessary capital and financing arrangements to boost their balance sheets. In turn, they have stopped lending to each other and in effect has caused the global credit crunch. I have friends working in the MBS and CDO side of business and they have absolutely no business due the halt of the flow in the market.
Our modern economy has been built upon trust that counter party risks are minimal and that free flow of capital will be the main driver of growth. Unfortunately, we have found out that the capital markets in its ruthless efficiency at times cannibalize itself, and we have seen this play over the past few months. I applaud your financial savvy and hedges that you have put up to protect your hard earned assets, but the normalization of the credit market will take some time especially when we are not finished with the defrosting process.
I agree with you regarding the Obama factor. He needs to push deficit spending to get the economy going again but he will have to find the source of his funds and higher taxation on the upper end of the spectrum will be welcomed by the populace. Then the tax lawyers and the private bankers will find other ways to shield the assets from further taxation and this might disturb the financial market as gains should be taken while the rates are more reasonable.
The sad thing about the free market is that it is bipolar and hard to maintain a steady norm. People are lemmings and will overheat and overchill the economy and mere tinkering by the Fed chairman will not yield in harmonious glide. By the way, blaming the president for the economic trouble has been the most popular way to express frustration since the time of Herbert Hoover.
Wow, without really reading your messge, I would resond with the following.
We may be in a recession but only because the reduced lending requirements over the past 8 years has allowed people to spend what was really not theirs. We are now facing reality and the housing ATM is over. The economic growth over the past few years was fake housing equity. what now John, what now?
Reality always sets in and now it is here. The tax rebates will not help and the gas savings McCain is proposing is a joke. Close to as much as you are…
Just remember – Our country was not broke before Bushy took office. The real estae indutry was not crumbling before he proposed his “everyone should own a home” thing.
Let’s put the blame where the blame belongs…
Hey josh – Don’t forget abaout the blocking of numerous regulatory measures to restrict the lending community that were blocked. I think it was “Let free enterpise work it out”. Here we are… how did we do?
I hope they (the people) foreclose on every property. The banks deserve it…
To try to drag this back closer to topic, CCRD lists IndyMac as “Grantee” on roughly 4000 mortgages in Cook County since 2002.
Checking their 10-K for 2007, they report that 44% of their 2007 loans were interest only, 9% were option ARMs, and 12% were other ARMs. This compares to 37%, 23%, and 12% (respectively) in 2006. (Table 5, page 97) Roughly 45% of loans were for CA, 22% for FL NY NJ AZ, and 35% for other states (in both 2006 and 2007).
IndyMac wasn’t a huge influence on Chicago real estate, but 1000-2000 mortgages with aggressively low initial payments would have some effect.
(For what its worth, at least IndyMac was keeping some of the toxic stuff. Their “held for investment” portfolio included 43% interest only and 26% option ARMs in 2007 (60% and 18% in 2006). Average FICO score (for the entire HFI portfolio) was 693. 45% in CA, 22% in FL NY NJ MD, 33% in other states.)
Steven Heitman – You are the silliest poster on this blog. Always name calling, now wanting me to die. So silly. Fortunately I will most assuredly outlive you. You ought to look in the mirror as to who is to blame for the real estate problems that exist…you helped cause it you moron.
Steven, do you blame Bush for everything that’s wrong in your life?
Sartre,
On who is next I had those exact same thoughts and predictions. I think its going to be WAMU actually. Wachovia seems to be better capitalized than WAMU, even if that isn’t saying much.
WAMU’s market cap is a lot lower too at 5B presently, Wachovia is valued around 22B currently. Although a few more days of -12% stock declines could impact this.
Also keep your eyes on some regional banks like National City, Keycorp & Fifth Third. While not mega banks they are huge banks for the regions they service and they could have a lot of construction loans that are souring.
Regarding Bush/Obama/McCain: I think those defending Bush’s presidency must be extremely extremely party biased and not a true conservative as he was 20x as fiscally irresponsible as Clinton. On the other hand, an Obama presidency that leads to increased taxes and reduced free trade, etc. could potentially worsen the already fragile economic situation. Mccain, if he keeps taxes where they are and continues to promote free trade, will not do nearly as much harm.
What people have to realize is that a large part of the bubble and the good times (in the early part of the decade) and the current credit crunch (now) was caused by the FED and whichever party is in office/congress does not have the effect that Greenspan wrought on us. We are actually pretty dependent now on Bernanke fixing the damages.
As for the implications of the Indymac/Freddie/Fannie crisis all I have to say is that a large correction (in real estate, stocks, etc.) is good and healthy for the economy to function. This will hurt some people (and irresponsible banks) in the short term, but the funny money/gravy train that so many lax spenders fed on had to stop at some point. This is assuming that we stopped the bubble soon enough… because if not, then surely we are headed for a lot more pain then any of us really want.
Anyways, here’s to hoping that housing prices drop another 15-20% and NOT any more than that. Because this means we will be where we were before this housing bubble: Sane and financially responsible but NOT all broke.
Trader,
For Chicagoland the case-shiller index still stands around 153 or so, a 53% increase from 2000. Even with a 20% drop in prices from here housing prices would still be 20% above their 2000 levels.
A 33% decline for Chicagoland puts us back at 2000 levels.
Don’t forget that overal wages have been flat and stagnant for most workers since 2000 so a return to 2000 housing prices wouldn’t be totally unthinkable. I’m I’m not including inflation into housing prices because inflation hasn’t really been included in salary; Inflation has lowered standards of living for workers because salaries have remained flat.
“and staying the hell out of the equity market no matter what CNBC says.”
Tony, I sold last year when cnbc was still touting the “goldilocks economy” apparently you haven’t been around long enough to remember 2002-03. I know people who jumped into QQQ at 4000, then 3000, and then 2500. They still don’t have their money back. All the time cnbc kept saying BUY BUY BUY!. I will tell you when it will be time to buy– when even thinking about the stock market gives you a nauseous feeling, we’re not there yet. People think they are getting a bargain, they are the real ‘idiots’.
If you are a day trader, this is a great time for you. But for the rest of us mere mortals, we don’t sit in front of our bloomberg all day tracking technical indicators. The bear market is just starting, go read up on Japan from 1990 till today before you call people idiots.
However, accounting for inflation a CS index of 125 is perfectly reasonable. Since Chicago didn’t bubble that badly, I wouldn’t expect prices to fall beyond that (unless 20% down mortgages disappear from the market).
Steve said:”Yeah!! Let the US collapse. Can’t wait and agree with guys that we must all go down…”
Steve, for a few seconds, please stop being an ass. Nobody is wishing for a recession, but clicking heels doesn’t make it go away. I am just describing what I see and hear. Pretending that real folks are not hurting is naive and I think you are smarter than that.
As regards to the US, we will be fine. Recessions are a normal part of the cycle and are actually very useful in curing misallocation of capital (housing and mortgages in this case) and removing weak hands (quite a few banks in this case).
Bob said:
“Also keep your eyes on some regional banks like National City, Keycorp & Fifth …”
I agree. From what I understand, regionals are very heavily involved with commercial real estate which is just starting to implode. I also read a couple of months ago that FDIC is calling people back from retirement, which is not a great sign.
Bob: when I said “we will be where we were before this housing bubble” I did not mean 2000 prices! The market needs to at least keep appreciation to match inflation or too many of our financial institutions will be in peril.
Speaking of politics and Chicago real estate, our local Democrats have really helped out local property values by recently raising transfer taxes.
I wouldn’t worry too much about Fannie & Freddie.. the government (eg: tax payers) will always be around to bail them out.
Transfer taxes are a small amount in the pile of closing costs, and the recent increase in really trivial. Making the seller pay 30bps (0.3%) to the city is nothing when they are already paying 6% to realtors.
Of course, for upside down sellers, having to bring $2K more to closing on a $600K sale is a bother. But there’s no one in that situation, right Steven?
Hey, who’s paying 6% to realtors? There’s no excuse for that!
Latest rumor: The UK Times is reporting a plan to give Fannie $15 billion in cash, no other changes. What a horrible, half-assed idea, if true.
Quicken Loans will no longer be lending in Cook County according to a friend. For those not familiar with Quicken, it reported $19 billion in home loan volume for 2007.
JL–doesn’t surprise me. I applied for a mortgage back in November, and Quicken was one place that WOULD NOT LEAVE ME ALONE. In fact, there were *two* loan officers calling me and sending me emails every day, literally, and getting nasty when I demurred. They pretty much defined “desperate.”
So, any thoughts on the bail-out? Nice how Paulson says that the GSEs are well capitalized and in great shape on Friday night, then on Saturday night, we hear the taxpayers are going to inject $15 billion. Most pathetic thing about it is the size of the bailout. I mean, if you’re going to do it, do it RIGHT. What possible function does this pocket change serve? This is half the amount they gave to JP MOrgan for Bear Stearns, for heaven’s sake!
I predict continued free fall of the GSEs on Monday morning.
“Don’t forget that overall wages have been flat and stagnant for most workers since 2000 so a return to 2000 housing prices wouldn’t be totally unthinkable.”
That is completely ignorant and moronic. First of all, wages have increased more than the media reports, but they’ve chosen to look at the numbers in a negative way (I’ll explain later). You can’t “not take into account inflation,” wages have still gone up 3-4% per year. You’ve demonstrated and admitted you know nothing about finance, so stop saying stupid things.
D
With a government bailout the GSE stockholders should and will lose everything – or almost everything. All the government needs to do is inject enough capital to keep them running. $15 B may be enough.
Politics is always to touchy subject…Couple thoughts, I can’t stand Bush, but you can’t blame him for our current economy, he did nothing to cause this. As for Obama, when taxes go up, asset prices go down. That’s not good for housing or stocks and will be bad for the economy too.
D
Bush’s weak dollar policies, “ownership society” mandate, and forcing of the GSEs to purchase poor quality mortgages it didn’t want to buy, among other things, *directly* caused this mess.
As for Obama and taxes, well, http://www.politifact.com/truth-o-meter/subjects/taxes/ is a good place to start for anyone. Not sure what your alternative is to raising taxes, DB. Spur growth instead by lowering interest rates? (snort!)
In fact, while I deeply hope Obama wins the election, I do not envy either him or McCain the task ahead of them, esp. with Bush/Paulson propping up the economy with half-assed measures until after the election, with moves all but guaranteed to make the inevitable crash even worse. Whoever wins, I expect it to be a one-term presidency. The next president is falling on a knife to (hopefully) save this country’s economy. (Volker, anyone?)
It should be noted that the effort to bail out irresponsible buyers and lenders (and, indeed, continue to promote ownership) is a bipartisan effort on Capitol Hill. Which makes it all the more dangerous; no politician wants to be the guy with the pro-foreclosure voting record.
This is likely to be the case for the next president as well. Saying “tough luck” to the American Dream would almost guarantee a one-term presidency.
Kenworthey,
According to Bloomberg it would also open the discount window to Fannie and Freddie. The 15B is likely just the first injection.
I have no idea whether this will impact their shares positively or not: it will have a huge dilutive value on outstanding shares but this action shows that the government will not allow these firms to cease operating.
Also this is a rumor at this point. But sounds like the government wants the shareholders to lose everything but keep the companies intact. Its delicate to orchestrate something like this so look for continued wild swings in the share prices for awhile.
Yes, Dave, I should have been more specific: I blame Bush for instigating the madness, and Congress for failing to stop it when it had a chance. There are no heroes here, only robber barons and wimps.
Here’s to a one-term presidency: it’s the only thing that will save us. Now ask: which of the two is likely to do the necessary deeds to rip the financial industry off the public teat? McCain talks of necessary bailout. Obama is waiting and seeing, but at least he has Paul Volcker, the one and only adult associated with running the Fed in past few decades, as an advisor.
Bob–I’m predicting dead cat bounce in GSE shares Monday, simultaneously coupled by further decline in the dollar. Question is how long the bounce lasts.
Can you post Bloomberg link? I didn’t see that and can’t find it. If they open the discount window, then what an interesting leak it was on Friday! Who orchestrated it?
Also, Bob, I think a $15 million cash injection *protects* shareholders (who should, in fact, be on the front line of casualties). Shows Washington doesn’t even have the political will to let equity die its deserved death. Unless I don’t understand things, which is the most likely scenario–this is all far out of my field, and I’m just an interested (and horrified) observer.
Its on Bloomberg but sourced from the Times of London:
http://www.bloomberg.com/apps/news?pid=20601087&sid=adGvdKB7NpAg&refer=home
I am suspicious of this Times of London report, however. It would cause Paulsen to lose _all_ credibility if this is accurate.
Deaconblue,
“That is completely ignorant and moronic. First of all, wages have increased more than the media reports, but they’ve chosen to look at the numbers in a negative way (I’ll explain later). You can’t “not take into account inflation,” wages have still gone up 3-4% per year. You’ve demonstrated and admitted you know nothing about finance, so stop saying stupid things.
D”
Every time you write something you sound like a pompous arrogant fool. The fact of the matter is that your post makes very little sense. You use a very broad stroke to discount everything the MSM reports about stagnant wages; you say you’re going to explain something later about why the MSM is wrong – but then you don’t. Then you sound like an even bigger goof when you say that wages have gone up 3-4% per year – with no proof. When you break it down, your post is like 3 separate incoherent ideas meshed together with a number of insults. Were you at home alone drinking again?
And then you have the cajones to say that I don’t know what I’m talking about. At least my posts have a coherent point that gets across. From now on, shut the hell up unless you have something to contribute to the board. This is an internet chat forum and I can say whatever the hell I want, even if you don’t agree with it. I think that your posts are just as moronic as you think my posts are. Both of us have different OPINIONS of things and that doesn’t make either of us right or wrong, it just makes for a more interesting message board. Repeatedly calling me a moron doesn’t make your point right, it just makes you sound like a goof. If you want to address my points then feel free to argue, disagree, agree or respond. Just don’t insult and name calling like a 4 year old on the playground. Also, it is possible to ignore my posts. Just don’t read them! Then you don’t need to respond either!
For the record, I get the most heat from D and SH when I say that are going to return to 1999 or 2000 levels. That seems to be the button to push! I don’t know why they’re so against the return to affordability. I guess if I was still in the denial/anger phase of DABDA I’d go crazy on anonymous posters on an internet chat board too. Or maybe their under a lot of stress because the arms on their investments properties are gonna reset this summer. Who knows.
For the record, I get the most heat from D and SH when I say that HOME PRICES are going to return to 1999 or 2000 levels. That seems to be the button to push! I don’t know why they’re so against the return to affordability. I guess if I was still in the denial/anger phase of DABDA I’d go crazy on anonymous posters on an internet chat board too. Or maybe their under a lot of stress because the arms on their investments properties are gonna reset this summer. Who knows.
CalculatedRisk is reporting the Times story, as well as a WaPo story about a previously planned $3B debt offering from Freddie on Monday (that now might simply be bought by NYFRB). Also noting that WSJ is reporting that Treasury is expected to make a statement later today.
If anything big happens, it will probably be early this evening. The Bear announcement was released at about 7PM eastern.
http://calculatedrisk.blogspot.com/
The timing of this isn’t as critical as Bear. Bear was a counterparty to many other institutions in derivative trades and had the potential to wreak havoc when the markets opened in Asia.
Fannie and Freddie are different in this regard and can’t be a victim of people withdrawing their money like Bear, nor am I aware if they are involved in derivatives. Although the consequences of either failing would be far worse than if Bear were allowed to go under instead of being forced into a shotgun wedding.
Basically their share prices are too low now to issue new equity to raise cash so they would need debt. Its not surprising that this debt would be backed by the full faith and credit of Joe taxpayer, its just surprising that the treasury and fed have acted like everything is completely normal up until this point.
For reference, Bloomberg is reporting that Fannie’s market capitalization after Friday’s close was $10.1B. Freddie was worth $5B. That means that the govt plan of trading $15B for new shares (as reported by the (London) Times) would dilute existing shareholders about 50%.
This will drive mortgage rates up, which will in turn result in less people buying, driving prices down even further. Which is good, since I can always refi, but never reneg the price of a property.
The announcement is just out from Paulson and the Treasury.
From Marketwatch:
“The Treasury has moved to increase its existing line of credit to Fannie and Freddie. In addition, Treasury have been given the power to buy the two companies stock. In a separate vote, the Fed board of governors voted to open its discount window lending facility to Fannie and Freddie. In return, Paulson asked Congress to rework a measure in the housing bill moving through Congress to give the Fed a formal role to work with the new GSE regulator that the legislation would create.”
Asian markets are NOT getting slammed (so far.)
Hey guys, the US is headed for socialism down the road no matter which political party controls the White House. Democrats may get us there slightly faster than what’s passed for ‘Republican’ in the last 8 years but we are headed there either way. If anything McCain may get us there even faster than Bush. Things can get much worse to answer a question repeated above. I predict the change most people get (in the long run) isn’t going to be the change they were looking for…
John
From wikipedia:”Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano Roosevelt’s New Deal to provide liquidity to the mortgage market.”
things are coming a full circle…
Hank Paulson has zero credibility. Less than Clinton before the infamous dress stain came to light to offer conclusive proof otherwise. And arguably this is a bigger betrayel of the American public: this is the man representing the treasury of our government. Less than 48 hours ago he was offering us assurances that they were fundamentally sound and there was no worry.
Now all of a sudden this? What a freaking joke. While I may not disagree with the medicine the doctor, or rather snake oil salesman, is surely a liar.
I don’t think this drives America closer to socialism because if you remember Fannie used to be a government agency. This just means they are quasi-government agencies whose management wins big to take on risk and doesn’t lose if they make bad choices. Probably the _worst form_ of corporate governance imaginable going forward. They need to nationalize them or leave them alone. In this quasi-government-entity form the taxpayer is scr_wed.
Bob,
Word.
That is all.
Socialist State? Sounds like a bunch of cry babies! The government stepped in and played the roll it is supposed to. There job is to govern for the people. Holding Fannie & Freddie above water helps a lot more people then it hurts. The financial system would come to a halt if one of the these firms failed and our entire country would fall into a deep depression. The only people hurt with this move are the shorts. Carma sucks doesn’t it?
Sabrina – Why would Asian Markets getted slammed from this news? We all new they were in trouble. The questions was only if anyone would step in and save them.
Sounds like good news to me, but then again I am always optimisitc!
One important bad thing for China (and other big US debt-holders) was reported by the NY Times (I found the link from CalculatedRisk):
“As part of the plan, the administration will also call on Congress to raise the national debt limit, people briefed on the plan said.”
Things are bad enough that they’re planning on raising the debt ceiling before the last minute, which suggests to me that they expect a large increase in US debt. That should drive down the prices of existing debt, reducing the value of China’s huge pile of US bonds.
“Carma [sic] sucks doesn’t it?”
If that were true, the fine citizens who caused this mess would be the ones paying for it. The government’s job (dependent on your views, I suppose) isn’t to bail out every sap who ever made a mistake. An important part of Freedom is the freedom to fail. Prevent a potential meltdown (e.g., Bear), fine; I can live with it. A small percentage of the population defaulting on ridiculous loans, though, is not an economic meltdown and could be left to run its course (an approach that would probably allow the market to correct itself more quickly, albeit more painfully for some).
Not defending the shorts, by the way, who as speculators are no different than those who created the bubble. I’ve opted to sit on the sidelines until I can take a long position in the market at what I deem a reasonable price.
Dave,
At issue here is that the government is not prepared to handle a bankruptcy of a multi-trillion dollar company. When you start talking about values this large, things such as orderly liquidation value cease to have meaning. In addition to the disruption to mortgage markets an unraveling this large could undo the hinges to the economy and trigger the next Great Depression quite easily.
I think the government made the correct short-term move here, even if our treasury secretary is a dishonest person. Despite Steve’s numerous grammatical nuances I think he is right in that if these two were allowed to fail the pain would transfer to more than just homeowners. Even us fence sitter renters wishing for a steep housing decline would yearn for a 2005 economy in 2010 if either of these two failed. With this action they are essentially nationalized all but formally: their equity is near worthless and their debt is near rates on government debt.
IMO Kenworthey is right too: there will be a dead cat bounce in their equity tomorrow likely. This means little: their equity is less than zero in Freddie’s case and near there in Fannie’s case and the gov will not bail the equity holders out. The equity is zero.
“Sabrina – Why would Asian Markets getted slammed from this news? We all new they were in trouble. The questions was only if anyone would step in and save them.”
Because the dollar will likely fall further on this news. Because the United States of America’s Treasury Secretary said one thing on Friday and now said another thing on Sunday afternoon (mainly to calm the Asian markets which, if calm, will calm the U.S. markets when they open the next day.)
“Holding Fannie & Freddie above water helps a lot more people then it hurts. ”
It the short term perhaps true, but in the long term, I disagree. Their charters are to promote affordable housing, they have achieved the precise opposite. They are less than useless, they cause the exact opposite of what they were created to do.
The collapse of the GSEs would lead to more affordable housing on a permanent basis. This would be the best solution for posterity. I am not opposed to partial backstops on their debt to accomplish an orderly run off, but then they should be abolished. Save 20% and then borrow at 2.5-3 times income at 300 basis points over treasuries sounds about right to me, and yes it will hit the economy in the short term. You may make a heroin addict feel better by giving him more heroin, but you are only delaying the inevitable. The heroin causes the DTs, don’t blame the cure.
The primary accomplishment of promoting an “Ownership Society” is to turn a large portion of citizens into debt slaves and consumption addicts. Not very admirable IMO.
“The financial system would come to a halt if one of the these firms failed and our entire country would fall into a deep depression.”
Take your medicine now or need much more medicine later. I agree that the housing market would collapse to a point where you need more than just a pulse to qualify for a loan. Prices will be something like 2.5-3 times median income. Furthermore, mortgage rates will be much higher, where a local bank will be willing to sit with the loan on their books. But this is not financial armageddon, it is a return to sanity in my opinion.
What will cause a deep depression is continually kicking the can down the road with temporary band-aids while the problem snowballs in the background.
“The only people hurt with this move are the shorts. Carma sucks doesn’t it?”
Couldn’t disagree more, these short term band-aids will do much more harm than good in the long term in my opinion. As far as feeling sorry for stock traders, I think short sellers of FNM and FRE would be pretty far down on my list, they have done pretty darm well. I’m not sure what you mean by Karma.
Good luck to you,
John
To the folks talking about taxes earlier, it helps to think of the United States like a competitor against China, India, Brazil, the European Union etc for business. Just as States in the USA compete for businesses to open, countries compete for opportunities. There tools for business development are taxes and interest rates. Money flows to lower taxes and higher interest rates around the world.
JKD,
I agree with some caveats. We have seen a bubble here in Chicago as well on the northeast coast, Florida, the sunbelt and California. However the bubble did not hit everywhere.
Also I don’t know if the GSEs were primarily responsible for the bubble: I think the blame there tends to go with people getting mortgages that never should have qualified and the lenders that facilitated this mess. Remember the GSEs only bought conforming loans.
I thought this recent history of Fannie and Freddie would be helpful given some of the (politically motivated?) fabrications of the truth posted here about these organizations:
• Fannie Mae Ugly 07/12/08 – Investors continued to flee Fannie Mae and Freddie Mac almost as frantically as the political class tried to reassure everybody there was nothing to worry about.
• The Price of Fannie Mae 07/10/08 – It’s time Americans understood the price they could soon pay for the Beltway’s confidence game with these high-risk “government-sponsored enterprises.”
• Too Political to Fail 04/21/08 – Fannie Mae and Freddie Mac aren’t held to the same standards of accountability as everyone else.
• Fannie Mayhem 11/20/07 – Chuck Schumer is lucky Congress ignored his idea that Fannie Mae and Freddie Mac should ride to the rescue of the housing market.
• Fannie More 10/23/07 – Barney Frank and Chuck Schumer have come up with a proposal that would increase the risk to taxpayers from Fannie Mae and Freddie Mac.
• Fannie to the Rescue? 09/29/07 – Fannie and Freddie went up the Hill to fetch a pail of money.
• Freddie Krueger Mac 05/10/07 – Just when you think they’re defeated, Fannie Mae and Freddie Mac arise in Congress to kill any attempt to clean up their dangerous habits.
• The Fannie Tax 04/12/07 – Democrat Barney Frank and the Bush Administration seem to have found common ground on new rules for Fannie Mae and Freddie Mac. Naturally, there’s a catch.
• Memo to Fannie 06/14/06 – A joke in Washington these days goes like this: “What’s the difference between Enron and Fannie Mae? Answer: The guys at Enron have been convicted.”
• Freddie’s Friends on the Hill 04/27/06 – The Federal Election Commission sheds some light on how Freddie Mac rewards its friends.
• Fannie Mae’s House 10/25/05 – Every Congressional session can be counted on to produce its share of bad bills. But the “reform” bill for Fannie Mae and Freddie Mac is in a class of its own.
• Fannie’s Friends on the Hill 05/09/05 – Congress finally seemed ready to protect taxpayers from Fannie Mae and Freddie Mac. Then Republican Mike Oxley decided to ride to their rescue.
• Fannie Turns a Page 12/23/04 – Fannie Mae – a slick, semiprivate firm operating with the patronage of politicians – is the kind of institution one still expects to find in a country like France.
• Fannie the Centaur 12/17/04 – Understanding their half-man, half-beast nature is crucial to fixing Fannie Mae and Freddie Mac in the wake of their recent financial scandals.
• Fannie Mae Liberals 10/14/04 – There were many moments of high entertainment during the House hearings on Fannie Mae’s creative accounting. But our favorite was the Mister Magoo performance given by Barney Frank (D., Massachusetts).
• Fannie Mae Enron? 10/04/04 – The company was cooking the books. Big time.
• Fannie Uncovered 09/23/04 – The housing-finance giant has been engaging in some accounting funny business.
• Fannie’s Risky Business 02/25/04 – Alan Greenspan puts his credibility behind the cause of reforming Fannie Mae and Freddie Mac.
• Christmas for Fannie Mae 12/23/03 – The Federal Reserve Board releases a new staff study about the impact of taxpayer subsidies for Fannie Mae and Freddie Mac.
• White House Fannie Pack 11/11/03 – White House chief economist N. Gregory Mankiw dares to tell the truth about Fannie Mae and Freddie Mac. The mortgage giants were not amused, which means we’re getting somewhere.
• Fannie Takes the Hill 10/09/03 – When the House of Representatives can’t get even a modest regulatory bill out of committee, the dangers of Fannie Mae become clear in reality.
• Speaking Truth to Fannie 03/12/03 – The president of the Federal Reserve Bank of St. Louis warns of a potential crisis arising from Fannie Mae and Freddie Mac.
• Fan and Fred Get the Business 02/19/03 – The year has not started auspiciously for the two mortgage-finance behemoths.
• Fannie Mae’s Risky Business 09/23/02 – We’ve been suggesting that Fannie Mae was exposed to too much interest-rate risk. All of a sudden investors seem to agree with us.
• Fannie Capitulates, Sort Of 07/15/02 – Fannie Mae and Freddie Mac end months of resistance, stonewalling and downright crankiness and agree to register their common stock with the Securities and Exchange Commission.
• Fannie’s Inside Info 07/01/02 – Even in this post-Enron world, Fan and Fred do not provide as much information about these securities as private mortgage lenders do.
• Inside Fannie 03/19/02 – Fan and Fred don’t function like other companies. They’re allowed to pile up debt, implicitly guaranteed by taxpayers, without being held to even the minimum of corporate governance standards.
• Frantic Fannie 02/28/02 – Companies taking on so much risk and debt, and backed by taxpayers, ought to be more transparent in what they tell the world.
• Fannie Mae Enron? 02/20/02 – Fan and Fred look like poorly run hedge funds: lots of leverage and snarkily hedged risk. Does the word Enron ring any bells?
*Courtesy of the WSJ
sartre, you are quite right on predicting possible bank failures. Check out
http://www.bankrate.com/brm/safesound/ss_home.asp
to see ratings and finances. CDs may not be a safe harbor for money. Any ideas?
I thought this blog was about “cribs”!
Jason,
This discussion has everything in the world to do with residential real estate (aka “cribs”). Most people who want to buy need mortgages.
Bob,
Easy mortgage money was everywhere. If an area didn’t see much appreciation due to crazy lending it doesn’t mean that prices weren’t still being propped up by the insanity. See most rust belt cities for examples of areas that didn’t see much appreciation but are crashing nonetheless.
There wasn’t much bounce in that dead cat. What was it, about a two hour rally? Paulson was trying to buy more time (hopefully until after the election) with the bailout, but it hasn’t accomplished much other than further hammering the dollar, clearly not its goal.
Damn cat you’d woulda thought the angle of his hit woulda given him more airtime than that.
All banks are taking it on the chin again. NatCity, FifthThird, Key, Wachovia, WaMu all down between 10-30%. Looks like WaMu or NatCity might be next.
Maybe an overreaction due to fears of the next IndyMac or legitimate concern?
I can tell you this: I made double-damn sure my co-op’s reserves weren’t in any one bank for more than $100K about an hour ago. We used to have WaMu CDs; fortunately, they matured last week and we didn’t re-up.
You know, I keep assuming the dollar is going to tank. It’s low, true, but not really lower than it was Friday. Why? I mean, I’m glad, but puzzled.
satre – I was saying to do the opposite of what CNBC says. The fact is no one is going to predict exactly when the market is going to start or end, but i would certainly rather be buying when there is blood than in the well proncounced glory days.
This is kind of like how every new issue of Money Magazine is for suckers because it touts the newest and greatest mutual fund. It amazes me that people think to themselves “wow, this fund is performing so great! It’s at an all time high – great time to get in.” Obviously the people you know who bought into the QQQQ must be reading this too. If they would have bought DIA, they would be up.
Yes, the Japanese economy has been in a slump for along time. And? I guess if my portfolio was comprised of 100% japanese stocks I would be concerned.
My bet is that in 10 years the market will be higher. 50% of appreciation for the SP500 has been through dividends, and I don’t care about flucuation. If the stock market goes to zero – the last thing I’ll be concerned about is the money I lost in my Fidelity account. I’ll be trying to wipe the rashes caused by radiation off my ass.
“the stock market goes to zero – the last thing I’ll be concerned about is the money I lost in my Fidelity account”
Yep. If there’s a system-wide collapse, we’ll all have bigger problems than figuring out how to pay the mortgage.
If you think foreclosures are bad now just wait a little while longer.
The first payments to get ignored in most households during “hard times” are the utility and credit card payments. I have a friend who works at a large utility company in the chicagoland area and claims that the amount of late/no payments are rising at a “scary” rate. Once these delinquent homeowners realize they will never be able to catch up on the payment plans, they are going to be handing over the keys.
Would anyone on this site consider buying FreddieMac/Fannie Mae stock now? It is CRAZY chep. And the Feds would never let it go down.
Crazy CHEAP. Sorry.
Jason,
Buying Fannie or Freddie now would be about the dumbest medium to longer term trading idea I’ve heard in awhile.
If you’re gambling on short-term gains and like the volatility be my guest, your odds are certainly better than a roulette wheel. But the Fed has even said any support would not help shareholders. This means shareholders are likely to get wiped out when they have to nationalize these two.
Safer bets would be battered regional banks as some surely have some longer term potential. Those that survive the downturn intact that is.
I think the feds WOULD let the stock go down. Just not the bonds. (I had my doubts yesterday re: the stock, but several subsequent reports indicate that the Fed buy-in would be of common stock, not preferred, the former of which would indeed dilute and potentially decimate the equity as OUGHT to be the case, and thus my faith in the US Government was restored. For about five minutes, before I started thinking about it all again.)
Just athought. I know nothing about stocks.
I just bought a put option on Fannie Mae for the hell of it. I could easily see their stock going to 0.
The Feds could even let their general obligation bonds drop in value so long as they don’t let their guarantees lapse nor their MBS bonds go down in value. I don’t see such a scenario happening but if both gets nationalized the federal government could do this.
Then they would have people lined up suing them though and it would be a very messy legal situation so its very unlikely. But these are strange times indeed.
The government will not let the bonds default. If that happened then no one would buy them and the mortgage market would dry up.
On a separate note here is a conspiracy theory. Just read that the FDIC is trying to restructure the Indymac mortgages instead of foreclosing. Maybe this was Schumer’s plan all along!?!?!? Start a run on the bank, have the government take it over, and restructure all the mortgages.
WSJ Article – Love when they say Lincoln Park is appreciating…
“Mortgage lenders and real-estate agents complain that insurers are painting the country with too broad a brush. For instance, the metropolitan area that includes Chicago, home to nearly eight million people, is designated a declining market by four of the top five insurers, even though home sales vary widely within the area.
“To put this blanket overlay on my marketplace and say it’s all a declining market, it’s not true,” says David Hanna, managing partner of Prudential SourceOne Realty in Chicago. City neighborhoods such as Lincoln Park and Hyde Park, as well as affluent suburbs such as Hinsdale, still are seeing home prices appreciate, he says.
Mr. Hanna points out the declining-market tag has hit such unlikely transactions as a $1.1 million sale of a home in Wilmette, a well-to-do suburb. The buyer had to come up with an extra 5% down payment.
In another case, a two-unit building in Chicago was ready to be sold to an investor for $449,000, when the required down payment again was boosted. The buyer still is trying to come up with the funds. It turned out that a different investor in that neighborhood had defaulted on seven properties, driving down comparable prices.”
That article merely quotes the managing partner of a realty firm with a vested interest in talking up the market and with no supporting data.
He does, however, include data to support the notion that we have not yet hit bottom.
Combine the above with the Chicago Tribune article and I guess you could say their is supportive data.
There are 6 zip codes in Chicago where prices continue to appreciate. One of them is Lakeview (60657). Believe me, I’m baffled by it but it’s true.
From wsj:
Federal Deposit Insurance Corp. Chairman Sheila Bair, who has been one of the most outspoken officials calling for banks to ease up on struggling homeowners, said that the agency is “really focused” on keeping borrowers in their homes for both their sakes and to maximize IndyMac’s value for taxpayers. “We will very aggressively pursue loan-modification strategies for unaffordable loans to make them affordable on a long-term, sustainable basis,” Ms. Bair said in an interview Monday.
Nothing to be baffled about. Sales volume has crashed and foreclosures are up. The shills have to fool some for commissions but the price drops are inevitable.
The sales number increase for the $1M+ market noted in the Trib article was deceptive because of the number of new luxury units delivered beginning the 2nd half of 2007. Take them out and there was no increase in sales (not to mention nearly all of the contracts were from prior years.)
Loan modification strategy = reduction in principal or subsidized interest rate. = bailout of those with Indymac mortgages by Joe Taxpayer.
Guess the lesson learned here is try to get a mortgage through the most shaky mortgage company you can find in the hopes for a government takeover and future loan modification.
The feds can modify as many loans as they want but that won’t stop the defaults. Most subprime and some alt-a borrowers are not responsible enough to make regular and timely payments to their creditors. That’s how they got bad credit in the first place. A loan mod might save the borrower a couple of hundred dollars a month but that extra money isn’t going into savings, it will be spent on the increased cost of gas, food and utilities. And if there is any money left over it gets used for discretionary purchases, like plasma tv’s, fancy rims and cars.
If the fed REALLY wants to bailout homeowners, they could reduce the borrower’s monthly payment to 28% of household income and modify the principal balance accordingly. That’s sort of what Section 8 does now anyway – they figure out what they think you can afford to pay and the gov pays the rest. Affordable housing for everyone!
Moody’s just had a report on defaults after loan modifications. Basically, 42% of loans modified in Jan-Jun 2007 were 90 days late on March 31, 2008.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aMXkplU4rkCI
Clarification: that was 42% of *subprime* mortgages modified in first half 2007.
The loan mods pretty much suck anyway. Most of the time the loan mods or “workout agreeements” INCREASE the monthly payment over a number of years to allow the borrower to catch up.
Of the dozens of workout agreements I’ve seen, only one actually ‘modified’ the terms of the agreement. Here’s what it did: The agreement wiped out $17,000 in late fees, attorneys fees and interest, added $4,000 to the principal balance (on a $166k note), lowered the interest rate to a teaser of 3.5% for 3 years with NO neg am. but then when the three year period was up it reverted back to the original subprime terms i.e. 6 month ARM indexed to the libor + 5% or something ridiculous. So the borrower will be OK for three years but then what? All the bank did was push the foreclosure 3 years into the future….duh!
homedelete,
The bank probably knew it was pushing the problem 3 years out into the future. The thing is up until recently the stock and bond markets didn’t.
The bank was thinking that if they can push these writedowns out far enough it will bide them time to raise additional capital from sucker investors or at least defer them being taken over by regulators as long as possible so senior management can continue on in their jobs as long as possible.
Time is exactly what the banks need. If all of the defaults were taken in one quarter there would be financial collapse. It is smart to spread out the red ink over a period of years. Who know, perhaps RE will increase in value during that time!
What is with Fannie Mae stock? It’s going up and up? Can’t people see that with all the losses they are going to take it’s worthless to stockholders? Sure, the government is going to step in and provide funding but the stockholders will be wiped out. I’ve bought put options on the stock.
Fundamentally the stock is probably worth 0. But if the government winds up buying equity to control them, which is one of the options being discussed, current shareholders would be diluted but may not be wiped out. Its way too volatile a stock for me to go near and daytraders must be having a field day.
In current form it should be worth zero. But when you start talking about government intervention anything is possible.
The SEC temporarily banned short trading on Fannie, Freddie and some other financials. It’s a pretty openly manipulative move to prop the stock, and seems almost guaranteed to end very, very badly. Hang on to your puts for a couple of weeks; I predict you’ll be very happy to have them. (On the other hand, Bob is right–now that the Fed, the Treasury and the SEC are so openly engaging in market manipulation, who the hell knows. It’s really disgusting: they tell homeowners to suck it up and accept personal responsibility, but they put safety nets under the asses of their Wall Street buddies. So do they believe in markets, or not? Depends on who gets hurt.)
Its even more disgusting when you figure out that the senior management of Fannie and Freddie are probably the highest paid government employees. They get paid millions for assume substantially less risk than a true private sector CEO.
As an addendum Freddie is preparing a new share offering to the tune of $10B. Given their current market cap is $6B looks like current shareholders are going to be diluted 66%.
This just posted on CBS marketwatch:
“SAN FRANCISCO (MarketWatch) — Market makers may get exemptions from a new Securities and Exchange Commission order that is trying to limit so-called naked short selling. “The staff is recommending exceptions to the short sale order for market makers of the 19 stocks and their derivatives from arranging to borrow in advance for short sales in their marketmaking and related hedging activities, to avoid constraining the market makers’ provision of liquidity,” SEC spokesman John Nester said in a statement that was emailed to MarketWatch”
One of the commentators stated: “Shades of Orwell’s Animal Farm: “All pigs are equal, but some pigs are more equal than other.” “
Yes, these are strange, strange times. Also: down is now up:
Citibank writes down “only” $7.2 BILLION dollars in bad mortgages (and also spreading now to credit card and auto loan defaults), and the market calls it an “upbeat” report. Freddie is now trying to sell $10 billion in new shares, with a market cap of less than half that. Crazy thing is? They might actually find buyers.
Sartre was the first to predict WaMu was next and it looks like its coming true.
“Analyst: WaMu’s unsecured creditors pulling out”
http://biz.yahoo.com/ap/080724/washington_mutual_analyst_note.html?.v=1
They are the last of the very large thrifts. Them, IndyMac and Countrywide (was CW a thrift?) were far larger than the competition. I guess their regulator OTS was asleep at the wheel and they knew it.
This was reported earlier on Thursday, and since then WaMu claims that it has enough capital to get by–for now. No word on the streets that FDIC has moved in, so looks like they’ll scrape by at least through the weekend!
Deaconblue on July 13th, 2008 at 8:59 am
“First of all, wages have increased more than the media reports, but they’ve chosen to look at the numbers in a negative way (I’ll explain later).”
It’s two weeks later and I’m still waiting for you to explain.
And, they’ve had less need for such borrowings b/c they’ve been selling garbage to the Fed–all the liquidity with none of the risk (to WaMu)!
WaMu’s bonds due in January 2010 are now yielding 23%. The writing is on the wall and they should get the red carpet prepped for the FDIC’s arrival.
The equities market still hasn’t seemed to figure this out as the market cap of WaMu is around 10B.
“the market cap of WaMu is around 10B.”
this is true but i don’t get it. when their earnings came out a couple weeks back the stock price was the same and the market cap was 6B. did they issue more stock?
Yea I think there was a private issuance. TPG Advisors, a hedge fund, bought 227MM shares back on June 30, that was at $8.75/share.
Whose to say rich people only get richer with hedge funds? A bunch just lost their ass on this trade.
Ouch. But they’re not alone — you can’t open the WSJ without reading about another shuttered hedge fund.
We are back to where we were in mid July, after the market tanking took a vacation due to temporary SEC rules barring naked short selling.
The long term bonds of large regional banks have started to decline in value, approaching distressed levels. This means they likely can’t tap capital markets to raise capital to deal with their mounting losses.
http://dayton.bizjournals.com/dayton/stories/2008/08/18/daily12.html?ana=yfcpc
http://www.bloomberg.com/apps/news?pid=20601109&sid=a_EVv_ohmExo&refer=home
“I’ve been at National City for 30 years and a month and for 29 of those we’ve seen nothing like it,” Thomas Richlovsky, National City’s 57-year-old treasurer, said in a telephone interview. “In past cycles certainly lending, or credit, has gotten more difficult. The cost of credit would go up. In this particular phenomenon of the last year it’s not like you can borrow money and the price went up. No, the market’s closed.”
The end is nigh for a lot more than just IndyMac.
http://online.wsj.com/article/SB122264858979184153.html
Article on how a lot of smaller banks are in deep doodoo as they bet on Fannie and Freddie preferred shares.
On a bright note is not as bad as it could be: 60 or so smaller banks going under or being forced to merge is far from financial armageddon.
Bascially every institution that was making headlines has went away or changed form lately, I’m curious to see who is next. National City then…?
With what lightning speed these places went out of business. Mind boggling.
Josh,
You wrote
“In turn, they have stopped lending to each other and in effect has caused the global credit crunch. I have friends working in the MBS and CDO side of business and they have absolutely no business due the halt of the flow in the market.”
Let me remind you that mortgages existed far before securitization became vogue in the 80s & 90s. Its not the taxpayers burden to provide your friends a market to trade securities in if the demand for the said market is nonexistent. I think $700 billion is a high price to pay to keep your friends from playing solitaire at work and continuing to make 200+k/year.
Securitization is what got us into this mess: bankers used to mind the till when they held their mortgage loans until maturity. Once they found a way to sell them they no longer cared about the quality of mortgage loans they were originating.
If you reward bad behavior you get more of it in the future. Nowadays moral hazard has dropped off the radar screen so the remaining wall street executives can continue to earn ridiculous amounts of money and make campaign contributions.
Tell your friends we thank them for fucking up America. I’d rather see them in the breadline than see this bailout.
The killer was the “no doc” loan and the marketplace for them. These “no doc” loans (liar loans) were fraught with, well, lies (tons and tons and tons of fraud) and is what allowed prices to go even higher (kept pumping air in the bubble) and is the main cause of the collapse. Had “no doc” loans and a market in which to pass along these bad loans, we wouldn’t have near the problems we have now.
I am upset with Wall Street and the federal government corruption that permitted it (mostly dems)! Let them fail, and fail miserably.
See:
http://www.youtube.com/watch?v=H5tZc8oH–o
Speaking of “no doc” loans John I just noticed that this was no longer an option on the site I check regularly for mortgage loans (aimloan dot com). I remember it being there as recently as a couple months ago which always got a grin out of me on seeing.
Not sure if they’re still being offered anywhere, but the sad fact that they were available up to this summer is quite sad given all we knew about the market by then.
Is it any wonder the banks are in so much trouble if it takes them this long to react to the market?
I heard from a mortgage broker today that 100% programs will be back and that he would have at least 1 next week.
So today Fannie Mae & Freddie Mac had congressional hearings grilling the former CEOs.
As it turns out they both fired their respective Chief Risk Officers when they raised alarm bells. Both companies had CEOs receiving in excess of several million dollars a year in compensation to pretend everything was all right.
Give these two entities were always implicitly backed by the federal government sounds like the highest paid government jobs I’ve ever heard of.
Excuses all around regarding the cause of the housing crisis but no acceptance of blame as is typical.
One silver lining of this housing bubble is it looks like its going to cock up the economy bad enough to perhaps ultimately get the government out of the “every American should be entitled to a mortgage” paradigm. We’re not there yet but in a few years we can hope.
To this day I never understood why we needed Fannie and Freddie in the first place. Anybody with a basic economics course would understand that making the financing part of real estate cheaper via a government subsidy just results in the market setting a higher equilibrium price for the real estate.
Amen! Only problem is that the government is currently doing everything in their power to keep people in homes and to help more buy homes at even lower rates. It’s a death spiral.
WSJ headline tonight reads:
“The Treasury’s inspector general has opened up a formal probe of the Office of Thrift Supervision in connection with a backdated capital infusion into IndyMac Bancorp weeks before its collapse in July.”
Now a formal probe isn’t evidence of wrongdoing, but imagine how messed up the system is if even the regulators are engaging in not merely malfeasance but outright fraud as well.
Buh bye WaMu..
http://www.chicagotribune.com/business/chi-fri-brf2-wamu-locations-feb13,0,4607421.story
Its too bad they’re letting the tellers go first and the not the overpaid s$*s making six figures who were running WaMu. But their train is about to come to a stop too soon enough.
Freddie’s Acting CFO Found Dead
Washington media reports said the acting chief financial officer of Freddie Mac has been found dead in an apparent suicide.
WUSA-TV and WTOP Radio are reporting that David Kellermann was found dead in his Northern Virginia home Wednesday morning.
The 41-year-old Mr. Kellermann has been Freddie Mac’s chief financial officer since September.
Sabrina Ruck, a Fairfax County police spokesman, confirmed to the AP that Kellermann was dead, but she could not confirm that he committed suicide.
Read the Washington Post article here:
http://www.washingtonpost.com/wp-dyn/content/article/2009/04/22/AR2009042201185.html?hpid=topnews
let the conspiracy theories begin!
This has the clintons written all over it. Vince Foster all over again (just kidding)