CR covers the FDIC: Federal Banking Agencies React to Takeover of Fannie Mae and Freddie Mac
Yves at Naked Capitalism is pondering the bank fallout:
Bye Bye Banks: Freddie and Fannie Preferred Holders to Take Big Hits?
CR has the Statement by Paulson on Fannie and Freddie
Read what seattlebubble bloggers are saying in the Econ forum
and this from Peter at LA Land
Obama and McCain back Fannie-Freddie bailout; Palin calls them “too big.”
Fact sheets from the US Treasury:
FHFA Director Lockhart Remarks on Housing GSE Actions
Fact Sheet: Treasury Preferred Stock Purchase Agreement
Fact Sheet: Treasury MBS Purchase Program
Fact Sheet: Treasury GSE Credit Facility
Mainstream Media:
Wall Street Journal
US Outlines Fan Fred Takeover
New York Times
US Unveils Takeover of Two Mortgage Giants
Bloomberg
Paulson Engineers US Takeover of Fannie Freddie
Reuters
US Takes Over Fannie Freddie
Conservatorship doesn’t kill preferred stock. Instead, it puts common shareholders first in line to absorb the losses. Preferred shareholders are second in line to absorb losses. Under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.
From the FDIC website:
The federal banking agencies have been assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two government-sponsored enterprises, a limited number of smaller institutions have holdings that are significant compared to their capital.
The Federal Reserve Board…are prepared to work with these institutions to develop capital-restoration plans pursuant to the capital regulations and the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act.All institutions are reminded that investments in preferred stock and common stock with readily determinable fair value should be reported as available-for-sale equity security holdings, and that any net unrealized losses on these securities are deducted from regulatory capital.
They’ve also put together a new secured lending credit facility which is available to Fannie Mae, Freddie Mac, and also the Federal Home Loan Banks. (Wait, what? I didn’t know the FHLBs were in need of this.)
Also, the U.S. Treasury has put together a temporary program to buy GSE MBS.
The taxpayers have now become the lender of last resort and the taxpayers have bailed out Fannie and Freddie.
I’d like to know more about what both presidential candidates think about all this, and I’d like to see film footage of Paulson. If anyone finds some more great links as Hurricane Fan Fred hits the US taxpayers, please post them in the comment section. Rhonda what do you think this might do for interest rates?
They’ve both commented in very vague, general terms. Oddly, there seems to be more-or-less agreement that both entities need to be nationalized, broken up, and sold off. I’d be very concerned if they went into any more detail; the president isn’t supposed to be an economist. The details are for the economic advisers to work out. Any candidate who presumed to be that all-knowing would be too egotistical to be viable.
So I think the responses, more-or-less, have been about right.
Hey, thanks Larry. Do you believe we’ll begin to see what each candidate’s economic advisors will say or…is it too soon to be thinking that they’ve already chosent their economic advisor?
If Gramm hadn’t been forced out of McCain’s campaign, we might have gotten a somewhat detailed response from him. And I think we all have a pretty good idea where he’d be headed. At this point, I doubt that we’re going to get any more detail out of either campaign.
Again, I think the only real question, based on released statements, is whether Obama would favor slicing and dicing and selling off the pieces after taking over. He said that they should either be totally public or totally private; I don’t think he expressed a preference. I don’t think either side disagrees with the takeover itself.
Monday morning will be facinating to see how rates react.
I’m also wondering if Fannie/Freddie will become more like Ginnie Mae (FHA) and what impact this will have on pmi companies (which are hurting anyhow).
CR speculates rates will decline due to the former-GSEs being able to borrow money more cheaply. Are there quotes on the weekends, Rhonda? If so, are you seeing that?
Richie from this thread over at Seattle Bubble gives us some WAMU math:
http://seattlebubble.com/blog/2008/09/07/fannie-freddie-takeover/#comment-55958
See comment #5
“WaMu is holding 7.8 million common shares of Freddie at the cost of $128 million and 25.5 million common shares of Fannie at the cost of $499 million. I don’t know if it is holding preferred shares too”
Jillayne here.
CR is reporting, via the WSJ, that WAMU’s CEO Kerry Killinger is going to be shown the door tomorrow morning.
http://calculatedrisk.blogspot.com/2008/09/wsj-wamu-ousts-ceo.html
Here is the film footage of Paulson:
http://calculatedrisk.blogspot.com/2008/09/fannie-and-freddie-press-conference.html
Senator Christopher Dodd says he wants to hold hearings into the F&F bailout:
“WASHINGTON (Reuters) – U.S. Senate Banking Committee Chairman Christopher Dodd said on Sunday he planned to hold hearings to examine the government’s decision to take control of Fannie Mae and Freddie Mac, saying there were many questions still unanswered.
“There are still many unanswered questions about the Administration’s plan,” Dodd said in a statement, referring to the two troubled housing finance companies.
“We need to understand the circumstances which led the administration to change course” after saying just weeks ago it did not think it would need to exercise emergency authorities Congress approved in July.
“In the coming days, I will invite the architects of this plan to come before the banking committee to provide members of Congress and the public with more information,” he said.”
http://www.reuters.com/article/bondsNews/idUSWBT00965720080907
biliruben, I just have a FEW lenders that allow me to lock on the weekend (I can QUOTE all day long..but locking is a different story). Typically the rates do not change from the lenders that allow to lock over the weekend until Monday AM.
This is a policy (not being able to lock over the weekends) since the meltdown. Even when I could lock over the weekend, it was not like how you see futures being traded on the stock market; it’s based on Friday’s last rate sheet (typically).
I am sitting on the edge of my seat waiting to see how the bond markets open tomorrow a.m. There’s arguments for both sides (rates higher/lower)…time will tell. And nothing is really going as predictable as it use to be.
I’m pretty split about it. It all comes down to predicting the traders. 50% of me thinks they will see this as “insurance” and will be releaved…therefore bonds will be a good bet against our economy (ie lower rates) and the other side (the lil’ devil on the left shoulder) says that traders will see this is a sign of just how bad things are and so they will pull their investments out of bonds and stocks and stuff them into gold or their mattress, which will drive rates up.
As my Grandma Marion would say (if she were here) “UFF DA”.
For our non-Scandinavian readers, uff da = http://en.wikipedia.org/wiki/Uff_da
Thanks, Rhonda. I’m curious too!
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this sets a precedent for guvment bailout of public (quasi-public) companies. no matter, how you slice it, the taxpayer gets stuck footing the bill.
How many other big quasi-government entities are there? The only other one I can think of is the Post Office, and maybe Amtrack. I’d expect the government to bail them out.
biliruben, this morning rates are about 0.25% lower for conforming 30 year fixed. 🙂
Rhonda wrote: “this morning rates are about 0.25% lower for conforming 30 year fixed”
What happens the day after the seizure likely isn’t too useful as a means of determining the real impacts. What will be interesting is to see where the rates are in October and November.
My personal guess is that mortgage rates will NOT decline all that much over the next couple years (and may even get substantially better). However, we can likely expect to see MANY more financial institutions go bust and a continued tightening of lending criterion (i.e. it will be ever harder to qualify for loans).
This nationalization of the GSEs will make it considerably harder for any private institution to regain it’s health. There is just no way private lenders can compete with the subsidized loans the GSEs can provide, thereby removing one of the few means of profit left.
The ONLY way private institutions can try and make money is by borrowing at the Fed window and buying GSE securities.
Hi Sniglet,
I have a similar yet slightly different interpretation.
I also believe the fed and now the government have shown their hand: They don’t know what to do so they’re going to do a bit of everything.
They’re going to try and prop up the housing market so rates will likely remain low/decent through the election.
They had to take over fannie/freddie because the two were basically insolvent. BUT the government need fannie and freddie to buy mortgages.
I’m thinking that Fannie and Freddie will be used for the banks to offload all the toxic crap on their balance sheets.
So the US Treasury didn’t necessarily bailout fannie and freddie, we, the US taxpayers are bailing out all the banks.
F&F (now the government) buys mortgage loans that for now nobody’s buying, and then the banks can slowly recover and get the mortgage market moving again….in order to try very hard to get the US economy out of a recession.
Housing leads us into a recession, and housing leads us out of a recession.
So I believe this nationalization of the GSEs will make it easier for banks to regain their health. They can cut out the cancerous Alt-As and prime ARMS on their books and feed them to the Fannie and Freddie.
What do you think about my interpretation? I am very interested to continue to read about your interpretations!
Hi Kary,
The other quasi-governmental agency I can think of is the Federal Home Loan Bank, which WAS mentioned by Paulson on Sunday.
Jillayne wrote: “I’m thinking that Fannie and Freddie will be used for the banks to offload all the toxic crap on their balance sheets”
Possibly… The government could certainly announce some sort of program for buying out all the “bad” assets that banks currently hold. However, they haven’t announced such a program yet. Also, I suspect it will never be possible to agree on a proper “price” for purchasing all that toxic debt. The banks clearly won’t sell it for market prices since that would make many of them insolvent over-night. Just look at the convoluted efforts those banks which have sold assets have went through to make it look like they were selling for greater than market rates (e.g. self-financing the buy-out, offering guarantees of covering any losses, etc). I suspect it will never be possible to find some mutually agreed price at which the government can buy these assets.
All that aside, even asuming the government were able to buy the toxic debt from the banks (getting it off their books), what business is left for the banks to do? They clearly won’t be able to make any money issuing mortgages of their own, since they won’t be able to compete with the GSE rates. Commerical RE is going in the toilet so that is a non-starter too. I agree with Messr Roubini’s comments on how the investment banking business model of the last 30 years is dead. There is simply no way to continue borrowing short and lending long (i.e. which is the corner stone of the investment banking business). All that remains is fees from trading, taking companies public, etc.
In short, whatever business remains for either the chartered or investment banks will be mere crumbs compared to what they have been used to in the last 20 years. As a consequence, I expect that most chartered and investment banks will either merge, close their doors, or shrink to become shadows. And this prediction is assuming the US government is somehow able to take all the toxic debt off their books.
Great post Jillayne! Thank you for so many links to the source materials. I am a LO and our rates improved dramatically this am by all of our lenders.
Sniglet wrote:
“My personal guess is that mortgage rates will NOT decline all that much over the next couple years (and may even get substantially better).”
What do you mean by getting better?
Q-diddy wrote: “What do you mean by getting better?”
I was going to mention this in the thread discussing the new arrows in the rate changes, and the adding of other indicators.
For some a lower interest rate would be a: 🙂
For others it would be a: 🙁
It depends on whether you’re a borrower or a lender.
“Housing leads us into a recession, and housing leads us out of a recession.”
I still say it’s all a delayed reaction to 911 and the change from Greenspan to Bernanke.
The recession would have taken place after 911 if the government policies didn’t prop up the economy and create the buying frenzy based on bad paper. When Bernanke didn’t transition in and said “let market forces prevail!” it was one of these “be careful what you wish for” things, and that snowball slid down the hill too far and got too big, before he changed his mind.
But saying that makes me feel like one of those old farts rocking on the porch talking about the gold standard and the gold leaving Fort Knox.
At some point we had to take the punch in the eye from 911 as to the economy…that some point has come.
Q-diddy wrote: “What do you mean by getting better?”
I mean lower. I believe mortgage rates will stay low, and will quite possible drop a fair bit lower than they already are.
Thanks Jillayne:
Here’s a column from Paul Krugman on the subject. He has been right most of the current millenium.
Worth a quick read, and explains why rates may stay low, and why we may be in for some difficult times.
http://www.nytimes.com/2008/09/08/opinion/08krugman.html?_r=1&oref=slogin
Sniglet, thanks for reminding me of this: “Also, I suspect it will never be possible to agree on a proper “price
Jillayne wrote: “Do you think there could be some plan to sell at a higher price to prop up all the banks or am I reading too much into this? What do you think about my idea that the F&F bailout is more about saving the banks (and the toxic loans on their books) than it is saving F&F?”
Yes, I think there is likely talk about some kind of plan to hive-off the toxic assets that financial institutions hold, but I am highly skeptical they will go anywhere. As I said, the banks WILL NOT just let the government have the assets for nothing, since this would require they take an immediate write-down on their books (which would drive them into insolvency). However, any plans to have the government pay above-market rates for the assets is fraught with huge political challenges since it will be hard to justify giving these banks something for nothing. There have been plans floated around for while now where the FHA would just start issuing guarantees for these toxic assets, which would then help them gain in value. But this is just a round-about way of the government assuming the risk and “paying” the banks for the assets.
My guess is that these banks will just have to go bust, and the government will then setup some kind of RTC to deal with the “bad” assets. However, they might not really put these toxic assets on the market since they wouldn’t want to cause even further market declines, and simply hold them for years hoping they will regain some value.
I definitely don’t think the F&F bail-out is intended to save banks. If anything, this will make life even worse for them. The seizure now means that tax-payers will be heavily subsidizing GSE mortgages making it IMPOSSIBLE for private lenders to underwrite their own loans (i.e. because they can’t possibly lend money as cheaply as the GSEs can, now flush with treasury $$$).
Further, the seizure now makes GSE debt even MORE attractive than it already was (i.e. because it is now officially backed by the US government). No investor worth their salt would even look at buying debt issues from private lenders now, not when they can buy GSE bonds with a government backing.
In short, US banks are toast…
Sniglet wrote-
“Further, the seizure now makes GSE debt even MORE attractive than it already was (i.e. because it is now officially backed by the US government). No investor worth their salt would even look at buying debt issues from private lenders now, not when they can buy GSE bonds with a government backing.”
Not necessarily, investors have caps on investments too. Once they max out on GSE paper which is obivously in high demand, they will have to turn to other assets to buy.
And just because the Fed has taken over, it doesn’t mean that banks can’t compete. The Fed will have to limit GSE lending at some point. In other words, the pie is smaller for banks, but it’s not all gone.
Q-diddy wrote: “Not necessarily, investors have caps on investments too. Once they max out on GSE paper which is obivously in high demand, they will have to turn to other assets to buy.
And just because the Fed has taken over, it doesn’t mean that banks can’t compete. The Fed will have to limit GSE lending at some point.”
Well, if anyone has already gorged on their limit of GSE paper they can just switch over to treasuries. I think there are very few institutions that have limits on the amount of t-bill holdings. Keep in mind that the name of the game these days is CAPITAL PRESERVATION, not yield. It doesn’t matter if t-bills or GSE bonds have crummy yields, it’s all about being confident that you won’t lose your principal. If anything, the GSE seizure just re-inforces this trend toward preserving capital at all costs.
I completely disagree with the statement about the GSEs being “forced” to constrain their lending at some point. For one thing, the Fed has no say in the matter since the GSEs aren’t banks, and they have no jurisdiction. Secondly, the government will continue to pump increasing amounts of capital into the GSEs in vain attempts to prop up the real-estate market. Ironically, however, the more tax-payer money goes into the GSEs the more will be needed (i.e. because the “cheap” tax-payer money will squeeze out the private lenders that can’t compete).
Since Jillayne asked about rates in her post, right now, they’re about 0.5 improved to rate since what I posted here on Friday. HUGE.
Tomorrow morning we’ll see if this holds.
If we want to know what lending will look like under the government, look to FHA.
The FHA Mortgage Insurance Program doesn’t buy loans, it insures the top equity position for banks and lenders.
Lending under a government-controlled Fannie and Freddie will mean even tigher underwriting guidelines for F&F conforming than we have now, which I predicted on Feb 2, 2008:
http://www.raincityguide.com/2008/02/02/pondering-the-2008-rmbs-vintage/
I think the banks are still in the game but first, they need to get rid of the toxic loans on their balance sheet.
Banks survive by making loans. They’ll make conforming FHA and F&F loans.
Perhaps covered bonds will rise up to fill the middle….at much less favorable terms.
Our conversation should soon turn to the mortgage broker’s survival in this new taxpayer bailout world we’ve found ourselves in.
Sniglet: NOOOO! Please say it ain’t so. “There have been plans floated around for while now where the FHA would just start issuing guarantees for these toxic assets, which would then help them gain in value.”
If you have any reference links, please share. As you know, I am worried about the burden we’re placing on the FHA mortgage insurance program. 3.5% down is NOT that much when prices STILL have a ways to go down.
Here is the proposal that BofA floated to have FHA secure toxic loans:
http://www.nytimes.com/2008/02/23/business/23housing.html?_r=3&ref=business&pagewanted=all&oref=slogin&oref=slogin
This outlines proposals of House Rep Barney Frank to have FHA assist in refis:
http://calculatedrisk.blogspot.com/2008/03/frank-fha-refinance-plan.html
I am sure there are more ideas floating out there as to how the FHA can bail-out the market (by having tax-payers assume risks for defaults), but this illustrates that the idea is certainly being discussed.
Here is a proposal to have FHA guarantee toxic loans that was floated by BofA:
http://www.nytimes.com/2008/02/23/business/23housing.html?_r=2&ref=business&pagewanted=all&oref=slogin
Here is a proposal from House Rep Barney Frank:
http://calculatedrisk.blogspot.com/2008/03/frank-fha-refinance-plan.html
I am sure there have been other proposals and discussions around expanding FHA to bail-out bad mortgages, but these are two that come to mind (God knows what’s being discussed behind closed doors).
I liked this video from McCulley of PIMCO.
http://www.cnbc.com/id/15840232?video=848178902
Necessary, yes, but sufficient?
From the WSJ: Wells Fargo Says It Will Take Third-Quarter Write-Down On Fannie, Freddie Holdings
http://online.wsj.com/article/SB122090702798111625.html
To quote CR, “The F&F Confessional is open”
http://calculatedrisk.blogspot.com/2008/09/wells-fargo-to-take-fannie-freddie.html
This may be a little late to the party, but to answer an earlier question, Bloomberg seems to think that McCain wants to break them up and sell them off, while Obama wants to nationalize them and make them permanent government agencies:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a1ujoLiLLz78&refer=home
Banks will always be in the game…there’s no way the Fed, sorry, the government can take on all the loans, nor do they want to.
Once the non-performing loans are weeded out, the banks that are left will continue to lend and Freddie and Fannie will see their lending reduced. They already own half the market, why ask them to do more? I think banks will be OK with their ~$6 trillion piece of the pie.
I also don’t think every loan type will be eliminated forever. I just think that banks will be capped on how much they can hold of the more risky types like Subprime and Option ARMs. If banks do decide to go down this path they will not have a secondary market to turn to. No more QSPE, SPEs, CDOs, etc., just good old fashion on-balance sheet funding.
Banks will always be in the game…there’s no way the Fed, sorry, the government can take on all the loans, nor do they want to.
Banks have already been largely squeezed out of lending, and it is only going to get worse now that the government is directly subsidizing GSE debt. Even FHA loans (which is what most banks are doing these days) ultimately puts the risk on the backs of the government.
One way a far higher percentage of new mortgages are now guaranteed by the tax-payer (over 80% in fact), and that number is only going to increase. The simple reality is that there is no way a borrower will be willing to pay the higher rates that private lenders would demand (for loans that weren’t secured/insured by the government) when they can get an FHA or GSE loan.
I heard an interview on NPR w/ Chris Dodd, Chair of the Senate Banking Committee.
He was totally surprised by the announcement.
Why?
What legitimate reasons would there be for the administration to not consult key members of Congress on a move of this magnitude? (I can already conjecture many illegitimate reasons…)
Hi Sniglet,
Point of information: FHA, Fannie and Freddie don’t make loans. F&F buy loans from banks. and FHA is an insurance program.
FHA, F&F still need the banks and lenders to originate the loans.
Further, a bank’s survival DEPENDS on being able to make loans. That’s how they make their profits. So it makes sense that interest rates came down a bit after the F&F bailout was made official. The F&F announcement helped the banks!
I’m agreeing that it is very hard for banks to compete right now on any loan product that is NOT conforming to F&F/FHA guidelines because the rates and fees on those products are way too high.
HOWEVER, with that said, there will always be borrowers who won’t qualify for conforming financing, but will still need a mortgage. This brings us to private financing, and hard money, both of which should be considered as future growth areas.
Hey Larry,
Thanks for the bloomberg link. I am trying to follow that particular issue very close.
Jillayne,
Yes, I may not have been explicity enough before in differentiating between FHA mortgage insurance and GSE loans. Thanks for clarifying.
That said, the end result of either FHA insurance or GSE lending is to leave the US government with the risk from any default. Also, in both cases the profit margin on the loan is extremely tiny to the lender (which makes sense, since the lender isn’t assuming any risk).
Yes, there will always be borrowers who don’t qualify for conforming products, but no-one will want to lend to them in a declining market unless they are able to charge rates so high that it goes into the realm of illegality. Further, the very fact that the government is now guaranteeing GSE debt makes it far more attractive for investors than any kind of mortgage security the private sector might put together.
In other words: if the government wasn’t backing the GSEs then more investors would be willing to put their money into private mortgage securities. Further, without the government backing of the GSEs, mortgage rates would rise for all loans (including FHA) which would make them more profitable for private lenders.
Sniglet-
Where did you learn about lending?
Also, now that F&F are owned by the government, they don’t need to issue debt. Less supply in the market means investors have to turn to other debt to buy. More USTs, but that too has limits.
Q-Diddy wrote: “now that F&F are owned by the government, they don’t need to issue debt”
That’s not what the Treasury Department is saying. According to the announced plans the GSEs will continue issuing more debt (great gobs of it, in fact) which will then be purchased by the government. It’s a bit circular for the government to buy debt with one hand that the other hand issues, but there it is…
As far as my knowledge of lending goes, I only know what I have been able to glean from articles I have read over the years. For example, I read numerous articles in the boom years on how banks were thrilled to have private MBS markets because it offered far higher profit margins than the plain vanilla conforming loans. In fact, many lenders have said they pushed into construction and CRE markets so much precisely because there wasn’t any money to be made with consumer mortgages.
Heck, a huge reason so many banks acquired brokerages in order to make money from their own proprietary trading is because they felt there wasn’t any money to be made by lending.
The just gets me back to my original point: the government seizure of the GSEs will only make it harder for private banks to make money from lending.
Sniglet-
They will infuse equity in the form of a stock purchase not buying debentures (debt) from F&F. I think you need to get your info straight.
Q-Diddy wrote: “They will infuse equity in the form of a stock purchase not buying debentures (debt) from F&F. I think you need to get your info straight.”
Yes, the government is making an equity investment in the GSEs, but they are ALSO going to start buying new GSE mortgage securities.
“Treasury will begin later this month by investing in new GSE MBS, which are credit-guaranteed by the GSEs. Additional purchases will be made as deemed appropriate. Treasury can hold this portfolio of MBS to maturity and, based on mortgage market conditions, Treasury may make adjustments to the portfolio.”
http://www.treasury.gov/press/releases/reports/mbs_factsheet_090708hp1128.pdf
Sniglet-
You’re confusing debt versus capital. Capital was the reason the for the bail out.
You should read Jillayne’s comments a little closer.
Q-diddy wrote: “You’re confusing debt versus capital. Capital was the reason the for the bail out.”
Yes, I understand that the government is bailing out the GSEs due to the fact they are under-capitalized. I also realize the government is making a capital infusion into the GSEs.
That said, the treasury department is CLEARLY saying they are going to start purchasing GSE debt as well. The quote I cited earlier is very straight-forward on this point.
Sniglet-
You made several assumptions about the F&F bail out:
1. Banks won’t earn enough profit
2. No one will take out a non-conventional bank loan
3. The government will issue gobs of debt through F&F
I’d like to uderstand why you think these are the direct result of the bail out.
Q-diddy wrote: “I’d like to uderstand why you think these are the direct result of the bail out.”
Think of it this way: if the GSEs went bust, then consumers wouldn’t have any choice but to go to private lenders for mortgages. The way it is now, there is no way a lender can get away with an 8% mortgage on anything that is GSE conforming. However, without those subsidized GSE mortgages as competition, private lenders could actually charge realistic rates (i.e. that were highly profitable).
Banks have actually been griping about the unfair competition from the GSEs for years (i.e. the fact GSEs can sell bonds to investors for more attractive rates than they can), so this is not just something I am making up. Also, many banks have said that the primary reason they jumped into construction loans and sub-prime was because there just wasn’t any money in underwriting conforming loans (i.e. the competition was too intense which drove down profitability).
As far as the government issuing (and buying) “gobs” of GSE debt, I thought I thorougly covered that with my quote from the treasury department FAQ. “Treasury will begin later this month by investing in new GSE MBS, which are credit-guaranteed by the GSEs” I don’t know how I can make this any clearer.
As far as non-conventional bank loans go, it is already very tough to find any non-conventional loans on offer ANYWHERE. To my knowledge, private subprime mortgage offerings don’t even exist right now. This proves that there simply isn’t any demand for non-conventional loans at the rates that lenders would want to charge for them.
Sniglet wrote:
“Think of it this way: if the GSEs went bust, then consumers wouldn’t have any choice but to go to private lenders for mortgages. The way it is now, there is no way a lender can get away with an 8% mortgage on anything that is GSE conforming. However, without those subsidized GSE mortgages as competition, private lenders could actually charge realistic rates (i.e. that were highly profitable).”
It’s the other way around, if the GSE weren’t around right now, banks would have no way to shed loans off their balance sheet. A lot of them would go belly up.
“Banks have actually been griping about the unfair competition from the GSEs for years (i.e. the fact GSEs can sell bonds to investors for more attractive rates than they can), so this is not just something I am making up. Also, many banks have said that the primary reason they jumped into construction loans and sub-prime was because there just wasn’t any money in underwriting conforming loans (i.e. the competition was too intense which drove down profitability).”
Banks whined about GSEs because they started treading into their territory like Jumbo loans. This was a complaint about the business model/role of F&F.
“As far as the government issuing (and buying) “gobs
Q-diddy said: “This is true for the short term, maybe for the next few years, but you can’t possibly believe that this is the model for mortgage origination and for that matter, banking in general going forward!? You really think we’ll be moving to a state-owned economy?”
In the short-term, yes, we WILL be moving towards a state-owned financial system, with the government taking over ownership of every lender that is “too big to fail” (which is most of them). Private lending will completely squeezed out until the government sheds all these financial institutions it will be acquiring (and it is JUST getting started: CitiGroup, WaMu, Wachovia, etc, are coming soon).
Sure, many existing banks will go bust if they have to mark their assets to market. The GSE bail-out likely saved many existing banks from immenent bankruptcy. But my point about how the GSE seizures make it harder for private lending to be profitable still holds.
Think of a new bank that starts from ground zero today: they raise several billion in capital and have NO toxic assets on their books at all. It would be much easier for this newly minted lender to start making money if the government didn’t own the GSEs. Without the subsidized government competition, this new bank could start lending to HIGHLY qualified borrowers and still charge highly profitable interest rates (10%, say for what would be a conforming loan product today). This bank couldn’t care less that the OLD institutions were pretty much insolvent.
At some point most of the existing financial institutions are simply going to have to close their doors since they are already insolvent. The new banks that emerge will then be able to start lending profitably once again.
The only thing the government bail-outs achieve is to delay the day when private finance can begin again. I do believe this will eventually happen, but only after the tax-payers have finally decided they simply will NOT fund any more bail-outs, and the government becomes unwilling to expand it’s balance sheet any more with bail-outs. We aren’t there yet…
Sniglet-
What makes you think the government will continue to run F&F the same as before?
Also, what banks can go belly up and how will they be absorbed?
Q-diddy wrote: “What makes you think the government will continue to run F&F the same as before?”
Ominously, the treasury department has stated that they don’t care about GSE profitability.
“Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking.”
The treasury has also said they are going to buy large amounts of new GSE bond issues to help prop-up the real-estate market. This cearly demonstrates that they really aren’t interested in protecting the GSE portfolios, they are trying to bail-out US home-owners. You could argue these are one and the same thing, but they really aren’t. It’s in the GSE interest to improve the quality of the loans it makes and to charge higher rates for them. The government, however, wants to keep quality and rates low. Look at how irate the government has been that the GSEs weren’t buying enough Jumbos, and were tightening some of their lending standards. The Treasury Secretary, as well as senators have giving tongue lashings to the GSEs in recent months for not following through on the legislation passed earlier in the year that allowed them to expand their Jumbo business. Is it any wonder that the GSEs wound up going bust when they are being pushed to make mortgage credit easily available to everyone and sundry?
How does it really help us to put MORE people into homes they can’t really afford, setting them up for default and foreclosure?
I predict that this crisis won’t end until the government stops trying to bail people out. It is only at that point that the markets will finally be able to discover a clearing price and begin to recover. Will this be painful? ABSOLUTELY!!!! But it has to happen at some point, and I’d rather it be now rather than several years from now, after the government has spent a trillion dollars buying mortgage securities.
As far as other lenders that are set to go bust, some of the first on the chopping block are: WaMu, Lehman, Citigroup, Wachovia, Merrill Lynch, and Morgan Stanley. There are many more (particularly smaller institutions), but these are some of the biggiest. The first 3 in my list are already on their death-beds. The best way to tell which institutions are in the most trouble is to look at the cost of their credit default swaps (i.e. the cost of insuring their bonds). It now costs 40% of the value of the bond to get insurance on WaMu debt. The firms with the highest CDS rates will be the first to go under.
How the defaults actually take place is a messier picture. In some cases I expect to see more shotgun weddings ala Bear Stearns (i.e. where JP Morgan bought them for a song, with the Fed providing the financing, and asset guarantees). We will also see outright government take-overs. In fact, complete government take-overs are likely going to be the norm since there is almost no one else who would even want to buy these dead husks anymore (look at how Lehman can’t find anyone who wants to bite).
We have yet to see a conservatorship of an investment bank yet, but I’ll bet anything that we will start seeing them soon. The government is just too terrified to allow one of the IBs to go under.
Unfortunately, we are only in the first inning on this. Things have barely even gotten started yet in this credit crunch.
Sniglet-
Your powers of prediction based on what you read is amazing, but your lack of understanding how things actually work discredits you.
Check what you said about GSEs “making” loans and “tightening” credit standards.
Again, go back and read Jillayne’s comments.
Q-diddy wrote: “go back and read Jillayne’s comments”
Ok. Enlighten me as to where I am going wrong. I am certainly not above making mistakes (God knows I’ve made some big ones). I have re-read Jillayne’s post and don’t see anything there that seems to contradict what I am saying.