Category Archives: Fannie Mae & Freddie Mac

Fannie and Freddie to Announce Mass Loan Modification Program

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From the Wall Street Journal:

Fannie Mae, Freddie Mac and U.S. officials are expected to announce plans Tuesday to speed up the modification of hundreds of thousands of loans held by the housing finance giants, marking the latest effort to try and prevent more foreclosures, people familiar with the matter said.

The announcement could mark the government’s most assertive use of Fannie Mae and Freddie Mac to help homeowners since the companies were taken over in September.

The streamlined effort will target certain loans that are 90 days or more past due, these people said. The program will aim to bring the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates and in some cases forgiving portions of principal debt, these people said.

Borrowers would have to provide a statement or affidavit showing that they have encountered some sort of hardship that has impacted their ability to pay their mortgage. It would only apply to loans made on or before Jan. 1, 2008, and borrowers will be disqualified if they file for bankruptcy. The homes must be owner-occupied and escrows for real estate taxes and insurance must already be set up.

U.S. government officials plan to encourage big banks that hold loans in their portfolios to take similar streamlined modification measures.

The announcement is expected to come at a press conference at 2 p.m. at the Federal Housing Finance Agency, which temporarily has Fannie Mae and Freddie Mac in conservatorship because of their shaky financial condition.

Spokespeople for the companies, the Treasury Department and the Federal Housing Finance Agency weren’t immediately available for comment.

Servicers are expected to be paid $800 for a successful modification and loan investors are expected to reimburse servicers for certain fees associated with the modification. There will be a 90-day trial period, and if borrowers successfully make payments for those 90 days the modification will be formally approved. 

This is the beginning of massive government intervention to try and slow foreclosures. On a positive side, Fannie and Freddie could provide a template for servicers to follow which may help homeowners receive a “yes” or “no” answer faster.  On the down side, this may also slow the recover of the housing market, prolonging the decline of home prices. Currently 40% of loan modifications re-default. This may also further erode investor confidence in residential mortgage backed securities, the impact being even tighter underwriting guidelines than what we’re now experiencing.

I’d like to see provisions in there regarding proof that the homeowner did not commit fraud when receiving the original loan, and proof that the homeowner has the ability to re-pay the modified loan.  But these things take time to ascertain.

Update from Calculated Risk:

Here is the press release from the FHFA. Note that this does not include principal reduction as a solution to create an affordable payment, and is limited to: “extending the term, reducing the interest rate, and forbearing interest”.

This is intended to help “thousands” (a drop in the bucket unless it is several hundred thousand), and seems to encourage homeowners to stop making payments until they are 90 days late.

2009 Conforming and Conforming Jumbo Loan Limits for Seattle Metro

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Update April 9, 2009:  On February 23, 2009 FHFA announced that according to the American Recovery and Reinvestment Act, 2009 loan limits will be revised to the 2008 loan limits.  As of this update, we’re anticipating the higher revised limits to take place at any time (1-Unit for this area will return to $567,500).  FHA has all ready implemented the loan limit changes.   This serves as a reminder that any information on the internet regarding mortgages can be out dated in a fairly short amount of time.

This morning, the Federal Housing Finance Agency has announced the 2009 conforming and jumbo conforming loan limits for 2009.  The conforming loan limit will remain at $417,000.  The jumbo conforming was reduced to 115% of median home value from 125%, with the passage of HR 3221.   Based on the new lower estimated home values, the 2009 conforming jumbo limits for King, Snohomish and Pierce Counties are:

  • 1-Unit:  $506,000
  • 2-Unit:  $647,500
  • 3-Unit:  $783,000
  • 4-Unit:  $973,100

Some banks and lenders have all ready began to send notices that they will stop accepting locks for the 2008 conforming jumbo limits ($567,500 for 1-unit) effective later this month.    This is done so that once the loan is sold and closed to Fannie or Freddie, the loan limit is compliant.   (You may not have until the end of the year to take advantage of the $567,500 loan limit).

More to follow…including updated rates this afternoon.

Buyer Beware: 'Tis the Season

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Boy, you’re going to think I’m the Scrooge…and this article may not apply to most of you…but I want to reach out to those of us who rely on our credit cards to help finance the holidays.  You see, years past it was not uncommon for home owners to get into the spirit and purchase many gifts for our loved ones–going over the top (meaning beyond our budget).  Yes, it feels great to see the look of joy and surprise on little Johnny and Susie’s face when the open the gifts they’ve been longing for…but this year, you may not have the “fix” of meeting with your Mortgage Professional in January to “reorganize” your debt.   Just in time for the holidays, Fannie Mae is unrolling DU Version 7.1 which really puts a damper on cash out refinances.

This officially takes place over the weekend of December 13, 2008; however lenders will start implementing this soon (so that loans are in compliance for Fannie Mae once they are purchased).   A cash out refinance will be limited to 85% of appraised value of your single family residence.   By the way, if you’re refinancing a second mortgage/home equity loan that was not used for the purchase of your residence, this is classified as a “cash out” refinance–even if you have never received cash out and you only reduced the rate on your second mortgage on a previous refinance.  (A refinance including a “non-purchase” second mortgage is treated as “cash out” with pricing and underwriting–no exceptions).   This will force more home owners to FHA mortgages which allow higher cash out refinances at a cost (upfront and monthly mortgage insurance regardless of loan to value).  

Factor in home values and you can really see the challenge with doing a cash-out refinance.  Lenders count on appraisals to establish a value for your home.  This value is based on what other homes like yours have recently sold and closed for in your neighborhood.  No sales?  A short sale?  Ugh.  It doesn’t matter what’s listed down the street, what your assessed value is or what you feel the home is worth in the lenders and appraiser’s eyes.

Tis the Season for big sales, no interest or payment for X many months and credit card companies including blank checks in our statements with dreams of sugar plum fairies and hopes that we’ll indebt ourselves further.  Please don’t do it. 

  • Make a budget for your holiday shopping.
  • Pay cash.
  • Consider a gift exchange for your family.
  • Find alternatives to spending for celebrating the Season.

You may wind up trapped, like Ardell’s Six Pack Joe, once your interest rates kick in and your bills start piling up with no refinance in sight.   I’m here to say that YOU do have a choice and you need to be informed and responsible for your debts.   Mortgages are getting tougher (especially refinances) and chances are, your home equity is not here to rescue you.

I won’t go into how credit cards and home equity loans are being frozen or the credit lines are being reduced without notice (and how damaging it is to your credit scores when your borrowed amount is above 50% of the credit card limit).  

You have less than two months to plan for Christmas.  Don’t be stuck with extra debt and tanking credit scores…your home equity may not be there to save you (even if you have it, you may not have affordable access to it).

FHA Update: The "It Girl" of Mortgage

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This morning I’ve been trying to update articles I’ve written on FHA in an attempt to have the information be accurate during this day and age of the ever-changing-loan-guidelines.  Please don’t rely 100% on information you find about mortgages on the web.  Programs and products are simply changing too often to keep up and information is becoming quickly outdated.  

This month, FHA loans have seen a few changes, many with the passage of HR 3221.   Let’s see if I can get us all caught up in one post. 🙂

Effective for FHA case numbers issued October 1, 2008 and later:

  • FHA mortgage insurance increase.  First FHA mortgage insurance was going to have risked based pricing, then HR 3221 came along and put a moratorium in effect until September 30, 2009.   Until then, for a FHA purchase 30 year fixed mortgage, upfront mortgage insurance has increased to 1.75% and monthly mortgage insurance is 0.55% for loan amounts over 95% LTV and 0.50% for borrowers putting more than 5% down on their home. 
  • Down payment assistance programs.  Seller funded down payment assistance programs are currently not allowed.  However there is a bill in Congress (HR 6694) that if passed, would allow DPAs once again but only to borrowers within certain credit scores.   Home Buyers can still obtain a gift or loan from family members as long as it meets underwriting guidelines.
  • Rental income credit when buying a new home and renting the existing residence.  This actually became effective in mid September.   When converting a primary residence to a rental home, the rental income can only be used for qualifying if:(1) the borrower is relocating or (2) the new rental meets at least 25% equity (to be determined by an appraisal < 6 months old or the existing mortgage balance is 75% of the original sales price).   Both mortgage payments are factored for qualifying purposes.  HUD (and Fannie/Freddie) have cracked down on this due to home buyers purchasing a new (less expensive) home and “walking away” from their McMansion mortgage payment.

Effective January 1, 2009:

  • Minimum down payment increases to 3.5%.  Home Buyers have until the end of the year to purchase under the 3% down payment requirement.   Sellers can pay actual closing costs once the buyer meets the minimum down payment requirement (which can be gifted or loaned by a family member).
  • FHA Jumbo loan limits to change.   HUD is in the process of reevaluating median home prices and will announce new loan limits before the end of the year.  With the passage of HR 3221, the maximum loan amount for FHA Jumbo was reduced to 115% of the median home price (currently, the $567,500 limit is based on 125% of the median home price).   Should HUD determine that our home values are unchanged, then the new limit would be reduced to around $522,100.   However, many areas have not had their values reevaluated by HUD in many years…so for now, we really don’t know what the new “FHA jumbo” loan limit will be.

A few more reminders about FHA insured mortgages…

  • Not all lenders are approved to originate FHA loans.  Check HUDs site to verifyif the mortgage company you work for is approved.   One clue I’ve noticed by LO’s who are trying to “fake it” is that they’re charging more than a 1% origination fee.   This is not allowed.
  • FHA does not have income limitations or geographic requirements.
  • FHA is not limited to first time home buyers.
  • FHA is not just for lower credit scores.

Sellers, you are reducing your exposure to more buyers if you are not considering those approved with FHA financing…especially with the higher loan limits.   A $700,000 sales price with 20% down is pretty close to the current limit.  Anything shy of 20% down would probably lean towards FHA jumbo.

Want more reasons to consider FHA financing?  Here’s how conventional compares:

  • Tighter guidelines.  And if you think DU 7.0’s been tough…wait until you get a load of version 7.1 which goes into effect in mid-December.
  • Risk based pricing on credit scores below 740. (FHA has risk based pricing starting at 620 and below).
  • More expensive private mortgage insurance for loans over 80% loan to value.

It’s easy to see why FHA has become very popular…you could say FHA is the “It Girl” of Mortgage.

Are you ready for FEMA Mortgage?

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Congress and Treasury Secretary Hank Paulson are working this weekend to hash out details of the proposed $700,000,000,000 bailout during this amazing time in American history.  My brother-in-law is an adjuster for FEMA, spending months away from his home evaluating damaged property across the country.   FEMA Mortgage could be created to essentially do the same thing.

Now that Uncle Sam will be buying bad mortgages, they could utilize FEMA mortgage adjusters to evaluate the borrowers current situation:

  • Can they afford their mortgage payment? 
  • Is this a situation worth modifying their existing loan?
  • Was income over-stated or not verified with the mortgage?
  • Was the property purchased as owner occupied and it’s now an investment property? 
  • Are there signs of mortgage fraud?

Home owners in trouble who have financial ability to stay in their home, would have the opportunity to re-qualify at either a lower rate and/or reduced loan amount with a silent second that would be called due if the home owner sold the property within a certain period of time (similar to State bond programs).   This would be available to home owners who were having difficulty due to an ARM adjusting or perhaps a financial set back that is now resolved (such as temporary loss of employment).    Loan modifications with Uncle Sam owned mortgages would be streamlined, very low cost  and legit.

Home owners who could not re-qualify based on their actual income, may have the opportunity to rent a property at a payment they can afford.  Having property occupied as a rental is better than abandoned–for that home and for the neighborhood.   Perhaps Uncle Sam will start FEMA Property Management…they can even re-use some of the trailers they bought for Huricane Katrina.  

If fraud was used on a mortgage now owned by Uncle Sam, the FEMA Loan Adjuster would determine if it was caused by the borrower or loan originator and proper actions would be taken.

A plan such as this, could provide jobs for out of work Loan Originators (of course they would have to pass the National Licensing requirements) and employ Real Estate Agents, builders and contractors, too.   FEMA Adjusters could also determine which foreclosed properties, owned by Uncle Sam, need repair before it can be resold at a higher value or if they should just be sold “as is”.

Your thoughts?

WSJ Reporting Deal Near to put Fannie and Freddie into Conservatorship

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The Wall Street Journal is reporting tonight that the time is almost up for Fannie and Freddie. That didn’t take long. No wonder the bill was rushed to President Bush to be signed at the end of July.

The plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency, said several people familiar with the matter. That would mean the government would take the reins of the companies, at least temporarily.

Plans include the government gradually injecting capital into the two companies and a “top level management shakeup.”

Freddie and Fannie own or guarantee more than $5 trillion of mortgages. They have suffered combined losses of about $14 billion over the past four quarters as they make provisions for a wave of defaults. Investors worried that a government bailout would wipe out the value of existing stock, and those fears have sent the shares down about 90% from a year ago. Many U.S. banks as well as foreign governments own stock or debt in the two giants, meaning their financial woes could cause broad problems beyond the housing market.

Emphasis mine.

This breaking story has already been updated. Read more here at the Washington Post and NYTimes.

Fannie Mae and Freddie Mac to be put under control, sources say

U.S. rescue seen at hand for mortgage giants

Update:

Here’s Bloomberg; Paulson plans to bring Fannie, Freddie under government control

Reuters: Fannie Freddie shares fall after report of bailout

I’m sure there will be more stories posted all throughout the weekend.  This Fannie and Freddie takeover is something I could have never imagined when I started my career in mortgage lending 25 years ago.  When they raised the conforming loan limit several months ago and allowed F&F take on Jumbos, there were many who said F&F wouldn’t be able to survive if loan defaults continued to rise.  Firstam Core Logic says defaults will to continue to rise for at least the next 18 months.  We should now begin thinking about the FHA mortgage insurance program and their 3.5% down requirement.  That equity goes away fast during a down market.

I am heading out to the Edmonds Woodway High School Football game. I will post a link to that CoreLogic report and any updates when I return.  Link to CoreLogic PDF posted above. 

Update 2: Sunday morning press release from Paulson:

Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers

Washington, DC–

Good morning. I’m joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA. In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.
Continue reading here.

 

Readers, what effect do you believe a F&F conservatorship will have on the local and national real estate market?

More Fannie Changes for Investment Properties and Second Homes

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Effective tomorrow (August 1, 2008) borrowers who convert their existing residence to an investment property or second home will be treated to tougher standards if they’re using a Fannie Mae loan.    Here are the new requirements:

Converting existing residence to a “second home”.

  • Borrower must qualify for both payments (this is not new).
  • Unless the borrower has at least 30% equity in the existing property, they will need 6 months PITI for both properties in reserves. 

Converting existing residence to “investment property”

  • The borrower may only use rental income (75% credit) of their existing property if they have at least 30% equity in the property.   Otherwise, they must qualify with both full payments (no credit for rent).
  • Rental income must be documented with a fully executed lease agreement and a receipt showing the security deposit from the tenant has been deposited into the borrowers account.
  • If the borrower does not have 30% equity in the proposed investment property (former residence) then they will need 6 months PITI for reserves for both properties.

Either an appraisal, AVM or Broker Price Opinion is used to determine if there is 30% equity in the existing home that is being converted to a second home or investment property (this may be determined by underwriting).  

Last, be careful when reading guideline changes, such as this.  Underwriting guidelines and loan programs are changing constantly, post like this are quickly “dated material” and no longer applicable–do verify information you find on the internet with your Mortgage Professional to make sure the information is still valid.

The Housing Rescue Bill

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Today President Bush signed a housing “rescue” bill HR 3221.  I’m really still absorbing all of this (I think it’s taking me a bit longer after my trip to Inman Connect).   Here are a few quick pointers:

The FHA risked base mortgage insurance pricing (which I’m in favor of) that was to be effective last week is now postponed until September 30, 2009.   FHA can now save some borrowers in trouble with their mortgage if their existing lender will forgive the underlying debt to 85% 90% of the current value of the home.   Gee…risked based MIP might be handy in these cases.

Also with FHA, Seller paid down payment assistance programs are will be gone and the minimum down payment for an FHA insured loan will be 3.5% (which is a very small increase) beginning October 1, 2008.

Jumbo FHA and Jumbo Conforming loan limits will be reduced from the current 125% of median home value to 115% of the median home value beginning January 1, 2009.   As I mentioned, your days of a loan amount of $567,500 are numbered.   The new conforming/FHA jumbo limit may be closer to $520,000.  

First time homebuyers (someone who has not had interested in a property for the past 3 years) are eligible to receive a tax credit…however, it’s really an interest free loan to be paid back over 15 years or from the proceeds when the home is sold (which ever comes first).  This is available only for homes purchased on or after April 9, 2008 and before July 1, 2009.  Income restrictions do apply.   For more information, check out this website.   

Last but not least (and I’m sure I’m missing stuff) Fannie and Freddie have a new regulator: The Federal Finance Housing Agency aka FHFA.   This from James B. Lockhart:

“Today President Bush signed the ‘Housing and Economic Recovery Act of 2008.’ I thank President Bush and Secretary Paulson for their leadership in making government sponsored enterprise (GSE) regulatory reform a reality.

The Act creates a world-class, empowered regulator, the Federal Housing Finance Agency (FHFA), with all the authorities necessary to oversee vital components of our country’s secondary mortgage markets — Fannie Mae, Freddie Mac and the Federal Home Loan Banks — at a very challenging time.  As Director of the new agency I look forward to working with the combined Federal Housing Finance Board (FHFB), Office of Federal Housing Enterprise (OFHEO) and Housing and Urban Development (HUD) GSE Mission teams and with other regulators to ensure the safety and soundness of the 14 housing related GSEs and the stability of the nation’s housing finance system.

For more than two years as Director of OFHEO I have worked to help create FHFA so that this new GSE regulator has far greater authorities than its predecessors.  As Director of FHFA, I commit that we will use these authorities to ensure that the housing GSEs provide stability and liquidity to the mortgage market, support affordable housing and operate safely and soundly.”

Too much to write about in detail for one post…just wanted to throw you some bits.

The Housing Crisis is Like Hurricane Katrina

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There were four back-to-back panel sessions on the topic of Foreclosures at Real Estate Connect this morning. Here are some sound bites and quotes.

There are 25,000 homes per MONTH in California that are going back to the lender.  This is going to create a glut of housing inventory for many months into the forseeable future.  The percentage of loan modifications that are re-defaulting and going into foreclosure is high.  Estimates are 40% or higher.

In Cali, the very low end price range REO homes are now selling to long term investors who are are able to put a renter in that house and make their cash flow goals. 

There are an estimated 400,000 people living in their homes for free in California right now.  Lenders are stalling the foreclosure process because there simply is not enough people working in the loss mitigation departments to process all the paperwork.

There is a huge problem nationwide with listing agents who are taking short sale listings and have no clue on how to help the homeowner navigate through the short sale process.

Quote: “This [the housing crisis] is like Hurricane Katrina.”

Question to the panelists: How can consumers who are facing foreclosure help themselves?
Answer from Frances Flynn Thorsen, “Stay away from Realtors.” 

Jillayne here. That answer brought forth many laughs and suprised blurts of shock.  I personally think this took quite a lot of moxie to say in a room filled with Realtors. The point Frances was trying to make was that not all homeowners who are in default want to sell their home!  When real estate agents stick with only a single mindset that selling is the ONLY option, they are doing a grave disservice to their clients.  Frances said it is imperative that agents connect homeowners with either Acorn or NACA or some other HUD-approved Housing Counseling Agency that can effectively negotiate with the lender, and to make sure the homeowner receives legal counsel from attorneys who specialize in consumer protection law, which is something they can find at NACA. 

There are very few loan modifications being granted if the homeowner is seriously underwater. The example given was $2,000 in monthly income and $11,000 in monthly debts.  No loan mod for that consumer because the chances of re-defaulting are way too high.  This homeowner may be better served through the foreclosure process.

The loan modifications that are granted are often done by lowering the interest rate on the note to say, 3% for a fixed period of time such as three years, but with NO principal reduction. 

Jillayne again.  I say this practice may lead to a build up of shadow inventory that could end up hitting the market in 2011 and further drawing out the housing recession into 2012.

Short sales in Florida are a complete waste of time.  Buyers in Florida are looking at sellers with equity or REOs ONLY.  Banks are only now starting to dump their REOs by lowering the prices in order to get them off their boooks.

Florida should WISH FOR another Florida bank failure because then the other banks will become extremely nervous about the bank regulators poking around and will begin to get real with dropping the prices on REOs in order to clear out their inventory, especially the closer we get to the end of a quarter.

“Real estate agents have a moral and fiduciary duty to our clients.  We have a duty to try and maintain values.  We should be encouraging sellers to help hold the value by offering to “buy down” the interest rate instead of lowering the sales price.”

Jillayne here again.  That quote came from LJ Jennings, a real estate broker/owner.  I’m not so sure that holding prices artificially high could pass a fiduciary test.  This may NOT be in the client’s best interest.

VERY interesting insight from a data analyst. She said some companies would rather stick with data that their analysts have been using INSTEAD OF showing NEW data to their end users….because then their existing analysts would be proven wrong and the company doesn’t want to deal with that. 

Take aways:

  • Banks will begin to “throttle out” their inventory quarter to quarter,
  • A lot more big pools of scratch and dent (loans with problems) loans will start to be sold off in bulk to investors
  • Lenders will slow down the default process for due diligence and accounting reasons
  • In the second have of 2008, 100 billion (correction: dollars) in loans will reset.  If ONLY 13% default, this is a huge number of homes that will impact inventory levels for the years to follow.
  • Hundreds of thousands of Alt A loans will reset in 2009.
  • Foreclosure relief bill is a little too late.  Our problem right now is that lenders are afraid to lend on a declining asset and buyers are afraid to buy.  The bill does more to shore up confidence in Fannie and Freddie than anything else.
  • There ARE options for a homeowner in default who does not want to sell.
  • Foreclosure is only a temporary part of a person’s life.  Life goes on.
  • Loan modifications and short sales are being done faster through banks that have a history of predatory lending (this is a concept I’ve been teaching for 8 years now.)

I have an entire set of notes from the attorney who spoke on the liability issues agents face when listing REO homes. I’ll have to do a separate blog article on that for you. 

The First in a Series of Fannie and Freddie Bailouts

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The rumors floated on Friday regarding Fannie and Freddie turned out to be true.  This first bailout proposal, released a few hours ago, has three parts.  I say “first” because there is no way that this is going to be enough to save what’s headed our way nor will this be the only time the government will need to “bailout” F&F.

The U.S. Treasury plans to seek approval for a temporary increase in the line of credit granted to Fannie Mae and Freddie Mac. They will also seek authority to buy equity in either company, and the Federal Reserve voted to allow the New York Fed to loan F&F money, if needed, giving F&F access to the Federal Reserve’s discount window.

The Wall Street Journal says the U.S. Treasury and The Federal Reserve are doing this mainly to boost confidence in F&F, not necessarily because any of this is needed, which to me seems to be a flat out lie.

The weekend move means that Fed Chairman Ben Bernanke, who has been steadily accumulating authority as the U.S. grapples with the financial crisis, will have even more power. The Treasury envisions the Fed working with the mortgage giants’ regulator to help prevent situations that could be a risk for the entire financial system. The move builds on Treasury’s broader goal of remaking financial regulation to give the Fed broader influence over financial-market stability.

I’m not sure if we’re suppose to be happy or scared at the thought of Ben Bernanke accumulating more power.  Maybe what’s really going on is some preemptive planning due to known or unknown possibilities that tomorrow’s auction of Freddie Mac debt doesn’t go well.

The Sunday move was designed in part to head off fears about Monday’s auction of Freddie Mac notes. While small, the planned sale had assumed an outsized importance as a test of investor confidence. Freddie should be able to find buyers for its three- and six-month notes, market analysts said. But there is a chance that some financial institutions and investors may demand higher-then-usual yields.

Similar Freddie and Fannie notes that are currently outstanding yield around 2.5%. If weak demand for Freddie’s auction leads to sharply higher yields on the new notes, that could trigger a selloff across a wide range of debt issued by the companies, some analysts said. But most said such a scenario is unlikely.

I’ve been glued to the web, the radio, and my phone since Friday evening reading, listening, and talking about this with friends and colleagues. If the federal government choses to provide (the implied) government backing for bondholders, then the United States increases our national debt by 5 trillion dollars which would have a profoundly negative impact on the value of the dollar and potentially bankrupting the U. S. economy. If the federal government chooses to do nothing and F&F are forced to mark their portfolio closer to market value and sell off assets to accumulate capital, then the true value of what’s in the bag becomes known. The secret will be out and now nobody will be interested in buying our Residential Mortgage Backed Securities, the market will know the true value of the loans currently being held by banks all over the U.S., mortgage lending slows way down, interest rates go way up, and the housing market goes cliff diving.

It seems to me that with this first bailout proposal (I am preparing for more bailouts as should you) everything is just going to be delayed as long as possible, taking us down further into a deeper recession step-by-step.

This bailout proposal is not enough. We have only just begun to see foreclosures rise. We still have the rest of 2008 to get through, when another round of pay option ARMS originated in 2006 begins to adjust, and through 2009 when the ARMs originated in 2007 adjust. Defaults and foreclosures are far from over.

There was a guy who predicted the demise of Fannie and Freddie back in 2006.  His proposal is that we nationalize Fannie and Freddie, quit pretending that they’re a private company, and restructure the debt, thereby forcing the bondholders to take a haircut.

Sniglet asks an interesting question (comment 123): “So what happens to the shareholders? Do any of these plans ensure that there is no dilution of equity if any form of bail-out were to occur? If the GSE shareholders aren’t protected then we could see a complete abandonment of the financial system by investors. Who will want to buy shares in financial firms if the government isn’t going to ensure their investments remain safe?”

From everything I’ve read over the weekend, the government likely will not protect shareholder equity.  Whether or not they should is up for debate.