Thursday, December 4, 2008

WSJ: Treasury Considers Plan to Stem Home-Price Declines

Bugger! I am in process of writing my 13 Outlier Predictions for 2009 and the Treasury Department is raining on my parade by stealing a large portion of one of my biggies for 2009.

Remember, since Fannie and Freddie were taken under government control under the guise of "$200 Billion at most" in cost [Sep 7: Bailout Nation Continues - Fannie/Freddie Now Owned by You] I've been saying the real cost will be much higher due to how we will "use" these 2 entities as things got more desperate - that was going to be the centerpiece of one of my Outlier Predictions. Look at what these entities were doing even before government control
In another step aimed at slowing the flood of foreclosures, Fannie earlier this year began offering to finance unsecured loans of as much as $15,000 to people who have fallen behind on their mortgage payments. These loans are designed to allow the borrowers to pay the past-due amounts on their mortgages.
Sure, give away $15K in unsecured loans, many of which to people who put anywhere from nothing to 3% down on a house, which is now underwater. Sounds logical. And that was before they were nationalized.

As I wrote in [Oct 12: Fannie/Freddie Turning into Vacuum Cleaners]

Notice a pattern of late? Sell a plan on one basis, and then turn around and do something different - bait and switch. Normally, I'd call them out on this "change in direction" with Fannie and Freddie, but things are so dire everything must be done to "preserve the system" - but the upshot is after trying to stabilize Fannie and Freddie we are now turning them into a large garbage pail. The costs to the American people of this are going to be enormous. But as always, we deal with the fire in front of us and kick the pail for the coming fires. Effectively that great "sucking sound" you hear is all of Wall Street's junk being sucked into the government.

This was in response to the fact that when taken over regulators said they would modestly allow a small amount of growth to their mortgage portfolios once the government took them over (that's what we were sold) but then quietly behind the scenes Paulson & Co changed tune.
  • Less than two weeks later, Fannie and Freddie were told to ramp up their mortgage bond purchases as the financial crisis deepened and credit activity came to near standstill.
  • Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds
  • Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury's $700 billion Troubled Asset Relief Program.
  • Adding underperforming assets to Fannie and Freddie's combined $1.52 trillion mortgage portfolios would come at a time when the two mortgage-finance companies already hold as much as $210 billion of bad debt that may be eligible itself for the Treasury's relief program
So effectively we've turned Freddie and Fannie into garbage pails, or two seperate TARPs of their own. But remember, this will only cost the US taxpayer "$200 Billion" (at most!) However, this is just the beginning of how we are going to be using them... and that was going to be the lead in to the 2009 plans.

My general thesis for this 2009 Outlier event was a shock and awe campaign to re-stimulate the housing market: seeing that mortgage rates have dropped from 6%+ to 5.5% just on the announcement of $500B in future purchases of mortgage backed securities, the Federal Reserve will step up into an even larger program of $1 Trillion plus of purchases, aiming to push mortgage rates to 4.5% or lower - effectively allowing every American with equity to refinance (and cash out of course so they can go buy new things with their house ATMs). This would also stimulate new buyers to enter the market - combined with new programs/subsidies created by our government (and their limitless pockets) to purchase existing home stock, along with tax incentives for buyers, along with interest rate "buy downs", along with principle adjustments for those underwater, along with things some of us could not imagine at this time.

Well this was going to be one of my 13 Outlier Predictions for 2009 - but it appears the Treasury Department is already on the case per the Wall Street Journal. As I said, with the way we are going to use Freddie and Fannie the cost to the US taxpayer is going to be far higher than the $200 Billion we were promised. It will come in the form of subsidies, principle adjustments for underwater home owners, interest rate buy downs, and the like. The cost will be enormous, and probably never measurable after it's all said and done.
  • The Treasury Department is considering a plan to revitalize the U.S. housing market by reducing mortgage rates for new home loans, according to people familiar with the matter.
  • The plan, which is in the development stages, would use mortgage giants Fannie Mae and Freddie Mac to bring loan rates down as low as 4.5%, a full percentage point lower than the prevailing rates for 30-year fixed mortgages.
  • Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration.
Bah, they could of waited a few weeks to leak this so I could of used this as part of my entry. Now I need to think of something completely new.

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