More bad news

[osupsycho]

The trillion-dollar mortgage time bomb
Risks are rising that Fannie Mae and Freddie Mac may need a government bailout that could cost far more than previous rescues.


NEW YORK (CNNMoney.com) -- Among the nightmares lurking around the corner for the already battered housing and credit markets would be a meltdown at mortgage financing giants Fannie Mae and Freddie Mac.

Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor's recently placed an estimated price tag on this worst case scenario -- $420 billion to $1.1 trillion of taxpayer's money.

This dwarfs how much it cost to help banks during the savings and loan crisis of the late 1980's and early 1990's. That cost taxpayers about $250 billion in today's dollars.

S&P added that saving Fannie (FNM) and Freddie (FRE, Fortune 500) might cost so much that the federal government's AAA credit rating, the top possible rating, might even be at risk. If that was lost, then all federal government borrowing would become more expensive.

Fannie Mae and Freddie Mac both help the mortgage market function by purchasing pools of loans and packaging them into securities.

So it is crucial for the mortgage industry for the two agencies to continue functioning smoothly.

The two companies are known as government-sponsored entities because they have Congressional charters, which implies that the federal government is behind them.

Fannie did not comment about the S&P report. According to a statement from Freddie, the firm said the S&P report was just "a scenario analysis, not a prediction" and added that "Freddie Mac remains a well capitalized company."

Victoria Wagner, a S&P credit analyst who worked on the report, said S&P isn't predicting that Fannie and Freddie would necessarily need a bailout at this time.

But she and other analysts are concerned about the impact more problems could have on the mortgage market since the two companies have become increasingly important to the health of the industry. Both companies are forecast to report more losses this year due to declining home prices and rising mortgage defaults.

Risks increasing

Wagner pointed out that at the end of January, 82% of all mortgages in the U.S. were backed by one of the firms, up from only 46% in the second quarter of 2007.

Fannie and Freddie primarily back so-called conforming loans, those made to borrowers with good credit and large down payments. But even limited exposure to subprime loans hasn't stopped them from running up huge losses as home prices tumbled and foreclosures soared.

And Fannie and Freddie's role in the mortgage and real estate markets is likely to grow, as Congress recently allowed them to back larger mortgages, up to $729,750, up from the previous limit of $417,000.

The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both firms, also recently lowered the capital requirements for Fannie and Freddie in an effort to pump $200 billion more into the credit markets.

The new loan limits will increase the risks and losses for Fannie and Freddie, said Wagner and other experts.

The high priced markets where homeowners and buyers need larger loans are now the ones seeing steep home price declines. And the default rates on larger loans are greater than the smaller loans that had previously been the core of their business.

"I don't think the message is a bailout is necessary or imminent," Wagner said. "But they're facing this increased role at a time that their own credit performance is suffering from the rifts in the housing and mortgage markets. They're both projecting much higher losses than we've seen in some time."

Some see bailout as more likely

But other experts expect that declining home values will force more borrowers who have a Fannie- or Freddie-backed loan to stop making payments in the coming months, rather than continuing to make payments on a home now worth less than their loan balance.

Rising job losses may also make it difficult for other borrowers who formerly had good credit to stay current on their mortgage payments.

"The real fundamental problem is real estate prices have been falling and they might fall substantially more," said Robert Shiller, a Yale University economist who argued for years that a bubble was forming in real estate prices. "OFHEO and Fannie and Freddie never considered the possibility of a massive real estate correction."

Some economists suggest that if investors start to see problems in the performance of loans backed by Fannie and Freddie, they'll dumping them. And that would force the federal government to step in.

"I would say there's at least a 50-50 chance of some sort of bailout. I'm not saying it will necessarily cost $1 trillion, but they'll need some kind of help, and it very well could happen this year," said Dean Baker, co-director of the Center for Economic and Policy Research

Investors are signaling growing concern as well. The yield premium for securities backed by Freddie and Fannie compared to the yield on Treasury bills has grown to about 2.25 percentage points from 1.7 percentage points at the beginning of the year. That's a sign that the investors see a greater risk of Fannie and Freddie running into bigger problems.

And OFHEO, in its annual report this week, said that while Fannie and Freddie have made progress clearing up accounting problems that had dogged both firms, they remain "a significant supervisory risk."

The agency added that since current home price declines are without precedent, the firms will have a difficult time correctly pricing the risk of the mortgages they're backing.

But Jaret Seiberg, financial services analyst for policy research firm Stanford Group, said Fannie and Freddie ultimately should be able to weather the storm though simply because there is no question that the government would bail them out.

So there shouldn't be a crisis of confidence about their future in the way that there was for investment bank Bear Stearns before the Fed stepped in and agreed to back $29 billion in potential losses so JPMorgan Chase (JPM, Fortune 500) could buy Bear Stearns (BSC, Fortune 500).

"What has allowed Fannie and Freddie to continue to operate when the private mortgage-backed security market dried up is their implicit government guarantee," said Seiberg.

First Published: April 21, 2008: 3:51 AM EDT

[FloridaPoke]

I think a larger bail-out is inevitable, but the real question is will it be at or below 10% of one year's GDP? I think it will be well below that. Remember, there are country bail-outs in our recent past (e.g., Japan) who spent as much as 20% of GDP on a financial bail out. I believe ours will be below 5% and will match closely (in % of GDP) of the 1980's S&L bail out.

But an even better question is this. Should any private enterprise being bailed out (e.g., Bear Stearns) come also attached with a requirement that until the debt is repaid, the compensation of the top paid executive of that private enterprise be limited to the highest paid salary in the US Government?

My point is this, for a private enterprise to enjoy my tax dollars in a bail-out, then stratospheric pay to top execs should be suspended until the people who caused the problem......solve the problem.

[allie]

I think a larger bail-out is inevitable, but the real question is will it be at or below 10% of one year's GDP? I think it will be well below that. Remember, there are country bail-outs in our recent past (e.g., Japan) who spent as much as 20% of GDP on a financial bail out. I believe ours will be below 5% and will match closely (in % of GDP) of the 1980's S&L bail out.

But an even better question is this. Should any private enterprise being bailed out (e.g., Bear Stearns) come also attached with a requirement that until the debt is repaid, the compensation of the top paid executive of that private enterprise be limited to the highest paid salary in the US Government?

My point is this, for a private enterprise to enjoy my tax dollars in a bail-out, then stratospheric pay to top execs should be suspended until the people who caused the problem......solve the problem.


floridapoke for president! i wish someone with that sort of common sense would be in charge of this whole mess. I wish someone with that sort of common sense had taken a hard look at the real estate market and lending practices 5 or so years ago. I mean seriously, the s & l/penn sqaure bank thing - NOT THAT LONG AGO. learn people. not exactly the same, but poor lending practices causes lots of problems for lots of banks within the last 25 years and here we go again.

it remains to be seen if those involved in this "oil boom" learned their lessons. not nearly as many rinky dinky outfits involved this time from what i can tell.

[osupsycho]

But an even better question is this. Should any private enterprise being bailed out (e.g., Bear Stearns) come also attached with a requirement that until the debt is repaid, the compensation of the top paid executive of that private enterprise be limited to the highest paid salary in the US Government?

My point is this, for a private enterprise to enjoy my tax dollars in a bail-out, then stratospheric pay to top execs should be suspended until the people who caused the problem......solve the problem.

I like this idea Florida. And with just a little searching I was able to find the the head of Freddie Mac, Richard Syron, has a base salary of $1,100,000 plus other bonuses and compensations. The 3 VPs make $500,000, $600,000, and $650,000 plus bonuses and compensations.

Those are some pretty high salaries in comparison to US government salaries...

Salaries of top Legislative, Executive and Judicial officials as of January 1, 2006

President -- $400,000
Vice President -- $212,100
Speaker of the House -- $212,100
House Majority & Minority Leaders -- $183,500
House / Senate Members & Delegates -- $165,200
Chief Justice of the Supreme Court -- $212,100
Associate Justices of the Supreme Court -- $203,000

[FloridaPoke]

I like this idea Florida. And with just a little searching I was able to find the the head of Freddie Mac, Richard Syron, has a base salary of $1,100,000 plus other bonuses and compensations. The 3 VPs make $500,000, $600,000, and $650,000 plus bonuses and compensations.

Those are some pretty high salaries in comparison to US government salaries...

Salaries of top Legislative, Executive and Judicial officials as of January 1, 2006

President -- $400,000
Vice President -- $212,100
Speaker of the House -- $212,100
House Majority & Minority Leaders -- $183,500
House / Senate Members & Delegates -- $165,200
Chief Justice of the Supreme Court -- $212,100
Associate Justices of the Supreme Court -- $203,000

Gotta love America. Our Travis Ford, who is 38 years old, makes 6 times as much as Nancy Pelosi (which by the way sounds fair to me) :)

[andyokstate]

George Will had a column about buyouts just yesterday:

What The Fed's Job Isn't

By George F. Will
Sunday, April 20, 2008; B07

Some say the world will end in fire, Some say in ice.

-- Robert Frost

And some say it will end because of subprime mortgages. But for those who cultivate fears of catastrophes as excuses for expanding government supervision of other people's lives, the bad news is that the world is not going to end -- not from global warming or economic cooling or anything else. Today's untethered Federal Reserve will, however, make the muddle-through interesting.

The late Sen. William Proxmire, a populist Democrat who represented Wisconsin for 32 years, wanted all members of Congress to write on their bathroom mirrors, so it would be the first thing they read each day, this: "The Fed is a creature of Congress." Congress created the Federal Reserve pursuant to its constitutional power "to coin money" and "regulate the value thereof." Fortunately, Congress has left the Fed free to go about its business.

But suddenly the Fed is undergoing radical "mission creep." The description of the Fed as the "lender of last resort" is accurate without being informative. Lender to whom? For what purposes? Last resort before what? Did the bank "lend" $29 billion to Bear Stearns, or did it, in effect, buy some of the most problematic securities owned by Bear? If so, was this faux "loan" actually to J.P. Morgan Chase? The purpose of the money was to give Morgan an incentive to buy Bear -- at a price so low that an incentive should have been superfluous.

In 1979, when the government undertook to rescue Chrysler, conservatives worried not that the bailout would fail but that it would work, thereby inflaming government's interventionist proclivities and lowering public resistance to future flights of Wall Street socialism. It "worked": Chrysler has survived to endure its current crisis. The fallacious argument in 1979 was that Chrysler was then "too big to be allowed to fail."

Today's argument is that Bear Stearns was so connected to the financial system in opaque ways that no one could guess the radiating consequences of its failure -- the financial consequences or, which sometimes is much the same thing, the psychological.

But what is now the principle by which other distressed firms will elicit Fed interventions in future uncertainties? By what criteria does Washington henceforth determine whether a large entity is "too connected to fail"?

The Fed has no mandate to be the dealmaker for Wall Street socialism. The Fed's mission is to preserve the currency as a store of value by preventing inflation. Its duty is not to avoid a recession at all costs; the way to get a big recession is to engage in frenzied improvisations because a small recession, a.k.a. a correction, is deemed intolerable. The Fed should not try to produce this or that rate of economic growth or unemployment.

After the tech bubble burst in 2000, the Fed opened the money spigot to lower interest rates and keep the economy humming. And since the bursting of the housing bubble, which was partly caused by that opened spigot, the Fed has again lowered interest rates, which for now are negative -- lower than the inflation rate, which the open spigot will aggravate.

A surge of inflation might mean the end of the world as we have known it. Twenty-six percent of the $9.4 trillion of U.S. debt is held by foreigners. Suppose they construe Fed policy as serving an unspoken (and unspeakable) U.S. interest in increasing inflation, which would amount to the slow devaluation -- partial repudiation -- of the nation's debts. If foreign holders of U.S. Treasury notes start to sell them, interest rates will have to spike to attract the foreign money that enables Americans to consume more than they produce.

Having maxed out many of their 1.4 billion credit cards, between 2001 and 2006 Americans tapped $1.2 trillion of their housing equity. Business Week reports that the middle-class debt-to-income ratio is now 141 percent, double that of 1983. Because anxiety is epidemic, bipartisanship has reared its supposedly pretty head.

Republicans and Democrats promise cooperation, compromise and general niceness using other people's money. If Congress cannot suppress its itch to "do something" while markets are correcting the prices of housing and money, Congress could pass a law saying: No company benefiting from a substantial federal subvention (which would now include Morgan) may pay any executive more than the highest pay of a federal civil servant ($124,010). That would dampen Wall Street's enthusiasm for measures that socialize losses while keeping profits private.

georgewill@washpost.com

[FloridaPoke]

Interesting read, although he seems to imply that Bear Stearns was NOT too connected to allow to fail, which I disagree with.

[BigBadBen]

Why is it that a Mortgage company can reap the benefits of our tax dollars because they lose money on these houses people are defaulting on, yet the folks who are losing their homes are just screwed?

[wickerbill]

Why is it that a Mortgage company can reap the benefits of our tax dollars because they lose money on these houses people are defaulting on, yet the folks who are losing their homes are just screwed?

If it wasn't such a mess that has broader economic consequences, I would say screw them all. I'm tired of reading stories of people living out in California who make $50,000/year buying $600,000 houses and then complaining about how they can't make their interest only mortgage payments and are losing their houses. This is what happens when stupid people give even more stupid people more money than they should have access to.

[FloridaPoke]

Why is it that a Mortgage company can reap the benefits of our tax dollars because they lose money on these houses people are defaulting on, yet the folks who are losing their homes are just screwed?

Great question and the answer is because of "adverse selection."

If you send a market message to the masses that a bailout at the lowest common denominator level was available.....then the masses will "game the system" and utter chaos would ensue.

At least at the top, there are only a few bad apples to police. Policing hundreds of thousands of people fully capable of paying their mortgage, but deciding not to do so in order to "game the system" is impossible.

Fair? Probably not in a few limited cases....but more fair than allowing the inevitable to occur if such a program were available.

[frankeaton]

floridapoke for president! i wish someone with that sort of common sense would be in charge of this whole mess. I wish someone with that sort of common sense had taken a hard look at the real estate market and lending practices 5 or so years ago. I mean seriously, the s & l/penn sqaure bank thing - NOT THAT LONG AGO. learn people. not exactly the same, but poor lending practices causes lots of problems for lots of banks within the last 25 years and here we go again.

it remains to be seen if those involved in this "oil boom" learned their lessons. not nearly as many rinky dinky outfits involved this time from what i can tell.

aah Penn Square Bank, my brother was in the "all" biz and had loans with them and who was the guy? never filed papers on assets they loaned on allowing more loans against them :stupid:

[Lewis the Pike]

I'm of the nogov't bailout opinion.....

I saw this mortgage fallout coming 3-4 years in the past... it was clearly obviously a bubble in SoCal...you know what I did???

SAVED MY MONEY!

So that way I could make a significant purchase on a distressed sale...

I am completely against this gov't manipulation of the economy and the cheapening of the dollar.....makes me want to puke.

They ain't even bailing out people, they are bailing out banks....

there, I'm done...for now.

[osutuba]

I think a larger bail-out is inevitable, but the real question is will it be at or below 10% of one year's GDP? I think it will be well below that. Remember, there are country bail-outs in our recent past (e.g., Japan) who spent as much as 20% of GDP on a financial bail out. I believe ours will be below 5% and will match closely (in % of GDP) of the 1980's S&L bail out.

But an even better question is this. Should any private enterprise being bailed out (e.g., Bear Stearns) come also attached with a requirement that until the debt is repaid, the compensation of the top paid executive of that private enterprise be limited to the highest paid salary in the US Government?

My point is this, for a private enterprise to enjoy my tax dollars in a bail-out, then stratospheric pay to top execs should be suspended until the people who caused the problem......solve the problem.
I 100% agree with you, Florida! It sickens me that there are C-levels out there in companies that are barely paying their low-level people any decent amount of money (lucky to pull off $35-40K), while those in the executive offices are hauling in 7-8 figures after bonuses, stock options, etc. As an additional requirement, they should be held under a $1 mil salary cap until 10 years after the debt is repaid, then they cannot go higher than 5 times the average salary of the top 20 salaries of the US Government for another 10 years.

[osupsycho]

I'm of the nogov't bailout opinion.....

I saw this mortgage fallout coming 3-4 years in the past... it was clearly obviously a bubble in SoCal...you know what I did???

SAVED MY MONEY!

So that way I could make a significant purchase on a distressed sale...

I am completely against this gov't manipulation of the economy and the cheapening of the dollar.....makes me want to puke.

They ain't even bailing out people, they are bailing out banks....

there, I'm done...for now.

Lewis,

I agree with you in that I would prefer the government stay out but don't you think there is a point where they have to step in to avoid complete chaos? I mean if we have something akin to say the ending of Fight Club then I think we are all screwed for awhile...

Now yes Fight Club was a manipulation to get the chaos but the results would be similiar IMHO if the banks are allowed to fail. It all ends with us going back to a barter system and the utter breakdown of current society as we know it...

[BigBadBen]

If it wasn't such a mess that has broader economic consequences, I would say screw them all. I'm tired of reading stories of people living out in California who make $50,000/year buying $600,000 houses and then complaining about how they can't make their interest only mortgage payments and are losing their houses. This is what happens when stupid people give even more stupid people more money than they should have access to.


I agree!

If people are dumb enough to go that deep in debt just to keep up with the Jones', and the mortgage companies are dumb enough to loan to those people, screw em all!!

Its a life lesson.

I dont want my tax dollars used for this crap. If the government is going to waste it, I would rather keep it! I would rather keep it anyway!

Wheres that fair tax????

[Lewis the Pike]

I agree!

If people are dumb enough to go that deep in debt just to keep up with the Jones', and the mortgage companies are dumb enough to loan to those people, screw em all!!

Its a life lesson.

I dont want my tax dollars used for this crap. If the government is going to waste it, I would rather keep it! I would rather keep it anyway!

Wheres that fair tax????


It will be a priority for each of these three small government candidates...McCain, Obama and Clinton.....

Wait no...that was only a priority for Huckabee and Ron Paul....
Which is why I am making sure the GOP realizes Ron Pail People are constituents and will be your voters; if our needs are being met.

That's why I encourage every true Republican (environmentalist, small government, limited intrusion of rights) to support Ron Paul, and not let McCain pander to the on the fence Liberals/Democrats....

WE ARE AMERICANS, not a voting block segmented by religon, national orgin, race, age, marriage, veteran status, or state. Not black, white, Jewish, Asian, veteran, Buddhist, Christian, Gay, Straight, Transgendered, senior citizen, baby boomer, etc., etc.....

WE ARE AMERICANS , and we need to tell the government we need more taxes, like we need another freakin hole in the head.....

I think the end of Fight Club would be Chaos.....What do we have now??

Out of control taxes, mounting inflation and corporate bailouts...The strongest economy is the suppliers and the consumers deciding the price, with the government protecting and fearing the people....not the government protecting the corporations and the people fearing the government and corporations....

It's OUR Country and right now we are renters in Corporate America's and Big Government's country; It doesn't have to be this way, and we have to take what what we own back from these worthless politician's and souless corporations that answer only to stockholders....

....cathartic...a bit:cowbell::cowbell::cowbell::cowbell::cowbell:

and yes, :ousucksnana:

[FloridaPoke]

It will be a priority for each of these three small government candidates...McCain, Obama and Clinton.....

Wait no...that was only a priority for Huckabee and Ron Paul....
Which is why I am making sure the GOP realizes Ron Pail People are constituents and will be your voters; if our needs are being met.

That's why I encourage every true Republican (environmentalist, small government, limited intrusion of rights) to support Ron Paul, and not let McCain pander to the on the fence Liberals/Democrats....

WE ARE AMERICANS, not a voting block segmented by religon, national orgin, race, age, marriage, veteran status, or state. Not black, white, Jewish, Asian, veteran, Buddhist, Christian, Gay, Straight, Transgendered, senior citizen, baby boomer, etc., etc.....

WE ARE AMERICANS , and we need to tell the government we need more taxes, like we need another freakin hole in the head.....

I think the end of Fight Club would be Chaos.....What do we have now??

Out of control taxes, mounting inflation and corporate bailouts...The strongest economy is the suppliers and the consumers deciding the price, with the government protecting and fearing the people....not the government protecting the corporations and the people fearing the government and corporations....

It's OUR Country and right now we are renters in Corporate America's and Big Government's country; It doesn't have to be this way, and we have to take what what we own back from these worthless politician's and souless corporations that answer only to stockholders....

....cathartic...a bit:cowbell::cowbell::cowbell::cowbell::cowbell:

and yes, :ousucksnana:

Holy crap, I agree with Lewis again. What in the world is this board coming to.

Again, who took the old Lewis and what did you do with him.

[bleedorange]

Holy crap, I agree with Lewis again. What in the world is this board coming to.

Perhaps now would be a good time to merge this thread with the "end of the world" thread. :D

[snuffy]

Perhaps now would be a good time to merge this thread with the "end of the world" thread. :D

Does anyone else hear REM in the background?

[osupsycho]

Florida I am going to do something that I find myself not believing, I am going to defend Lewis. You see Lewis has always had the stance he puts forth here. He just seems to lay it out better here than he has previously.

BTW I also agree with both of you.