Mortgage crisis heats up

[Ixiah]

Don't know if anyone caught it but the feds took over IndyMac in what could be the most expensive bank failure ever.

http://money.cnn.com/2008/07/11/news/companies/indymac_fdic/index.htm

This is literally nothing however compared to Fannie Mae and Freddy Mac.

http://www.nytimes.com/2008/07/11/business/11fannie.html?partner=rssuserland&emc=rss&pagewanted=all

The two have been using accounting tricks to delay recognition of losses.

Both companies have also recently changed their policies on delinquent loans, which they previously recorded as impaired when borrowers were 120 days late. Now, some overdue loans can go two years before the companies record a loss.

http://www.nytimes.com/2008/05/06/business/06fannie-web.html?fta=y%26pagewanted=print

Several sources indicate they have not disclosed 19 billion in losses and the share price has crashed. The big question - does the government bail them out if they collapse?

The two combined are sitting on 5 TRILLION (!!) in debt so the cost would be potentially staggering. Hmm, maybe somebody was right in saying they were getting too big. :whistle: If you don't save them however then the housing market will literally freeze up as they currently handle 80% of the mortgages in the country.

To me there is no good solution. Just two very bad ones. FWIW McCain seems open to a bailout while Obama has not responded (other then to indicate this is caused by the lack of oversight by the Bush administration).

http://thecaucus.blogs.nytimes.com/2008/07/10/mccain-open-to-fannie-and-freddie-bailouts/

[Maggie]

This is not a good situation no matter how our representatives, the Fed, the banking sector, etc. try to spin situation. Size is not the only issue here.

The real cause of this mess is a classic bubble in the housing market, the bursting of which has hammered lenders as well as borrowers. If the housing market had continued to rise, we never would have heard complaints; however, anyone with a brain knew the market couldn’t go up forever. In fact, Washington had long encouraged loans through the Community Reinvestment Act as a way to make marginal borrowers into homeowners – many of these are the ones with issue now – along with I assume individuals who purchase property with the intent to flip that property for a quick profit. Although this act was a well intended, albeit misguided, effort by liberals/progressives (take your pick) in Congress to “help” certain American’s become homeowners – it has been abused.

The Washington political class has subsidized financial beasts like Fannie Mae for decades in return for campaign funding. Wall Street, builders, et al. have also cashed in on the subsidized business, and paid back Congress in the form of campaign funding. Now guess who gets to pay this collusion?

My bet is that Congress will try to pass this little hot potato to the Fed so they don’t have to directly appropriate taxpayer funds toward a “bailout”. However, that will still basically the same impact on the taxpayer – Congress just won’t have to take any affirmative action (something they are quite good at). I know people will argue that Fannie Mae, etc. can’t be allowed to fail. But part of me thinks: Let them burn. Remember, many of the people, Democrat and Republican that assert this point of view actually created the situation in the first place and are merely looking to save face.

[rrshock]

It's starting to look more and more like most people will be paying their mortgage payments to the government in one way or the other.

The IndyMac thing also brought up another good point. There were alot of pepople that had more money in that bank than was the insurable amount. FDIC insured for up to $100,000. Now those people will get back their $100K, but might not see a penny over it. So not only did the bank basically fail, but customers were dumb enough to not pay attention and will lose out. How big? It didn't say, but it can't be good.

With Bank of America taking over Countrywide (the other big mortgage bank), I think this recnt thing just seals the deal on all the big ones.

If the govt takes over Fannie and Freddie, then there will be none of the big ones left. Maybe it is time to regulate banks and their lending practices better.

And the banks could have stopped the housing inflation a long time ago if they wouldn't have gotten so greedy. 100% loans are ridiculous. And they knew that they were loaning money in upwards of 200% and 300% of what a home had been worth. That just seems really risky without even looking into it farther.

[1979Shocker]

It looks like Fannie Mae/Freddie Mac are going to be helped out.

Treasury, Fed to help prop up mortgage giants

[DUShock]

Free market is free market. One cannot have your cake and eat it too. Oh, wait, nevermind

All that is wrong with the nation I love.

[RoyalShock]

I can only see three consequences to this.

1. The only lesson learned by the big lenders is that they have a safety net.

2. We get a whole lot more government involvement and regulation.

3. Both.

[BenWSU]

You guys aren`t reading the articles that mention IndyMac`s loan info.

They`re making loans to people WITHOUT income.

[DUShock]

You guys aren`t reading the articles that mention IndyMac`s loan info.

They`re making loans to people WITHOUT income.

Ben not to be smug but I have read the article in both my NY Times & Wall Street Journal accounts. This complexity of dirivitives is well beyond making loans for the sake of fees. Insane, sadly. Royal is correct about the consequences and it's hard to combat with logic.

Free markets rely on the underlying assumption that participants will act in a rational manner. When the participants do not and it's on a mass scale the market is severely ascew.

In other words "time to pay the piper"

[Maggie]

I believe the Fed will need Congressional approval to aid Fannie Mae in the way they intend which they will no doubt give – this is what I meant by passing the buck. Either way it is the same to you and me, as taxpayers.

Furthermore, the fact that IndyMac was making loans to people without income is not surprising – these types of loans were implicitly encouraged by CONGRESS when it passed the Community Reinvestment Act. I'm sure IndyMac also made loans for 100% of the value of the property as well (and in some cases, believe it or not, higher).

Everyone keeps mentioning the Free Market but if that Act was not messing with the free market I don't know what is – granted they had "good intentions" (that and they encouraged by campaign contributions from certain lobbyists) but you know what they say about a road paved with good intentions……so from that perspective DUShock is correct.

[Maggie]

I can only see three consequences to this.

1. The only lesson learned by the big lenders is that they have a safety net.

2. We get a whole lot more government involvement and regulation.

3. Both.

I agree. Fannie and Freddie were created by the U.S. government, and they can borrow freely at low interest rates because creditors know that the government will not let them collapse. This implicit subsidy has allowed them to grow far too large (a point Ixiah made), and now the taxpayers are in jeopardy of having to make good on all their debt.

This demonstrates how stupid and dangerous it is to allow any company to operate under the assumption that it keeps the profits while the taxpayers take the losses Such thinking breeds arrogance and encourages recklessness, both of which appear to have played key roles in this debacle. For the time being, it may be necessary for the Government to make clear that it is standing behind Fannie and Freddie and will not allow them to fail (and I don't like writing this). But to prevent an even worse catastrophe in the future, Fannie and Freddie should be broken up or dramatically downsized. This may sound strange coming from me -- to consider a government takeover of any company -- but a takeover aimed at restructuring, downsizing, and eventually reprivatizating the Fannie and Freddie might be the least bad option if a run on them actually materializes.

In any event, it is a mess.

[BostonWu]

If the govt takes over Fannie and Freddie, then there will be none of the big ones left. Maybe it is time to regulate banks and their lending practices better.

The banking industry is one of the most highly regulated sectors…obviously the regulators were not doing their job. It all boils down to greed on both sides of the isle – lenders and consumers were greedy making/taking loans they had no business with – and the regulators weren’t doing a damn thing about it.

[BostonWu]

Problems were well documented dating back to at least 2003. Here’s part of the executive summary from Feddie Mac’s regulator:

EXECUTIVE SUMMARY
In the early 1990s, Freddie Mac promoted itself to investors as “Steady Freddie,” a company of strong and steady growth in profits. During that period the company developed a corporate culture that placed a very high priority on meeting those expectations, including, when necessary, using means that failed to meet its obligations to investors, regulators and the public. The company employed a variety of techniques ranging from improper reserve accounts to complex derivative transactions to push earnings into future periods and meet earnings expectations. Freddie Mac cast aside accounting rules, internal controls, disclosure standards, and the public trust in the pursuit of steady earnings growth. The conduct and intentions of the Enterprise were hidden and were revealed only by a chain of events that began when Freddie Mac changed auditors in 2002. This report describes the circumstances leading to Freddie Mac’s $5 billion restatement and makes recommendations on corrective and preventative measures.

Corporate Culture and “Tone at the Top”
The corporate culture fostered by that “tone at the top” resulted in intense and sometimes improper efforts by the Enterprise to manage its reported earnings. Beginning in the early 1990s, Freddie Mac promoted expectations of steady, rapid growth in profits. A corporate culture evolved that placed a very high priority on meeting the earnings estimates of Wall Street analysts but neglected key elements of the infrastructure of the Enterprise needed to support growth. The senior management of Freddie Mac placed an inordinate emphasis on meeting stock analyst expectations regarding non-volatile earnings growth.
The corporate culture fostered by that “tone at the top” resulted in intense and sometimes improper efforts by the Enterprise to manage its reported earnings, compromised the integrity of many employees, and limited the effectiveness of its internal control structure. Freddie Mac created and maintained reserve accounts that did not comply with GAAP and entered into transactions with little or no economic substance, all for the express purposes of obtaining accounting results that would support the goal of reporting steady earnings growth and meeting analyst expectations.

http://www.ofheo.gov/media/pdf/specialreport122003.pdf

[Maggie]

If the govt takes over Fannie and Freddie, then there will be none of the big ones left. Maybe it is time to regulate banks and their lending practices better.

The banking industry is one of the most highly regulated sectors…obviously the regulators were not doing their job. It all boils down to greed on both sides of the isle – lenders and consumers were greedy making/taking loans they had no business with – and the regulators weren’t doing a damn thing about it.

It is my understanding that Fannie and Feddie were created by the federal government during the New Deal. I believe they operate with much less regulation/oversight than the average bank (they certainly have advantages) and I know they operate with the implicit understanding that the Federal Government won't let them fail. The latter fact, to me anyway, is the root cause of their problems.

The housing market as a whole and lending practices in general is a different issue although it ultimately adversely affects Fannie and Freddie because they purchase and take responsibility for mortgages.

[Maggie]

Problems were well documented dating back to at least 2003.

Critics of Fannie and Freddie have been warning of a problem with these entities for a very long time – before 2003.

However, Fannie and Freddie have many friends in high places, they have hired many ex-administration officials to serve on their boards (Democrat and Republican), they hire relatives of elective representatives, etc. They have a very strong lobby in Washington and have been able to resist efforts to reform, regulate or impede thier growth.

I am fairly certain that there are many members of Congress that don't want people looking to deep into the way Fannie and Freddie run their shops.

There is some truth to what this guy, Jim Rodgers, is saying (but he also, apparently, has a stake in a decline):

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7hS5BuYqeR8&refer=home