Okay, here it is Friday afternoon and time to write the “Mortgage Market Week in Review.” You know how some newscasts warn you to tell the kids to go in the other room because what comes on next isn’t going to be pretty? Well, there aren’t any pictures but what’s happening in the financial world is not pretty right now. If you’re squeamish, you might want to wait to read this until after you’ve eaten. So here goes:
The battle that’s waging right has now settled quite firmly in the “credit crisis” camp. Here’s what’s been happening on that front:
Indymac Bank (who?) They have a good sized branch presence in Southern California but did a lot of mortgage lending on the wholesale side. They announced that they are effectively ending their writing of residential mortgages and buying residential mortgages from brokers (with the exception of retail staff at their branches in California). How does the song go, “Another one bites the dust?”
Lehman – this time it’s not a mortgage company, it’s another investment bank (remember Bear Stearns?). They’ve spent a lot of time this week trying to dispel rumors that they are in trouble and trying to show that they actually have enough capital (aka cash) to make things work. It sounds a lot like what was being said before Bear Stearns almost went under and almost brought the entire financial system down with them.
and now for the big issue of the week:
Fannie and Freddie: Yep, I put them in bold print and underlined because they are, in my mind, infinitely more important to the housing and mortgage market than what Indymac or Lehman are. So what’s up with Fannie and Freddie? Here’s an overview:
1. They are experiencing substantial losses. Somewhere in the neighborhood of $11 Billion (that’s $11,000,000,000) so far this year.
2. Many analysts are raising questions about whether they have enough capital to keep functioning the way they are.
3. They currently control over $5 Trillion worth of mortgages (that’s $5,000,000,000,000) in the United States.
4. According to a former Fed regional governor, they have lost so much money that they are already insolvent.
5. One analyst said that in order to remain in decent capital positions, Fannie and Freddie need to raise approximately $75,000,000,000.
6. Fannie Mae’s stock has fallen over 50% this week alone and over 90% since August. With those type of stock prices, it’s going to be very very difficult for them to raise that kind of money.
7. As that scenario has unwound this week, the markets and the rumor mills have really kicked up as people start wondering what sort of government activity would step in to solve the problem.
It’s frankly been a very ugly week and there isn’t any resolution in sight yet.
So what does it all mean:
1. If you need a mortgage, get it now. Call me this weekend, call me Monday, do it now because it’s not going to get any easier to get a mortgage any time soon.
2. If you think you might need a mortgage in the next six months, consider getting it sooner. Have you ever seen the government get involved in anything and have it get cheaper? Seriously, if things do get so bad that Fannie and Freddie get bailed out by the government, then we’re going to be looking at more expensive credit than we have now. How much? How soon? I don’t know.
3. What’s this going to do to the housing market? I wish I could tell you that I knew, but I don’t think it’s going to be a positive.
I think it’s safe to say that we are at a point in the credit crisis where we are going to see some seismic shifts in the picture in the financial world and that banking, investments, and mortgage lending are going to look different because of it.
I wish I had better news for you, but I have to say that I can sleep better since I’m telling it like it is rather than soft selling it.
Call or e-mail me if you want to discuss it further.
Thanks!
Tom Vanderwell
(616) 292-7559
David Shafer says:
On Fannie and Freddie, why do the regulators say the rumors are hogwash and they have plenty of capital?
Fannie and Freddie only buy conforming loans:
Fact: Conforming loan foreclosure rate 1%
Remember any loans made and bought by these two that had a loan to value of over 80% had to have mortgage insurance. So F & F has a 20% cushion. Oh, you say real estate values have dropped over 20%. Well yes, from peak pricing to now, but only a small percentage of folks bought at the peak. Bottom line for conforming loans 98% still have positive asset value compared to the loan value.
So let’s put it all together; 1% of conforming loans are in foreclosure, 98% of loans have a positive loan to asset value combined with the insurance, real estate values are starting to descend less abrubtly (not enough months data to call this a trend), regulators insist that F & F have proper capitalization.
Seems to me to be a safe bet, that this is a stock market issue, not an issue of these companies going out of business. But the future will tell us!
July 11, 2008 — 1:18 pm
Mark Madsen says:
Great article. I just started a donation fund to save Freddie and Fannie.
July 11, 2008 — 1:34 pm
Robert Kerr says:
Fannie and Freddie only buy conforming loans:
Fact: Conforming loan foreclosure rate 1%
David, Fannie and Freddie have been buying subprimes for over a year.
At year end 2007, Fannie was holding ~$60B in subprime (2.5%) and ~$350B in Alt-A (14%)I don’t have Freddie’s subprime / Alt-A figures handy.
July 11, 2008 — 1:46 pm
David Shafer says:
Had no idea they were buying sub-prime. When/how did they start doing this? Did the Fed’s instigate it?
July 11, 2008 — 2:05 pm
Hunter Jackson says:
What happens, really happens, if they go down and the FED bails them out too late? We all know they will be bailed out if need be, but what about too late?
July 11, 2008 — 2:20 pm
David Shafer says:
Ok F & F have 47B and 120B respectively in sub prime (out of $5 Trillion). Current serious delinquincy is .63% for Fannie according to them. Still don’t see the numbers pointing to disaster. They state that the sub-prime they have are still rated AAA (I know, I Know) or the best of the class. $345 Billion in Alt-A for Fannie. So roughly 400B out of 3 Trillion in non-comforming loans. I’ve obviously been out to lunch on them buying the sub-prime and alt-a bonds!
July 11, 2008 — 2:39 pm
Stan says:
Yo momma is so fat…..sorry that was meant for another blog.
Tom thanks for cheering me up just in time for the weekend.
July 11, 2008 — 3:04 pm
David Shafer says:
Investors lose their capital. Liquidity allows for continue buying of conforming loans. In other words, not much or as it should be.
July 11, 2008 — 4:29 pm
Robert Kerr says:
IMB is now officially dead; the Feds moved in today after the stock fell to $0.28.
IMB is the largest S&L ever to go bust.
And, David, IMB was not a subprime lender, it was Alt-A. I notice you’re estimating FNM’s and FRE’s risk based entirely on subprime, you may want to rethink your math and include their Alt-A holdings.
July 11, 2008 — 4:32 pm
Tom Vanderwell says:
On Fannie and Freddie, why do the regulators say the rumors are hogwash and they have plenty of capital?
David, if they told us the truth – whatever the truth is, we’d probably see a real market panic.
Tom
July 11, 2008 — 5:37 pm
Tom Vanderwell says:
Great article. I just started a donation fund to save Freddie and Fannie.
Mark,
I hope you’ve got a BIG piggy bank for that fund! 🙂
Tom
July 11, 2008 — 5:42 pm
Tom Vanderwell says:
What happens, really happens, if they go down and the FED bails them out too late? We all know they will be bailed out if need be, but what about too late?
Hunter,
I don’t think you need to worry about it being too late. Uncle Ben and Paulson are watching things very closely (much closer than we know) and they’ll move when they have to. Not a moment before and not a moment after.
Make sense?
Tom
July 11, 2008 — 5:44 pm
Tom Vanderwell says:
Ok F & F have 47B and 120B respectively in sub prime (out of $5 Trillion). Current serious delinquincy is .63% for Fannie according to them. Still don’t see the numbers pointing to disaster.
David,
From what I understand, it’s not the performance of the entire portfolio as it is the value of the portfolio that’s causing problems. They might only have .63% that’s currently delinquent, but the value of their portfolio has dropped by 20% and due to their leveraged status, they are suddenly upside down.
Does that make sense? When you take them already upside down and facing additional losses, that’s the problem.
Anyone who sees it different, let me know.
Tom
July 11, 2008 — 6:08 pm
Tom Vanderwell says:
Stan,
I don’t believe you’ve ever met my Mamma 🙂
Seriously, I’d love to cheer you up, but times like this call for Straight Talk instead. Sorry.
Tom
July 11, 2008 — 6:10 pm
Tom Vanderwell says:
RIP, IMB
TJV
🙂
July 11, 2008 — 6:11 pm
Hunter Jackson says:
Hopefully Uncle Ben has our best interests at heart (i don’t mean realtors, I mean america).
July 11, 2008 — 7:47 pm
Thomas Johnson says:
@ David: Remember any loans made and bought by these two that had a loan to value of over 80% had to have mortgage insurance.
The PMI insurers are called mono line insurers. Google it. They are all illiquid and technically BK. Even a bottom feeder and insurance geniuus like Warren Buffett won’t touch them. So F&F have no insurance that will pay and the emperor has no clothes. A taxpayer bailout of F&F may be politically impossible because the largest holders of F&F bonds are the Chinese Communists.
@ Hunter: Uncle Ben may have the ChiComs best interest at heart. Oh, and S&P just wrote that a taxpayer bailout of F&F would be about a $ trillion and that could balloon the US deficit so large it could endanger the AAA rating status of the US Treasury bonds. This from the same guys that slapped a AAA rating on every piece of subprime crap that Wall St. shoveled at them.
I hope no body has any bank deposits anywhere that exceed the FDIC limits. Over FDIC limit depositors at Indy Mac just got wiped out. Have a great weekend.
July 11, 2008 — 10:43 pm
Michael Cook says:
Interestingly enough, no one has mentioned the biggest problem with losing F&F. Well obviously they wont be lost because they are government backed… Anyway, they are the largest purchaser of loans anywhere. They are why we can get loans so cheaply. Without F&F as they currently stand, interest rates would shoot way up or banks might actually start running out of money again (yes, this is possible). Not excited to go back to those days. I would be interested to hear thoughts on what the new F&F will look like after the government cleans house. Any guesses? I can only assume worse, as most government involvement typically only makes things worse, but we might get lucky.
July 12, 2008 — 4:58 am
Tom Vanderwell says:
Have you ever seen the government get involved in anything and have it get cheaper? Seriously, if things do get so bad that Fannie and Freddie get bailed out by the government, then we’re going to be looking at more expensive credit than we have now.
Michael,
See above – I think that the only “guarantee” if the government gets involved is that things won’t get cheaper or easier.
Tom
July 12, 2008 — 6:12 am
Tom Vanderwell says:
Hopefully Uncle Ben has our best interests at heart (i don’t mean realtors, I mean america).
Hunter,
Uncle Ben is a very intelligent man. I think that he knows a LOT more and is doing a LOT more than most people give him credit for. I believe that he and his people are working on things that we have no clue about and things that will work through this.
See what BawldGuy wrote on his blog about the movie ending, and you’ll know what I mean.
Have a good weekend.
Tom
July 12, 2008 — 6:15 am
Robert Kerr says:
I think Bernanke is in over his head. He’s making classic short-term mistakes from just 30 years ago and a man of his pedigree should know better.
I have little faith left in his ability to right this economy with policy.
July 12, 2008 — 9:50 am
Dan Green says:
For a point of clarification, if Fannie and Freddie are explicitly backed by the U.S. government, its debt is elevated to Treasury Class. In other words, it’s default-free.
For this reason, we would expect “base” mortgage rates to fall if Fannie and Freddie get nationalized.
However, mortgage rates available to the PUBLIC are a different story because Fannie and Freddie are Wall Street-to-Consumer intermediaries.
The GSEs reserve the right to impose loan-level fees on every mortgage they securitize and they’d likely exercise that right. Heck, they’ve done it TWICE in 2008 already in the form of “Adverse Market Delivery Charges” and “Loan-Level Pricing Adjustments”.
Higher fees can be paid out-of-pocket by borrowers, or it can be paid in the form of a higher rate. Most folks opt for the latter choice.
Therefore, “base” rates may fall on mortgage debt, but “adjusted” rates made available to the public likely wouldn’t.
July 12, 2008 — 11:25 am
KO says:
Tom,
i was in complete agreement until you you said that Ben can work us out of this. I think we are going to see a market correction regardless of what the Fed does.
In order to bail out the banks they will have to create more dollars. Creating new money simply makes the existing money worth less. Any bailout is just going to cause a major rise in oil, foreign currencies will rise in relation to the dollar, and all commodities. Cost of living will definitely rise sharply
July 13, 2008 — 5:29 pm
Peter Baptiste says:
Well daily this drama seems to unfold and reveal more about the financial mortgage crisis America is in. We’re still not sure that we’re out of the woods. It seems like now with another bank in trouble and possibly more on the way things may get worse before they get better. Thanks for the post
July 13, 2008 — 11:10 pm