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Archive for September, 2008

VA and FHA Higher Loan Limit Extension Through 2011: The Main Street Bailout

We don’t have a “Main Street” in Southern California; we have the US Route 101 (or CA State Highway #1). We call it the Coast Highway, the Pacific Coast Highway, or the PCH.  When I think of a bailout plan for Main Street, I think of it for homes within 5-10 miles of the PCH.

We got that “Main Street bailout” a few months back.  FHA loan limits were hiked to as much as $729,000, earlier this year and the VA followed suit, this summer.

Both provisions are gone after Christmas…unless…

…President Bush gets to leave a legacy for the Main Streeters on the coasts.  The scuttlebutt in D.C is that President Bush wants to extend the life of those temporary loan limits, for FHA and VA, through 2011.

This program has helped us a lot.  Consider that California loan originators have funded more FHA product in August, 2008 than we have in the prior two years.  When declining market conditions limited agency jumbo loans to 85% loan-to-value, FHA picked up the slack.  With the tenuous outlook for PMI companies, FHA and VA jumbos are filling the vacuum for new home buyers.

It is further rumored that these “guvvie jumbos”, limited to purchase transactions, will be made available for refinance transactions; 100% loan-to-value for VA and 95% loan-to-value for FHA.  The rumor is that President Bush believes that government financing can provide relief for homeowners stuck in jumbo ARMs, soon to be adjusting.

It’s conjecture at this point but we may just have these loan products until 2011.


A Quick Primer on Liberal & Conservative Economic Theory

We may or may not be in favor of the bailout.  We may or may not fully understand what the bailout will or won’t do.  We may or may not be any smarter than the politicians who (in my humble opinion) don’t have a clue what the bailout will or will not do.  But I am guessing we can all recognize good ideas from bad ideas.  It’s easy: the former stimulates business and the latter stifles it.

Case in point (you can read the full story here):

Congressional leaders scrambled Tuesday to come up with changes to help them sell the failed $700 billion financial bailout to rank-and-file members. One idea gathering support: raise the federal deposit insurance limit to reassure nervous savers and help small businesses…

Republican House aides said the FDIC proposal might attract some conservatives who want to help small business owners and avert runs on banks by customers fearful of losing their savings…

Another possible change to the bill would modify “mark to market” accounting rules. Such rules require banks and other financial institutions to adjust the value of their assets to reflect current market prices, even if they plan to hold the assets for years…

Some House Republicans say current rules forced banks to report huge paper losses on mortgage-backed securities, which might have been avoided…

Liberal Democrats who opposed the bill are suggesting other changes. Their ideas include extending unemployment insurance and banning some forms of “short selling,” in which investors bet that a stock’s value will drop…

The conservatives want to

  • Raise the insured limit on bank deposits.  Of dubious actual benefit in my opinion – but tough times call for paper mache measures.
  • Change the mark-to-market rules.  The mark-to-market rules are onerous to investment companies and do not reflect asset values accurately.  This should have been enacted long ago.  Using the bond concept of yield to average life would make more sense.

The liberals, on the other hand, want to

  • Extend unemployement insurance.  What? To stimulate the economy you want to increase the weight of one of its anchors?  I know this is a liberal favorite but does it have to be trotted out everytime they want to negotiate?
  • Ban aspects of short selling.  Typical of those that neither understand how markets work or how short selling in particular works.  Without short sales we not only lose true price discovery, but more importantly the firms that help insure risk for the creators of debt have no where to lay off that risk.  A two-for-one bad idea.

So we have two camps; one finds ways to increase confidence while improving the bottom line for financial companies, the other looks for ways to stifle business and markets alike.  Is it any wonder big items like the bail out don’t get done?

I am not a big fan of either party, but at times like this the choice is easy.


No One to Root For…

I wrote yesterday that we were Front Seat to History, but main stream press continues to miss it and I fear I was a little too cavalier in my writing.  The real story here is not the initial failure of the bailout, but the in-your-face blatancy of our politicians.  There is no longer even the veil of accountability or representation.  I know this is a political philosophy question regarding representative government, but there has always been at least lip service paid to the idea of politicians keeping their finger on the pulse of their constituents.  Senator McCain said “Americans are frightened…” and the Democratic leadership is returning to the bargaining table in hopes of enticing more politicians from both sides of the aisle to vote against the wishes of the very people who voted them into office.  Today we had President Bush demand “Congress must act.”  In most scenarios, if  the White House disagrees with congress, the President takes it to the people and admonishes all of us to call, write or email our representatives and let them know how we feel.  But in this case there is no call to action.  Why is that?  Obviously the majority of America does not agree with the bailout as it is presently understood, but there is more to it.  Congress and our executive leaders are all of one mind: get this done despite what middle America thinks.  This has two connotations:

  • Don’t bother representing your constituents – they are too stupid to understand.
  • Don’t bother representing your constituents – they are not the ones who pay your bills.

Either way I want to SCREAM OUT to everyone watching this.  I want to say: Pay Attention!  It is rare that an event of this magnitude happens close enough to an election that we witness the true motivation of those who run for office.  If you feel a disconnect with your elected officials… is it any wonder?


Tom’s Top Ten Reasons He Doesn’t Like the Bailout….

  1. Because a government intervention the financial systems rarely works well.
  2. Because it fails to acknowledge the fundamental shift that is occurring in our society as we move from being “overleveraged” to using credit responsibly.
  3. Because Nancy Pelosi likes it.
  4. Because no one has been able to prove that by buying this garbage from the banks, it will do anything to actually help credit get done.
  5. Because Barney Frank likes it.
  6. Because JP Morgan and the FDIC were able to work out a very smooth transition when Washington Mutual closed down last week and it was done without any unusual interventions.
  7. Because the bailout refuses to consider that not all banks are equal.   Those who are most likely not going to make it would get the same government money as those who are perfectly healthy.    That’s just not right.
  8. Because Rep. Peter Hoekstra (R-Michigan) voted against it, and I have a lot of respect for Pete.
  9. Because the Main Stream Media is preaching an unbelievable amount of panic, distrust and fear and they are doing it with items that are not factual.
  10. Because the government hasn’t done a good job (because I don’t believe they can) in showing that there’s a connection between buying bad assets from the banks and helping Main St.
  11. Because Citigroup and the FDIC worked out a “take over” of Wachovia without any significant market disruptions and without any unusual bailout efforts.

Okay, so it was actually 11.   The point is, the bailout is not good for our country and not good for our economy.   Are banks going to fail?  Yep.   Do I hope that “my bank” isn’t one of them?  Yep.   But like Jeff Brown says, we know how the story ends up and we’ll all be fine.

Tom Vanderwell


Wachovia Fails… Did You Notice?

Lost in the tsunami of bail-out failure, Wachovia gave up the ghost.  Wachovia now joins Countrywide and WaMu as the big three option arm originators now become three of the biggest financial failures of all time.  If this looks familiar to any posts you may have read here at BHB, including those on The Mortgage Dance and Wachovia Completes the Gang of Three, consider it pure coincidence.

Does it sound like I am gloating a little over the downfall?  I am.  Option arms were the tool and bribery was the modus operandi.  Loan originators fed their greed while homeowners lied to get homes they could not afford and Wall Street leveraged the whole thing to apocalyptic proportions.

I wonder if there is enough blame to go around.


Front Seat to History

Whether or not you approved of the bailout, you have to count yourself lucky to be witnessing an historic event.  Take a good, hard look at what is unfolding before us.  One elected official after another said they could not vote for this legislation because their constituents back home were not in favor of it and would vote them out of office.  As a matter of fact, this was part of an openly discussed game plan yesterday before the vote:

Both parties were also scouring the political map to identify lawmakers who face little or no opposition for re-election in November, knowing they would be more willing to vote yes. New York Times News Service

Think about that again.   They wanted to vote for it, but the people they represented were overwhelmingly against it and would have thrown them out for approving the bill.  How often does anything of REAL importance happen this close to an election?  This is so close to election time that the legislators are accountable for their votes.  Imagine that!  And they are scared.  They can not do their politics as usual because they don’t have time so spin it.  This is a magical time to witness: politicians acting out of accountability rather than self-interest.  Were that it was always true…


Update on the Bailout – Part II

It Failed.

I’d like to consider this an open thread – now what do “we” do?

I’ll throw some ideas out there, but I want to hear from others first.



An Update on the Bailout….

and yes, after doing some more reading on it, I do still consider it a bailout.

I’m going to put a copy of a post that Yves at Naked Capitalism wrote in italics and then my comments will be interspersed in bold print and then I’ve got more thoughts at the end.

Hope this helps you understand it better.

Congressional Charade: Changes in Bailout Bill Cosmetic, and Everyone Knows That

For a quick, one-stop synopsis of the Mother of All Bailouts (as of this month), see this readable version at Clusterstock (we’ve become a recent convert to this site).

Reader and sometimes contributor Lune, who was once a Congressional staffer and still subscribes to the the inside-the-Beltway press, provided a wrap of their coverage of the bailout bill. It makes clear that everyone understands that turning Hank Paulson’s three pager into a 110 page draft made for a nice fig leaf but made virtually no substantive difference.

Gee, why doesn’t that surprise me.   They added 107 pages of rules and regulations and it’s basically just spelling out the same difference as before.

From Lune:

Well folks, we’re almost to a done deal (certainly closer than Thursday). The Hill papers are reporting that they’re getting closer in both the Senate and the House to the needed votes to pass the new bailout bill. Roll Call gives the most frank assessment of what happened over the weekend in an article entitled “Same Bailout, New Dynamic” (subtitle: Outrage Prompts Sales Effort).

All the late-night talks, last-minute demands and dramatic pronouncements aside, the fundamental structure of a $700 billion Wall Street rescue plan that Congress spent the weekend wrangling over has not changed significantly from the outline proposed by a bipartisan group of Senators and House Members last Thursday.

Did you hear that?:  It’s basically the same deal as last week Thursday, just spun differently.

“This is in essence the same,” said Sen. Bob Corker (R-Tenn.), who attended those talks.
. . .
Assuming enough House Republicans agree to vote for the package, it appeared that the House could vote as early as today, while the Senate might have to wait to take it up Wednesday after Rosh Hashana on Tuesday.

“If it doesn’t pass, we shouldn’t be in Congress,” a confident Sen. Judd Gregg (R-N.H.) said on Sunday, adding that he thought the measure would pass with broad bipartisan support in both chambers.

Maybe we shouldn’t be in Congress?   Now there’s one of the best ideas that I’ve heard from an elected official in a while.

Members and staff disagreed about why the bones of the package stayed the same but took so long to hash out.

I’ve got an idea on why it took so long – political posturing and spin that would hopefully give enough people the time to “fall in line.”

Negotiators on Saturday added a mortgage insurance program to the proposal at the request of rebellious House Republicans, though that plan is unlikely to be used by
failing companies given the Treasury’s ability to take bad debt off the books of troubled financial firms.

Read that last sentence again – the mortgage insurance plan is unlikely to be used – why?   Because the Treasury is going to buy the debt otherwise.   Look at it this way, you’ve got a 1974 Plymouth Valiant (don’t laugh, I had one in college) that has 240,000 miles on it but it still runs.   If you bought insurance for it, it would cost you $1000 a year for insurance.   However, if you didn’t buy insurance, and the car got totalled (became “worthless,” you could sell it to the government for $2500.)    What would you do?

That means the high-stakes negotiating sessions over the weekend served mainly to generate buy-in and political cover for Republicans and Democrats.

Some Democrats said the time between Thursday and Sunday was largely wasted on back-and-forth talks that yielded few changes. In addition, there was the distraction of presidential nominee Sen. John McCain (R-Ariz.) inserting himself into the mix, they said. Keep in mind it’s Democrats who are saying that the Republican candidate got in the way – it’s all about spin…..

“They were very close to an agreement on Thursday,” one senior Senate Democratic aide said. “Then John McCain blew into town and blew things up for three days. Now, they have virtually the same agreement now that they had before, with a couple of options in it that [Treasury Secretary Henry] Paulson will never use.”

One Senate Democratic leadership aide echoed that notion, saying, “This is largely based on the draft we had Thursday morning. … Once we got past the McCain shenanigans, the legislative process took over and people worked very hard to work out an acceptable agreement.”

. . .
House Republicans proposed a mortgage insurance idea so Wall Street could fund its own bailout. House Democrats proposed a pay-as-you-go trigger requiring a fee on financial firms if the bailout results in losses for the Treasury.

The political goal was the same — both sides wanted to be able to tell constituents that Wall Street, not average citizens, would pay for the bailout.

Read that again, both sides wanted to be able to tell constituents that Wall St, not Main St. will pay.   Does it say, “BOTH SIDES WANT TO MAKE SURE THAT WALL STREET PAYS?”   Nope, it’s about image.

But neither proposal won out — the mortgage insurance idea will largely be a side option for the Treasury secretary, and Paulson reportedly already rejected the proposal in internal Treasury talks this summer.

. . .
A senior House Democratic aide at press time estimated that Democrats could wrangle about 125 votes for the plan, meaning GOPers would need to find nearly 100 supporters in their ranks if the numbers remained unchanged.

All eyes are on the House. From another article in Roll Call entitled “House Moves Shakily Forward on Bailout“:

Both the House Republican Conference and House Democratic Caucus spent hours cloistered in closed-door sessions Sunday night as Congressional leaders tried to gather support for the package within their own ranks by putting outstanding questions about it to rest.

All eyes are on the House Republicans, who threw talks on a deal into disarray Thursday when they abandoned bipartisan, bicameral negotiations with the White House.

. . .

The bill filed tonight is “a giant improvement” over previous proposals, namely because it considerably reduces taxpayer risk, House Minority Leader John Boehner (R-Ohio) told reporters after the meeting.

“At the end of the day, there really is no taxpayer risk in this bill,” Boehner said, referring to mandated insurance provisions in the package.
Gee, how does he figure that?   The US Taxpayer is going to buy $700 Billion in bad loans and there is no tax payer risk?   I’m glad he’s not a commercial lender at my bank…..

Asked how many Members will vote for the bill, Boehner said he didn’t know but that GOP leaders “are working on it. … I made it pretty clear to our Members that we are supporting this.”

. . .

At one point, Rep. Mike Pence (R-Ind.) [Ed: chair of the Republican Study Committee, a conservative Republican caucus in the House which has been the primary roadblock to the bailout plan] received “a tepid response” when he proposed starting from scratch and coming up with a new bill, according to one aide.

. . .

Rep. Scott Garrett (N.J.), a member of the influential Republican Study Committee, told reporters outside the Conference meeting that at least some of the conservative group will back the plan, although he said he would be voting against it.

I heard on Wood Radio this morning that Pete Hoekstra (Republican Congressman from “my” county) will be voting against it.   Thank you Pete!

And finally, the wizard behind the curtain is revealed (”It’s Frank’s World, We Just Live In It“):

In case there was any doubt who was running the show over the past week, or how confused even most Members were about what was happening with the Wall Street bailout, a few lawmakers confirmed it for us.

A handful of Members — guys who are ostensibly getting briefings and actually sit in on meetings — were apparently so confused about the status of the bailout, they sunk so low as to actually join press scrums (those knots of lowly reporters crowding a particularly in-the-know Member) around House Financial Services Chairman Barney Frank to try to get a clue.

Is it any surprise that Congresspeople elected for their ability to clear brush or deliver sound bites with a photogenic smile are about to cast one of the most important votes of their careers without a clue about what they’re voting for? Winston Churchill once said “The best argument against democracy is a five minute conversation with the average voter”. The American corollary to that adds a 5 minute conversation with the average elected representative…

Now some more comments from me about this:

1. Is the Financial world in trouble right now?   Yes it is.   The financial services world grew to bloated heights fed on the search for new and easy debt.   That party has blown up in our faces.   We are now faced with a readjustment of the financial markets.    I read an article this morning that said that when Sweden went through a similar problem in the early 1990’s, what they did is they looked at it and said, “Which banks are healthy enough to make it?”  Then, they set up a plan to help those and set up a plan to liquidate and/or merge the ones that aren’t.   I guess you could call it a sort of “Financial Triage.”    For those of you not familiar with the term “triage” it’s a medical term for sorting out, at the scene of a disaster, the patients who are dead, not going to make it, can make it given immediate support and/or are fine.

2. Do I think we need to do “something” right now?   Yes I do, but I don’t feel good about this.   I’d really like to, instead, see something similar to the Sweden plan that would work not to keep everyone floating (because let’s face it, it’s getting to be a pretty long list of instituitions that have sunk in the last 2 weeks alone) but to keep those who are strong enough going so they can service the new financial markets that are evolving.

3. What impact will this have on the housing market and real estate market?   I’m not really sure, but here’s my take on a couple of scenarios:

  • If the bailout works well and truly stabilizes the markets, we could see rates holding steady and consumer confidence returning and more people venturing out into the real estate market.
  • If the bailout doesn’t work well and the markets continue to remain troubled, then we’re going to see the non-Fannie-Freddie-FHA markets dry up.   That doesn’t bode well for those in the higher priced markets (where over $417,000 is needed to buy a house).
  • If the bailout raises concerns about the borrowing capabilities of the US Treasury (because of the massive amount of debt that it’s taking on, then I think we’re going to see rates start creeping upward.

Of those three options, I’d put the odds at 20% that the bailout works well, and split 40/40 between the other two.

Keep in mind, these are only my opinions, thoughts and ruminations about the dynamics that are literally changing on almost a minute by minute basis.

Hope this helps, let me know if you have questions,

Tom Vanderwell


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In a declining market, buying a short sale is too tall an order

This is my column for this week from the Arizona Republic (permanent link).

In a declining market, buying a short sale is too tall an order

Is it time to kick the stilts out from under short sales?

Right now in most neighborhoods in the Phoenix area, the houses that will draw the most attention from buyers will be either short sales or lender-owned homes. They’ll be in all states of repair, but the prices will be very aggressive.

And of those homes, the lender-owned homes will actually sell. They may be completely trashed, but the people whose job it is to sell those properties are judged by how quickly they can unload non-performing assets. Make an aggressive offer and you’ll get a aggressive deal.

There are downsides, of course. You can inspect all you want, but don’t expect repairs. Because of this, many lender-owned homes will not qualify for FHA or VA financing. And once escrow closes, you’ll have to restore the home to livable condition.

By contrast, a short-sale home might be in better condition. And it might be even more aggressively priced. The trouble is, the price in the MLS listing will be meaningless. The seller can approve that price, but the seller’s lender has to approve it as well. And the people who approve short sales aren’t judged by how quickly they sell the home but by how much money they bring in.

The lender can take from 60 to 90 days to respond to your offer for a short sale home. And the response may be to counter at a higher price. If you counter back, you may wait another 30 days for a response.

Here’s the worst part about this unwieldy procedure: Home prices are still falling in the Valley. You could wait months to get approval on a contract for a house that is now worth tens of thousands of dollars less than what you offered for it.

My take? We need to cut short sales off at the knees. It seems foolish for Realtors to take them as listings, and beyond foolish to encourage buyers to pursue them. Lender-owned homes are offered by motivated sellers. Short sales are a waste of time.

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Promoting Affordable Housing

I didn’t believe it when I read it; the bailout bill is “earmarked” and ACORN is one of the beneficiaries of the largesse.   ACORN may control up to 20% of the $700 billion proffered by the Bush/Obama Bailout Plan.

ACORN?  Are you kidding me?  THIS is what ACORN really is (from Sol  Stern):

ACORN’s bedrock assumption remains the ultra-Left’s familiar anti-capitalist redistributionism. “We are the majority, forged from all the minorities,” reads the group’s “People’s Platform,” whose prose Orwell would have derided as pure commissar-speak. “We will continue our fight . . . until we have shared the wealth, until we have won our freedom . . . . We have nothing to show for the work of our hand, the tax of our labor”—claptrap that not only falsifies the relative comfort of the poor in America but that also is a classic example of chutzpah, given ACORN’s origins in a movement that undermined the work ethic of the poor. But never mind—ACORN claims that it “stands virtually alone in its dedication to organizing the poor and powerless.” It organizes them to push for ever more government control of the economy, as if it had learned no lessons about the free-market magic that made American cities unexampled engines of job creation for more than a century, proliferating opportunity and catapulting millions out of misery.

Remember, ACORN has been one of the largest groups to criticize “predatory lending” and the use of sub-prime loans.  Here’s ACORN President Maude Hurd, speaking about last night’s Presidential Debate:

“Given the recent turmoil in our financial markets and the ongoing negotiations around a bailout package for Wall Street, it’s not surprising that much of the debate focused on the current economic crisis, which was in many ways predictable.  ACORN has been sounding the alarm for years as more and more deregulation stripped protections for consumers and basic safeguards of sound lending.

Senator McCain failed to acknowledge the trigger of this explosive crisis: predatory lending, which entrapped hundreds of thousands of homeowners into toxic mortgages they could not afford fueling record numbers of foreclosures.  If Mr. McCain is unwilling or unable to acknowledge such facts, how is he suitable to lead our country out of the worst financial mess since the Great Depression?

Okay.  Forget that opportunistic borrowers used subprime loans to cash in on the housing boom.  Forget that close to 70% of the early-default borrowers lied on their loan applications.  Forget that even if the default rate rises to 25%, 3 out of 4 of those “toxic” loans were successful in completing the mandate of a driveway for every family.  Remember, if you will, the original loan program designed to grant credit to borrowers with disregard for their history of and ability to repay those loans; the Community Reinvestment Act.  Who was behind this “predatory” loan program?

You got it, ACORN:

The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they benefited from. These included various “neighborhood organizations,” as they like to call themselves, such as “ACORN” (Association of Community Organizations for Reform Now). These organizations claim that over $1 trillion in CRA loans have been made, although no one seems to know the magnitude with much certainty. A U.S. Senate Banking Committee staffer told me about ten years ago that at least $100 billion in such loans had been made in the first twenty years of the Act.

So-called “community groups” like ACORN benefit themselves from the CRA through a process that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA “protest” is issued by a “community group.” This can cost banks great sums of money, and the “community groups” understand this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.

What do you think ACORN will be doing with the $140 Billion they get?  Promote the agenda of “keeping Americans in their homes“.  Homes they clearly can not afford.  THAT, ladies and gentlemen, is predatory lending defined.

There is one way to promote affordable housing; reject the Bush/Obama Bailout bill. Rates will go up (temporarily) and housing prices will plummet….but houses will be a WHOLE lot more affordable.

Market pricing, without government intervention, may be the best affordable housing program going.  Of course, that ain’t gonna happen cuz someone has to get paid off.  Let’s just hope it won’t be ACORN.

UPDATE:  My initial statement was incorrect.  I said:

ACORN may control up to 20% of the $700 billion proffered by the Bush/Obama Bailout Plan

The earmark for ACORN is for 20% of the hopeful profits from the bill.  I still don’t like funding a socialist organization with profits from a planned economy policy.


Some Details on the WaMu Buyout

In a comment to an earlier post I was sent the link to JP Morgan Chase’s Investor Presentation regarding their purchase of WaMu.  This was courtesy of Bob Wilson, whom readers may know for his many thoughtful comments here on BHB.  I highly recommend reading it by clicking here, but in the mean time – some of the highlights:

  • They are taking over the deposits and leaving the liabilities.  This helps the FDIC out tremendously but I can’t help thinking of the great line from The Godfather: “Leave the gun, take the cannoli.”
  • They plan to exit all non-bank originated retail lending.  Say good-bye to most of WaMu’s products.
  • They are most excited by WaMu’s large presence in California.  According to their projections CA sees the most population growth, followed by Texas and then Florida.  This is great news for these hard-hit areas.  Arizona sees about half the growth rate and the northeast and rust belt continue their problems with fundamentals.  (I believe we are looking at a very stratified housing market for some time to come.  There has never been a national housing market and such a concept is becoming harder to even say with a straight face.)
  • JP Morgan Chase paints a pretty rosy picture of potential earnings.  They look at their credit card and investment sales in-branch and overlay that onto all the WaMu branches.  But I don’t see the same types of customers at WaMu as I do at Chase and I have a hard time believing Chase will get the same level of commercial banking profits from them.
  • Expected cost of this acquisition is $1.5 billion now and another $.5 billion over the next couple of years.
  • They will keep WaMu’s low risk, profitable lending programs in the multi-family niche which should be welcomed by investors who are currently getting shut out of the market by underwriting constrictions.
  • Finally, they project current-pricing-to-trough depreciations for CA, FL and the US as a whole.  The numbers are interesting, but what’s more interesting are the headings.  They project losses based on three scenarios: Current Estimates, Deeper Recession and Severe Recession.  Apparently the analysts feel we are in a recession now no matter what the government calls it.  Under these headings CA is looking at losses of 10%, 14% and 24% respectively.  Florida’s expected depreciation is 16%, 21% and 36%!  Finally, the entire US housing market (there we go again) is looking at price depreciation of 8%, 11% and 20% under those three headings.

Wish I had a summary of all this, but I’m just giving you the raw details.  I’ll leave it to a more banking minded writer to tell us what it means.  One last thought: I just got off the phone with one of my real estate agent clients.  He wanted to know what his WaMu stock is worth now…


Mortgage Market Week in Review – to Bail or not to Bail?

Yikes, every week it’s getting more and more challenging to lay out for you what’s going on in the markets.   Hopefully it will get easier, but I’m not really sure that it will for a while.  So what are we going to talk about this week?   This week it’s about the proposed bailout, the biggest bank failure in the history of our country, and a few thoughts from Dick DeVos (huh – trust me, it will fit in later).

The bailout – $700,000,000,000.00. That’s how much money the Treasury wants to have to bail out the troubled financial institutions.   What do they want to do?   Here it is in a nutshell:

  • They want to buy approximately 5% of the mortgage backed securities (presumably the worst ones) from the banks and investment institutions.
  • Why?  The theory is that if they take those loans off their books, that will free those institutions to start lending again (start loading up their books with better loans this time.)
  • Do we have any guarantee that it will work?   Nope, the only guarantee we have is the word of Treasury Secretary Paulson and Fed Chairman Bernanke, both of whom are very smart but both of whom have been wrong on numerous occasions as the credit crisis has spread.
  • Would the tax payer end up paying for the entire $700 Billion?  Long term, probably substantially less than that because, depending on how the portfolio gets managed, because these loans are backed up by assets (houses) and the value of those won’t go the way of Washington Mutual stock and become worthless.
  • Will banks immediately turn around and start lending more to others?   That’s a question that we don’t know the answer to.
  • I read an article this morning that said that the Central Banks might actually be making the problem worse.   How so?   They keep pumping more money into the system and that is making it easy for banks to borrow money from the Fed so they don’t have to borrow money from each other and that has put a squeeze on the normal credit markets.   Interesting concept, have to check on that more.

Yesterday afternoon, it appeared that a “deal” on this was worked out.   But then the House Republicans came in with a different idea. What are the specifics of their idea?  I don’t know other than that it’s something similar to the FDIC insurance.   Let me make a few comments on why I think this has gotten so contentious and so difficult:

  1. I think that the American people are getting fed up with Wall Street.   They are getting sick of Wall Street playing fast and lose with their and our money and then crying to Washington, “Save us!”   I heard one congressman yesterday say that the calls to his office (and the phones were ringing non stop) were running 150 to 1 against the bailout.     That’s not a small majority, that’s a pretty convincing majority if you ask me and right before an election, that speaks loudly.
  2. I think that certain of the people in Washington (I’m trying to remain a-political about the labels) are saying, “If we don’t push to come up with a plan that is more of a workout than a bailout this time, we’re heading down a very dangerous path and we’ll be destined to repeat ourselves again and again.” So they are trying to force a solution that extracts some more pain from Wall Street and attempts to prevent this type of issue from happening again.
  3. The concept of moral hazard appears to be back in play. Moral Hazard?  Yep, the concept that if you take a risk, you get the benefit if it works well but the pain if it works poorly.   Ask any business owner about the concept of risk and reward.

So the credit and financial markets remain wound up tighter than, well, let’s just say very tight.   I personally feel better about things today than I did yesterday because of one main fact:  At least the government is taking some time to discuss, argue, fight and look at options rather than marching blindly into a huge intervention in the financial markets.

One other note – I’m writing this at approximately noon on Friday (it takes some time to send out), so the news of a bailout might be different by then.   I’ll post any updates as I hear them at

The Biggie (so far):  Last night, the FDIC came in and finally shut down Washington Mutual.   They are the largest bank failure in the history of our country.   The interesting thing is that they did the shut down in a way that isn’t going to cost the FDIC any money (Whew – that could have been a big one!).    No word that I’ve heard of yet on what happens to their loan portfolio.   My mortgage is with Washington Mutual and I’m going to keep sending my payments to Washington Mutual until I get notification of something different.   If you’ve got concerns about that, check out what I wrote over at Zillow’s blog.

So who’s next?  Based on the performance of their stock this morning, it seems that the markets are saying that Downey Financial (out west), National City, and Wachovia are the “short list” canidates.    Though I was listening to an analyst on CNBC today and he said that between now and the end of the crisis, he expects over 100 banks to fail.   So far, we’ve had 13.   Wow.

Now a couple of thoughts from Dick DeVos.   For those of you who aren’t from Michigan, you might not know who he is.   Dick is a son of Richard DeVos, one of the founders of Amway and he ran for governor of Michigan in our last election.   He spoke at a conference last night talking about what we have to do to rebuild Michigan’s economy.   A couple of points that I found quite interesting:

  • In talking about Michigan’s need to evolve from an automotive state to a high tech/medical/? state, he said, “The pain threshold hasn’t been crossed to get us to be willing to change yet.” I think the same thing could be said for the financial world.   The pain threshold hasn’t been crossed yet, but I have a feeling that it will be crossed soon and that we’re going to see some significant changes in the financial world going forward.
  • When someone (not me) asked him his opinions on the whole bailout issue, he didn’t want to get into any details because he said he didn’t know enough about the details to talk intelligently.   But he did say something that I thought was interesting, “Seldom do governments do a very good job of fixing things.” Hmmmm, food for thought, don’t you think?

Now a couple of “thoughts” about what it all means to the housing and mortgage markets:

  1. It further reinforces my belief that we are heading into a market where the three F’s are the name of the game.  Fannie, Freddie and FHA are going to be the only mortgage lending that are going to happen for the majority of the markets. There will be small portfolio lenders, but nothing much.    This doesn’t bode well for the higher priced markets where they need jumbo mortgages.
  2. The credit markets are going through what is frankly a structural revolution and until we end up getting to a “bottom” of the deleveraging, we’re going to see credit get harder and harder to get.
  3. Do I think it’s going to be a “substantial” jolt to the housing market with this bailout?   No, I don’t.   I don’t think we’ll see an impact to the positive side and I don’t think we’ll see a major downward pressure from this.
  4. I don’t see any of this making mortgage rates cheaper. I think we’re going to see that this has an impact on the value of the dollar and inflation trends is going to push mortgage rates up.   Not violently, but still upward.
  5. Opportunities for the smart and financially savvy buyers and sellers will still exist but it’s going to be more important than ever to be prudent, know the numbers that you are working with and work with professionals.

If anything HUGE (as opposed to just huge) breaks out, I’ll let you know.   I’d like to say that I’m optimistic about next week being calm, but I’m not.

Oh, one other thought – the latter part of next week, I’m going to be traveling a bit (charity work – God’s Littlest Angels Orphanage) so my schedule is going to be a bit sporadic but I’ll still be available by cell phone and by e-mail.   Call or e-mail me if you need me.

Tom Vanderwell


The Mortgage Dance Continues

I posted the following back in July and with WaMu going down it seems like a good time to bring it back to the top.  If there is any confusion as to who is going down and why, make a point of clicking the link on the “accounting debacle”.  It goes to a post from August of last year and will explain a lot about what is really happening and why.

And the beat goes on…  but sometimes it helps to have that little bouncing ball show us exactly what lyric we are singing this week.  All together now:

Today the Fed suprised no one by opening the discount window to ailing siblings: Fannie Mae and Freddie Mac.  Together they hold more than half of all mortgages in the US and the guarantee that they would not fail has been implied for some time.  The Fed also intimated there would be no other bail outs in the foreseeable future.  Who is walking the thin line?  WaMu, Wachovia, Downey, Indy Mac (oops, they were written out of the chorus last week).  Now it looks as if the Fed has reworked a few more lines and their song to the Wall Street firms goes a little something like this: if you can not fix your problem with the ability to borrow at 2.25%, your problem is not fixable.

This does not bode well for our short list.  Downey is more of a regional and will likely go down under its own weight of Losses and Lawsuits (the real ”L” words).  Previous posts right here on BHB have fixed WaMu as the consensus “next big one” to fall.  Wachovia, in my opinion, is more of a question mark.  Straight-laced, tea-loving bank goes to a frat party where “everyone who is anyone” is drinking and the peer pressure just becomes too much.  This is a hangover for which they are ill prepared.

What does this mean for real estate and the mortgages that drive its cycles?  Here’s one thought: if you are a specialist in homes that do not play the Fannie/Freddie tune, you may want to create some more income streams and fast.  Any regional that has not already eviscerated it’s “improvisational jazz” lending will find themselves looking at a Wall Street that no longer believes anyone is above failing.  If recent history has taught us anything it is this: the big firms currently involved in lending are either asleep at the wheel or lying outright.  We watched Counrywide lie about their financials right up until the end.  We watched WaMu take hits twice their predictions.  Even Wachovia, a stalwart bank, was “surprised” by losses more than double what they had predicted for Wall Street.  Not sure why anyone believes anything these firms say now.

I believe this all goes back to a problem that is not discussed in the media (whether for lack of a sound bite or just ignorance is anyone’s guess) and never given the light of day by these firms themselves: the accounting debacle tied to neg-ams.  Want to know who is going down next or where “surprise” losses will most likely come into play?  Look to the firms that made a killin’ putting clients into neg-ams.  (And before some of you start commenting on how neg-ams are just a tool and can be a good loan to boot – you know who you are – let me say “I know.”  Loaded guns are just a tool too.  Cars are just a tool.  I am in favor of both.  But if I stand at the door handing out keys and guns to everyone as they leave the party… let’s just say the onus of responsibility comes back to me.)

I guess it is not so difficult to follow the bouncing ball afterall.  I think I’ll go to bed tonight and dream about how attractive Fannie & Freddie have become lately.  They just may be the only two left on the dance floor.


Keep Your Hands & Feet Inside While the Ride is in Motion

The bailout fails AND WAMU finally gives up the ghost.  It is going to be an interesting Friday!


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