Treasury Is Close to Finalizing Plan to Backstop Fannie, Fre
http://online.wsj.com/article/SB122064650145404781.html?mod=googlenews_wsj :shock:
WASHINGTON -- The Treasury Department is close to finalizing a plan to help shore up mortgage giants Fannie Mae and Freddie Mac, according to people familiar with the matter.
The plan includes changes to senior management at both companies, according to a person familiar with the plans.
An announcement could come as early as this weekend.
On Friday, a series of high-level meetings were planned between Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, the chief executives of Fannie Mae and Freddie Mac and the companies' new regulator, the Federal Housing Finance Agency.
Treasury has been working with bankers at Morgan Stanley to use its newfound authority, granted by Congress in July, to devise a way to prop up the mortgage giants, which have been pummeled by investors in recent weeks.
The two giants are vital cogs in the U.S. housing market and their financial woes have threatened to worsen the bursting of the housing bubble.
"We are making progress on our work," said Treasury spokeswoman Jennifer Zuccarelli. She declined to comment further on Treasury's plans.
WASHINGTON -- The Treasury Department is close to finalizing a plan to help shore up mortgage giants Fannie Mae and Freddie Mac, according to people familiar with the matter.
The plan includes changes to senior management at both companies, according to a person familiar with the plans.
An announcement could come as early as this weekend.
On Friday, a series of high-level meetings were planned between Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, the chief executives of Fannie Mae and Freddie Mac and the companies' new regulator, the Federal Housing Finance Agency.
Treasury has been working with bankers at Morgan Stanley to use its newfound authority, granted by Congress in July, to devise a way to prop up the mortgage giants, which have been pummeled by investors in recent weeks.
The two giants are vital cogs in the U.S. housing market and their financial woes have threatened to worsen the bursting of the housing bubble.
"We are making progress on our work," said Treasury spokeswoman Jennifer Zuccarelli. She declined to comment further on Treasury's plans.
Comments
All that's going to be left is FHA. 20% down and 30yr fixed here we come!
I still think 80% declines are...quite unlikely. But these events are certainly disconcerting. My fellow Americans, I am - ahem - proud to announce that we have just socialized the entire residential real estate market.
I can very easily envision a 80% decline scenario. Picture this:
1. Nearly all buyers without 20 percent down and nearly perfect credit are off the grid.
2. Unemployment increasing rapidly (up to 6.1% nationally)
3. Foreclosures increasing rapidly (Seattle just now going underwater, foreclosures will be increasing by the day)
4. ARMS (particularly option ARMs) still resetting
5. Nearly all exotic loans and many typical ARMs will be nonexistant
6. Yields skyrocket upward, increasing mortgage rates to double digits.
Doesn't seem too unlikely considering what is unfolding. I'd say more likely than not at this point.
I have been a believe in massive price declines, but I don't see how this take-over in and of itself changes things much. If anything, the new capitalization, and direct government funding, will make the GSEs even more aggressive in lending.
The bigger problems will be the fall-out that occurs when many financial institutions that own GSE stock have to take an even bigger bath than they already have. Worse, this will spook investors off of private mortgage funding. Who would want to take on the risk of owning any kind of mortgage security that wasn't backed by the government?
In short, the government is becoming the first and last resort for mortgage finance.
We don't know the full damage/fallout from this yet.
We're in unchartered territory now. I'm not sure what the government is going to do with F&F.
What I'd like to do is get the conversation going NOW about the FHA mortgage insurance program.
(FHA doesn't buy loans, they insure mortgage loans made by lenders.)
If FHA is STILL doing 3.5% loans in a declining market, then we can look forward to hundreds of thousands of FHA loans that are being originated now....in 2008....to be underwater in the next 12-18 months.
When F&F started buying jumbos, many said F&F would have to be bailed out. I thought, maybe 2011, 2012. Never did I imagine it would happen so soon.
Without FHA, all bets are off in terms of how bad this entire mess can get.
I can understand where you might have thought that it wouldn't happen so fast as Seattle is your major point of reference. If you look down in Los Angeles at areas such as East LA, Compton, Watts, Highland Park etc. (using Redfin of course), it is an absolute bloodbath. I've seen houses that are 50-75% off their original selling price of 500K+. Not to mention many many other areas down there. When the option-ARM's hit down there it will probably be even worse as the houses will be the 1-1.5 million$ homes and will ultimately incur higher $ losses for the banks. I've even seen $2 Million dollar (2005 sale) homes that have been listed for over a year and have the prices chopped to $1.2MM and they aren't selling.
The worst thing is...the next wave is just starting :shock:
We'll have to wait for more details to come out on this, but the proposals that i have seen place the GSE's under FHA control. I'm assuming that FHA management is going to be doing some substantial tightening of standards, but who knows.
Whatever the ultimate outcome, I still see mortgage rates going up substantially on this news. I also think we are about a half step away from the bond market collapsing.
I fully expect that this time next year 2008 vintage mortgages will be the WORST performing of the lot. In declining markets it is usually the most recent buyers who are the most vulnerable to hardship when there is significant depreciation.
Just look at how 2007 loans are already defaulting at higher rates than anything else, and standards were already significantly tighter in 2007 than in previous years.
Anyone who still believes this downturn is going to be a modest affair is seriously deluded. The failure of the GSEs merely underscorse the dire state of our financial system. There will be NO quick recovery from this, and no one who can swoop in and bail us out. It doesn't matter how good the local economy of your region is if the global financial system has stopped offering mortgages.
Like I've said before, welcome to the brave new world where the government is the first and last resort for financing. How long can a system like that keep afloat? At some point tax-payers will recoil at the ever growing costs of being THE real-estate lending bank for the nation.
Agreed, that list is exactly what's happening. But I don't see anything in there that proves one way or the other how much the declines will be. Do these events suggest 1% declines or 99% declines?
My guess is that 30% declines are inevitable, and a maximum of about 50% declines across the board would be the most I expect. Why is that? Because the real bulls have been acting like 10% declines are impossible and the real bears seem to think 80% are certain. I figure they all have good data but are generally wrong so I split the difference. But if you have numbers to really back up why an average house in Seattle or Bellevue will be going for around $80K to $120K, I would be interested to read it.
Paulson Plans to Take Control of Fannie, Freddie
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Treasury Secretary Henry Paulson is preparing to announce plans to bring Fannie Mae and Freddie Mac under government control,......
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Do I have proof?? Absolutely not. I don't think anyone can "prove" exactly what the decline will be, we can only make educated guesses. My guess is based on what will happen if the median house prices falls back in line with 2.5-3 times median income with a possible over correction (ala Japan). That would put us in the 80 percent correction range.
I'm all ears if someone has an educated guess that makes more sense than this.
does not apply to the following:
Bear Stearns
Fannie Mae
Freddie Mac
BofA
Wamu
and other companies/institutions that are too big to obey the laws of Free Market Capitalism and whose CEOs will retains all bubble earnings while their companies are reinflated with taxpayer money.
But the rest of you.....TOW THE LINE OR ELSE!!!
I'm still going back to what the bottom line actually means. The median house in Seattle is around $450k right? An 80% decline on that would produce a $90k house.
That would be a rewind on prices (excluding inflation) to what...1990? If the median household income in King County is around $60k, a $90k house is ridiculously cheap. By such standards, $180k is a pretty reasonable price and perhaps $150 or so would be a reasonable median after the crash destroys confidence. This would still be about 66% decline overall.
What's easy to forget here is that the same # of %s grows more significant as you go down the chain. Imagine 5 years where each year saw 20% decline from peak prices. Our imaginary house is worth $500k to start with.
The first year, it drops to $400k a 20% decline. The second it drops to $300k from $400k (40% decline from peak) a 25% YOY decline. The third year it goes to $200k, a 33% YOY decline. The fourth it goes to $100k, a 50% YOY decline!?! The fifth year, we reach a price of $0 (is this Detroit?) which is a 100% decline.
Freddie / Fannie top executives win big as do those who shorted Freddie / Fannie stock. Everyone else loses.
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Few Stand to Gain on This Bailout, and Many Lose
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......Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay, retirement benefits and deferred compensation, provided his dismissal is deemed to be "without cause," according to an analysis by the consulting firm James F. Reda & Associates. Mr. Mudd has already taken home $12.4 million in cash compensation and stock option gains since becoming chief executive in 2004, according to an analysis by Equilar, an executive pay research firm.
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Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million, largely because of a clause added to his employment contract in mid-July as his company's troubles deepened. He has taken home $17.1 million in pay and stock option gains since becoming chief executive in 2003.......
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