rip fannie and freddie

[philcski]

Originally Posted by dalakhani

They sure dont Philly and they should just keep their mouths shut instead of trying to grandstand all the time. During Senate testimony this past spring you could just watch Bernanke's face in response to some of the questions. If facial expressions formed actual words, his was saying " you ****ing moron, how is an elected official asking a question as stupid as that."

On another note, interest rates should be going through the floor now that the fed gov has taken over the GSE's. The spreads between mbs and treasuries should close rather dramatically in the coming days. Interesting that the dollar continued to roll against euro and pound and that commodities continue to slide.

Logically, that would make sense. In truth it didn't happen- Treasury spreads actually went DOWN today despite the US Government theoretically becoming more "risky". ABX (an index which tracks MBS pools) AAA tranches only improved by a half a point, so about 5bps a year, and are still trading in the mid 40's dollar price.

Meanwhile, FRE and FNM stock plunged to 1/8th of their previous value, wiping out the remaining $10 billion of market cap- hitting the fine citizens of the United States directly in their 401k and mutual fund plans (which pretty much every "conservative" fund owned). Additionally, all CDS contracts written on FRE and FNM triggered a credit event with close to 100% recovery, which in simple math means if you bet one way or another and were RIGHT, you lost all the present value of that contract, so all of Wall Street took major hits today.

But they're coming to save us!!!

[dalakhani]

Originally Posted by philcski

Logically, that would make sense. In truth it didn't happen- Treasury spreads actually went DOWN today despite the US Government theoretically becoming more "risky". ABX (an index which tracks MBS pools) AAA tranches only improved by a half a point, so about 5bps a year, and are still trading in the mid 40's dollar price.

Meanwhile, FRE and FNM stock plunged to 1/8th of their previous value, wiping out the remaining $10 billion of market cap- hitting the fine citizens of the United States directly in their 401k and mutual fund plans (which pretty much every "conservative" fund owned). Additionally, all CDS contracts written on FRE and FNM triggered a credit event with close to 100% recovery, which in simple math means if you bet one way or another and were RIGHT, you lost all the present value of that contract, so all of Wall Street took major hits today.

But they're coming to save us!!!

Why do you think this happened?

[PSH]

Unfortunately, the bailout was not a matter of if it was going to happen but when. Even though FNM had as of 6/30 more than enough capital on its books to at least get thru the year before another capital infusion may or may not have been necessary it became apparent that something had to be done like the Gov't announced this weekend to attempt to stop the huge markdowns being taken on the books of financial institutions. These financial institutions own billions and billions of $$$ of FNM and FRE bonds and were forced to take huge writedowns which affected their own capital on their books and hence the major equity infusions (many from sovereign wealth countries) to these institutions. The problem lies that many of these financial institutions have to continually mark down their paper as the prices of homes continue to decline and foreclosure rates increase. Everything seems to be connected in this financial world.... The hope and aim of the Gov't takeover is that it will reduce the costs to buyers of homes and that these financial institutions will once again feel confident to start making loans again. Our economy can not recover until these financial institutions get their own books in order and start to make loans. Housing prices have to stabilize in order for that to happen. Yes, it is sad that the equity holders are wiped out in FNM and FRE but unfortunately equity holders are the lowest on the totem pole in protection. We shall see if this action by the Government stabilizes the housing market and also stabilizes the spreads of mortgages and other financial fixed income instruments to Treasuries. One should remain skeptical on how this plays out.

PSH

[philcski]

Originally Posted by dalakhani

Why do you think this happened?

I think people are still skeptical. The root of the issue is poor lending practices by banks who followed the thought process of "well, even if the homeowner can't pay the mortgage, we'll be able to recover the full loan value because housing prices ALWAYS rise" whereas in some parts of the country homes were already at a saturation point of cost versus income.

Originally Posted by PSH

Unfortunately, the bailout was not a matter of if it was going to happen but when. Even though FNM had as of 6/30 more than enough capital on its books to at least get thru the year before another capital infusion may or may not have been necessary it became apparent that something had to be done like the Gov't announced this weekend to attempt to stop the huge markdowns being taken on the books of financial institutions. These financial institutions own billions and billions of $$$ of FNM and FRE bonds and were forced to take huge writedowns which affected their own capital on their books and hence the major equity infusions (many from sovereign wealth countries) to these institutions. The problem lies that many of these financial institutions have to continually mark down their paper as the prices of homes continue to decline and foreclosure rates increase. Everything seems to be connected in this financial world.... The hope and aim of the Gov't takeover is that it will reduce the costs to buyers of homes and that these financial institutions will once again feel confident to start making loans again. Our economy can not recover until these financial institutions get their own books in order and start to make loans. Housing prices have to stabilize in order for that to happen. Yes, it is sad that the equity holders are wiped out in FNM and FRE but unfortunately equity holders are the lowest on the totem pole in protection. We shall see if this action by the Government stabilizes the housing market and also stabilizes the spreads of mortgages and other financial fixed income instruments to Treasuries. One should remain skeptical on how this plays out.

PSH

Therein lies the problem and why you are wrong. The lenders worked under false assumption that home prices would continue to rise at an unsustainable level, despite warning flags of the cost of housing spiraling out of control. The lenders should have been held accountable for their poor investments, and learned a lesson from it- not allow the government to step in and bail them out. Continued poor lending practices under the assumption that the "implied government backing" will only cause housing prices to further rise, putting additional pressure on the consumer and the American economy. It's a vicious cycle that must be stopped through painful lessons learned and this is NOT the answer.

[dalakhani]

Originally Posted by philcski

I think people are still skeptical. The root of the issue is poor lending practices by banks who followed the thought process of "well, even if the homeowner can't pay the mortgage, we'll be able to recover the full loan value because housing prices ALWAYS rise" whereas in some parts of the country homes were already at a saturation point of cost versus income.



Therein lies the problem and why you are wrong. The lenders worked under false assumption that home prices would continue to rise at an unsustainable level, despite warning flags of the cost of housing spiraling out of control. The lenders should have been held accountable for their poor investments, and learned a lesson from it- not allow the government to step in and bail them out. Continued poor lending practices under the assumption that the "implied government backing" will only cause housing prices to further rise, putting additional pressure on the consumer and the American economy. It's a vicious cycle that must be stopped through painful lessons learned and this is NOT the answer.

I hear you Phil. But letting Wall St. take their lumps will only further exasperate an already skittish market. Lack of available lending products and higher rates are now the leading detriments to housing recovery. Ratios of price/income and mortgage payment/rent have come back to sane ,sustainable levels.

So say you let the GSE's fail which appeared fait accompli. What would that do? It would cause the housing market to completey tank as the ONLY source of money would be FHA (which will see huge troubles ahead...another subject) or private banks (which are charging crazy rates for non agency paper).

If the government was going to inject the massive amounts of capital necessary to prop up the GSE's, doesnt it only make sense that they can truly run and regulate them? And for the record, the government is going to make a nice profit when this all shakes out.

lastly, the bolded part needs a little clarification. Do you really think the banks and brokers that originated the loans even CARED about whether the homes would appreciate? Do you think the investment banks did? Or do you think that they thought they could continue to pass the paper off to some other poor sucker?

Originally Posted by dalakhani

I hear you Phil. But letting Wall St. take their lumps will only further exasperate an already skittish market. Lack of available lending products and higher rates are now the leading detriments to housing recovery. Ratios of price/income and mortgage payment/rent have come back to sane ,sustainable levels.

So say you let the GSE's fail which appeared fait accompli. What would that do? It would cause the housing market to completey tank as the ONLY source of money would be FHA (which will see huge troubles ahead...another subject) or private banks (which are charging crazy rates for non agency paper).

If the government was going to inject the massive amounts of capital necessary to prop up the GSE's, doesnt it only make sense that they can truly run and regulate them? And for the record, the government is going to make a nice profit when this all shakes out.

lastly, the bolded part needs a little clarification. Do you really think the banks and brokers that originated the loans even CARED about whether the homes would appreciate? Do you think the investment banks did? Or do you think that they thought they could continue to pass the paper off to some other poor sucker?

I will interject.
I can't help it.

imo they(Mortage companies) were pulling people off the street and giving them mortages that looked very attractive to 2ndary and on investors who did not do their homework (the majority of the people would not be able to pay these rising rate pile o crap loans). Basically a pyramid scheme destined to fail. And now we see who ends up holding the cleaning products that wont sell. Stupidity and greed are fantastic partners for the get rich quick.

[philcski]

Originally Posted by pgardn

I will interject.
I can't help it.

imo they(Mortage companies) were pulling people off the street and giving them mortages that looked very attractive to 2ndary and on investors who did not do their homework (the majority of the people would not be able to pay these rising rate pile o crap loans). Basically a pyramid scheme destined to fail. And now we see who ends up holding the cleaning products that wont sell. Stupidity and greed are fantastic partners for the get rich quick.

A little simpler than I would have written, but pretty much correct.

[dalakhani]

Originally Posted by pgardn

I will interject.
I can't help it.

imo they(Mortage companies) were pulling people off the street and giving them mortages that looked very attractive to 2ndary and on investors who did not do their homework (the majority of the people would not be able to pay these rising rate pile o crap loans). Basically a pyramid scheme destined to fail. And now we see who ends up holding the cleaning products that wont sell. Stupidity and greed are fantastic partners for the get rich quick.

Yes, fraud was ramapant. But you have to understand the climate of the industry during that period of time 2003-2007. Investment banks were creating products that all but screamed "we dont care if its fraud or not". Are you telling me its the mortgage broker's fault for originating a loan that required no income, no assets and no JOB with an LTV of 100%? These were wall st creations and their appetite was INSATIABLE. And why? Because they knew they could package it up in a CDO and have a ratings company slap triple A on it.

I think the notion that loan officers and consumers can get away with that level of fraud without Wall St. being compliant is totally naive. It was Indeed systemic.

[PSH]

Originally Posted by philcski

I think people are still skeptical. The root of the issue is poor lending practices by banks who followed the thought process of "well, even if the homeowner can't pay the mortgage, we'll be able to recover the full loan value because housing prices ALWAYS rise" whereas in some parts of the country homes were already at a saturation point of cost versus income.



Therein lies the problem and why you are wrong. The lenders worked under false assumption that home prices would continue to rise at an unsustainable level, despite warning flags of the cost of housing spiraling out of control. The lenders should have been held accountable for their poor investments, and learned a lesson from it- not allow the government to step in and bail them out. Continued poor lending practices under the assumption that the "implied government backing" will only cause housing prices to further rise, putting additional pressure on the consumer and the American economy. It's a vicious cycle that must be stopped through painful lessons learned and this is NOT the answer.

I appreciate you telling me that i am wrong.
Obviously, the lenders got into trouble by writing questionable loans. Anyone can see that. My point is where we are today what was going to happen. Yes, the lenders should be accountable for their poor investments but the government made sure that was not going to happen because of the fear of the collapse of the whole financial system. See Bear Stearns and Countrywide - government engineered takeovers by JP Morgan and BofA.
I see Lehman, JP Morgan, and the other financial companies on a regular basis and the writedowns that you see are real with more to come. The takeover of FNM and FRE by the government may not solve this financial crises but it is a step in the right direction. As i said earlier we shall see. To let the whole financial system possibly unravel is what would be wrong.

Just my opinion and although i am wrong in your eyes, i am right in my eyes.

PSH

[philcski]

Originally Posted by PSH

I appreciate you telling me that i am wrong.
Obviously, the lenders got into trouble by writing questionable loans. Anyone can see that. My point is where we are today what was going to happen. Yes, the lenders should be accountable for their poor investments but the government made sure that was not going to happen because of the fear of the collapse of the whole financial system. See Bear Stearns and Countrywide - government engineered takeovers by JP Morgan and BofA.
I see Lehman, JP Morgan, and the other financial companies on a regular basis and the writedowns that you see are real with more to come. The takeover of FNM and FRE by the government may not solve this financial crises but it is a step in the right direction. As i said earlier we shall see. To let the whole financial system possibly unravel is what would be wrong.

Just my opinion and although i am wrong in your eyes, i am right in my eyes.

PSH

Sorry, I'm not trying to be mean here, apologies if it came off as such.

The whole financial system would not unravel if the government had allowed to FNM & FRE to continue. Both had plenty of capital and access to more. People and corporations have to learn from their mistakes, and if there's no ramafications to poor decision making where is the incentive to "do the right thing" - which in this case would be to recognize the fallacy of the assumptions in which these loans were underwritten?

So do you believe the next big Wall St sinking ship, whom will remain unnamed but with proper research can be deduced, should also be thrown a life raft as well? I don't.

[dalakhani]

Originally Posted by philcski

Sorry, I'm not trying to be mean here, apologies if it came off as such.

The whole financial system would not unravel if the government had allowed to FNM & FRE to continue. Both had plenty of capital and access to more. People and corporations have to learn from their mistakes, and if there's no ramafications to poor decision making where is the incentive to "do the right thing" - which in this case would be to recognize the fallacy of the assumptions in which these loans were underwritten?

So do you believe the next big Wall St sinking ship, whom will remain unnamed but with proper research can be deduced, should also be thrown a life raft as well? I don't.

I am going to take a stab at Lehman Brothers. And, no, they should be allowed to fail.

Phil, as far as fannie and freddie goes, dont you think they received the ULTIMATE punishment? In effect both were wiped out in one fell swoop. Management was replaced in both and it is just a matter of time before all the employees become government employees. I know they still have jobs but many will be offered a pittance compared to what they made when the GSE's were private. How was anyone "saved" here? The only thing that might have been saved was the mortgage market.