Moon of Alabama Brecht quote
July 13, 2008

Freddie and Fannie - "Who could have known ..."

Freddie Mac and Fannie Mae, the over-leveraged government sponsored mortgage finance companies, are swimming belly up and will have to be rescued by the taxpayers in one form or another.

"Who could have know ... ?"

Searching through the Moon of Alabama archives I found an exchange I had with anna missed back in November 2004 (typos corrected).

anna missed asked:

So I wonder what happens to all those (Bush) new and old homeowners if the interest rate is jacked up in some significant way to move the Fed debt down. With the housing market, in some measure, carrying both production, financing, and labor through the Bush economy, could rising interest rates create enough of a disruption to precipitate a major deflation in the real estate market? And what happens when people are faced with negative equity, and how does that effect their ability to secure future credit? And how could an import based, retail, and services economy survive such an evaporation of credit?

Should real estate held close to current value be dumped?

My response back then:

Some 50% of the mortgages in the last months were adjustable rates (ARMs). Their rate will increase immediately when treasury rates go up. People will have to default and quite a bunch of houses will be available on the market, subduing prices. With prices going lower more peoples mortgage will exceed their home equity. This could become a chain reaction with a very significant drop in house prices and lots of bankruptcies.

This may have effects in the banking sector (expect Freddie and Fannie to somehow go belly up).

If you want to stay in your house for the rest of your life and if you can pay your fixed rate mortgage rates without problems stay put. If you plan to move in two years or if you are not sure you can pay your future mortgage rates you may better look into renting a place for a few years and buy a house again when they become cheap.

But when will houses become cheap again? Should one buy now?

No. Knife catching is hazardous. The IMF did a study some years ago looking at twenty housing market busts in 14 countries since 1970. House price deflation from peak to trough was usually around 28% and took 4 years. It is likely that the house price deflation in the current bust will be bigger and take longer. I do expect a 40% price decline in average. It will take 5 to 6 years until the markets stabilize.

That the decline will take so long has political consequences. There is nothing anyone can do to prevent it or shorten it. The presidential election in 2012 will be about the declining economy just as the current one. The incumbent in 2012 is therefore likely to lose.

Posted by b on July 13, 2008 at 16:08 UTC | Permalink

Comments

I just found your blog via technorati.com.

I am writing to invite you to post advice articles on Advice Network.

[spam content deleted - b.]

Posted by: Alex Schoenfeldt, | Jul 13 2008 16:27 utc | 1

b,

I need your advice. Should I buy a house or a bunker for the coming meltdown?
Thanks in advance.

Posted by: biklett | Jul 13 2008 16:42 utc | 2

I need your advice. Should I buy a house or a bunker for the coming meltdown?
Thanks in advance.

Don't buy, rent the bunker.

Posted by: b | Jul 13 2008 17:43 utc | 3

Should I buy a house or a bunker for the coming meltdown? 
Thanks in advance.

Buy *only* if the price is low, suitable, etc. and most important, if it is place you want to live in, plan to continue living in, being or becoming a part of the community, do not care about the price you paid, as that does not matter as you do not care about equity, re-sale value, mortgage value, etc. A place to live, and the only financial considerations being what you earn, get, etc. after you are living there.

Otherwise, rent or live in a tent.

Ok probably the question was a joke, but ppl should think about this shit.

Bush jawed up the ownership society. Making, or letting, house prices rise was a way of making the poor go into debt and smart scammers and flippers to make big bucks in a brief time window. Right in harmony with the ‘free market.’ There as nothing else to tout - back to land/ RE ownership, but not used productively. Equity and hubris bought a lot of flat tv screens, all made in China. Ponzi scheme, straight up.

Now its sob and wring hands and save American home owners, but nobody will, and why should they? .... The Fed will save the banks, as partners and socially necessary, insofar as it can, which may be much less than ppl expect. How many banks are expected to fail? 50 I read? More? the question is: How much more shoddy paper and debt can the Gvmt. take on?

Posted by: Tangerine | Jul 13 2008 18:41 utc | 4

if you are familiar with the foreclosure industry you may be able to find some very good deals

Posted by: jony_b_cool | Jul 13 2008 23:12 utc | 5

Treasury Acts to Save Mortgage Giants

While the Treasury did not specify the size of the packages, officials briefed on the plan said they were told by administration officials that, to be meaningful, Congress should consider extending the line of credit to the two institutions to $300 billion.

Each company now has a $2.25 billion credit line, set nearly 40 years ago by Congress. At the time, Fannie had only about $15 billion in outstanding debt. It now has total debt of about $800 billion, while Freddie has about $740 billion. Today the two companies also hold or guarantee loans valued at more than $5 trillion, about half the nation’s mortgages.

Lawmakers said that as part of the plan, the administration called on Congress to raise the national debt limit.
...
Initial reaction to the plan by some Congressional Democrats was positive.

Posted by: b | Jul 14 2008 4:58 utc | 6

Bernhard, these days I find myself constantly saying: 'But we discussed this all at the Whiskey Bar, at Moon of Alabama, [insert names of 50 other blogs] years ago...'

So it takes on the form of deliberate action by the PTB, accumulation by dispossession.

If a fool like me knew this was coming, how can the MBAPhDerati not? I do not believe anything any of them says now. Liars to a man.

Quite a state of dissociation, not to mention dispossession.

Posted by: Dismal Science | Jul 15 2008 17:18 utc | 7

I wrote: It will take 5 to 6 years until the markets stabilize.

That the decline will take so long has political consequences. There is nothing anyone can do to prevent it or shorten it. The presidential election in 2012 will be about the declining economy just as the current one. The incumbent in 2012 is therefore likely to lose.

Today Krugman writes

When will it all end?

The answer is, probably not until 2010 or later. Barack Obama, take notice.

Posted by: b | Jul 18 2008 11:14 utc | 8

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