Friday, November 30, 2007

Federal Housing Bailout Punishes New Homebuyers

How do you make an omelet without breaking an egg?

United States Federal Government Treasury Secretary Henry Paulson and others continue to talk in circles about how their bailout is not a bailout and about how they will influence the housing market without influencing the housing market.

"The whole idea in the initiative ... is to make sure as many can be saved as possible without disrupting the market," [Office of Federal Housing Enterprise Oversight (OFHEO) Director] James Lockhart told Reuters on the sidelines of a conference in New York" (Reuters).

The other side of the coin:
Treasury, Fed, OFHEO, etc. throw new homebuyers to the wolves.

The "rescuers" (bailouters) try to obscure the fact that any bailout usually harms someone else because what is good for owners/sellers is generally bad for buyers:
  • More bailouts = less inventory for sale (supply/demand) = consumers/homebuyers pay higher prices.
  • More bailouts = higher "comps" (comparable prices in the neighborhood) = consumers/homebuyers pay higher prices.
  • More bailouts = moral hazard = more risky borrowers enter the market to bid against you = consumers/homebuyers pay higher prices.
  • More bailouts = propped-up housing bubble prices = propped-up property tax bubble = consumers/homebuyers/taxpayers pay higher prices/taxes.
Bailouts keep housing unaffordable for you or your children.

You could try to believe that the government can make an omelet without breaking an egg--although its track record is to break a dozen eggs without producing the promised omelet at all.

Please pay at the register anyway--and don't forget to leave Paulson a tip.

Federal Reserve Poole Drinks the Bailout Kool-Aid and Learns To Love the Fed Put

Fed Doublespeak:
"Fixing" (breaking) the "non-functioning" (functioning) Markets

St. Louis Federal Reserve President William Poole, previously more of an inflation hawk in the Fed, has flipped into a bailout apologist with his whitewash paper today, "Market Bailouts and the Fed Put" (11/30/07).

Calculated Risk commenters did a good job of exposing the flaws in Poole's whitewash.

The root absurdity of the Fed's claim that its interventions are fixing a non-functioning credit market is (like most allegations of market failure) most easily illustrated by an eBay auction:

  • Seller lists item.
  • No one bids.
  • Auction ends without a sale.
This is an example of a working market, not a broken market.

Sometimes the correct action is no sale.

Functioning free markets do not guarantee churning commissions.

Functioning free markets do not guarantee any particular level of trading activity.

The markets were working fine in August 2007 by spiking the overnight inter-bank lending rate to 6% in response to the latest information of overlooked risk in overpriced housing assets/securities.

Of course, a price-fixing (interest-rate setting) central bank is anathema to a free market, so Fed hostility to a properly functioning free market is unsurprising.

Thursday, November 29, 2007

SEC NRSRO Causes Asset Mispricing?

When is the government not the answer?

When it caused the problem in the first place.

Bailouts are bad for the same reason that other government interventions are frequently bad, because the quick cry for government regulation often overlooks the embarrassing fact that, not only did a financial disaster occur under the government's watch, but government regulation actually caused or worsened the financial disaster.

The global credit crisis resulted from the subprime mortgage mess partly because the big ratings agencies mis-priced the financial assets and risk:

"But when it comes to using ratings, many large investors' hands are tied. Pension funds, banks and insurance companies can only buy debt that's been rated by a Nationally Recognized Statistical Rating Organization. NRSRO for short. The Securities and Exchange Commission awards that seal of approval. Until just a few years ago, the only NRSROs were, you guessed it, Standard and Poor's, Moody's and Fitch. Joseph Mason teaches finance at Drexel University" (Marketplace radio program).

Those big 3 SEC favorites retained an implicit government-approved authority which they used to rubber-stamp the housing bubble's gross overpriced mis-valuations of homes and mortgage-backed securities (MBS).

Meanwhile, the rating company Egan-Jones has been trying unsuccessfully to get the NRSRO certification but the SEC has shut-out Egan-Jones for 10 years while various accounting and financial scandals occurred under the SEC's watch:
[Sean Egan stated:] "With Enron and Worldcom we were often times the lone voice raising these concerns."
US Federal government financial regulations discouraged consumers/shareholders from using accurate information.

The government's hand in creating the global asset bubble and credit crisis does not instill any confidence that any of its bailout plans will make economic conditions better. The bailouts might make the economic situation worse.

Sunday, November 11, 2007

Did Government Create Mortgage Securities Mess? Is It about To Repeat Its Mistake?

Another Deja Vu Nightmare from Schumer, HUD, and the rest of the Federal Government

Who cares about the Hollywood writer's strike when we have the daily farce of government bailout policy?

The US federal Housing and Urban Development (HUD) website boasts that it was the federal government which invented and pushed mortgage securities, a tool that some analysts and pundits now accuse of causing/enabling the housing bubble crash, subprime mortgage mess, foreclosures epidemic, institutional financial losses, teetering stock market, and global credit crisis:

"[HUD's] Ginnie Mae is a wholly owned government corporation within the U.S. Department of Housing and Urban Development. Ginnie Mae pioneered the mortgage-backed security (MBS), issuing the very first security in 1970. An MBS enables a mortgage lender to aggregate and sell mortgage loans as a security to investors. Ginnie Mae securities carry the full faith and credit guaranty of the United States government, which means that, even in difficult times, an investment in Ginnie Mae is one of the safest an investor can make" (HUD).
The "safety" means that you the US taxpayer are liable for all the risk, so you can pay a debt-defaulter's mortgage to make sure that a Wall Streeter does not lose money. That guarantee is quite a blessing if you spend your days trying to figure out ways to pay other people's mortgages and spend your nights worrying about Wall Streeters losing money.

Take a moment to absorb the irony of all the politicians now decrying mortgage securities when politicians created and pushed mortgage securities.

Senator Charles E. "Chuck" Schumer (D-NY) complained to the Federal Reserve, Treasury, HUD, FDIC, SEC, and others:

"Over the past several decades, innovations in the mortgage markets have made it much more difficult for too many homeowners to refinance their loans when they need to. Furthermore, the prevalence of unscrupulous lending fueled by the increased appetite for subprime mortgage securitizations has resulted in a growing number of homeowners facing payment shocks as rates reset that could cause them to lose their homes. In order for them to keep their homes, their loans must be modified. Twenty years ago, most of these borrowers could go to the bank that held their mortgage and seek assistance. Today, with their loans sliced and diced into many pieces held by a variety of unaffiliated market participants, there is no one on the scene to help beleaguered homeowners do loan workouts" (Schumer press release, 8/22/07).

Schumer's new "solution" is to put the same fox in charge of the same henhouse again (Schumer's press release then referred to him in the third person):

"Schumer has supported the empowering of non-profit agencies, sanctioned by the Department of Housing and Urban Development, to play this role of facilitator" (Schumer press release, 8/22/07).

Schumer concluded his solution with a call for more, untested, government tinkering in the housing markets:

"The reality of today’s mortgage market calls for new and creative thinking by the regulators" (Schumer press release, 8/22/07).
HUD's response to the flood of bad mortgage securities is to announce its creation of yet another mortgage security:
"The new security will be a multiple-issuer pool type under the Ginnie Mae II Mortgage-Backed Securities Program, and will be available for pool issuances beginning December 1, 2007" (HUD 10/16/07 press release).
So the timeline is:
  • Government decides it must invent new creative financing for housing.
  • Government creates Mortgage Backed Securities (MBS) to divide/resell the debt/risk.
  • Government accuses Mortgage Backed Securities (MBS) divided/resold debt/risk of causing housing disaster.
  • Government decides it must invent new creative financing for housing.
  • Government creates new Mortgage Backed Securities (MBS) to divide/resell the debt/risk.
You can't make this stuff up.

Saturday, November 10, 2007

You Paid $100k for Pictures of Your Fearless Government Leaders

Housing is imploding, the dollar is imploding, the economy is imploding, and US federal Housing and Urban Development (HUD) Secretary Alphonso Jackson ordered you to pay $100k to paint his portrait and the portraits of other HUD secretaries.

(Update 11/11/07: While Hurricane Katrina victims claim that their federal FEMA trailers are poisoning them with toxic levels of carcinogenic formaldehyde, HUD is busy decorating its shiny new auditorium in Washington DC with $100k of paintings.)

Maybe people could afford their mortgages if they did not have to pay $100k for pictures of their dear leaders.

I suppose we could disband HUD and consider the resulting tax savings as a "bailout" for taxpayers.

Let Jackson keep his portrait as his severance package.

Update: Alphonso Jackson update: HUD Secretary Jackson Steps Down amid Probe (3/31/08) by Libby Lewis

See also:
You Owe 9 Trillion Dollars
Political Humor: Ron Paul, Alan Greenspan, Ben Bernanke

Thursday, November 8, 2007

You Owe 9 Trillion Dollars

Crossposted from Home Finance Freedom:

Congratulations, the United States gross national debt now exceeds $9 trillion.

You owe $30k. Your baby owes $30k. Your family of 4 owes $120k.

Your government put you in all this debt to make you richer, in case you were wondering why your life has felt so easy and virtually cost-free all these years.

Remember that when choosing a
presidential candidate.

Friday, November 2, 2007

FOMC's 5 O'Clock Follies Continue: Bernanke's Halloween Trick

Great Depression Syndrome Meets Vietnam Syndrome

This week the Federal Reserve Federal Open Market Committee (FOMC) met, and Chairman Ben Bernanke announced another cut to the benchmark Fed funds overnight interest rate (25 basis points (bps)).

Bernanke's surreal tap dance about the housing bubble crash, subprime mortgages mess, global credit crunch, inflation, unreported M3 money supply, and incipient US recession is reminiscent of the Vietnam War's "5 O,Clock Follies," the farcical US government press briefings (in Saigon) of war progress for reporters willing to print the government's canned press releases as news stories.

To recap, the Fed's position is:

"There is no housing bubble. There is a housing bubble but it will not crash. It is crashing but it will not affect the rest of the economy. It is affecting the rest of the economy but it is contained. Well it wasn't completely contained before but it is now. Don't worry we contained it again. No really this third time it's extra contained."
The most oxymoronic internet defense of Fed policy was that the containment was "expanding," which sounds as effective as the containment by 2 other government programs, the New Orleans levees and the Teton Dam.

Bernanke realizes that this might look uncontained to the untrained eye: