I’d like to open this installment of my newsletter by thanking each and every one of you for bailing out my industry’s big brother and sister, Freddie Mac and Fannie Mae. I really appreciate you paying your taxes in a timely manner to a government that has fully embraced the “too big to fail” concept of our financial markets and is willing to rob Peter (you) to pay Paul (Wall Street). It’s like Robin Hood...only backwards. And no one is wearing tights. And nobody could qualify as “merry.”
Am I jumping to conclusions? Quite possibly. I wouldn’t be surprised one bit if half of our politicians regularly wear tights (and I think that is a mental image we can all appreciate). But let me shed some light on how I view the past couple of weeks and let you folks draw your own conclusions.
In another crisis of confidence, the financial solvency of Fannie Mae and Freddie Mac was called into question two weeks ago. For those just joining us, Fannie and Freddie’s role in mortgage lending is to buy bundles of loans from banks and brokerages so that those banks and brokerages will have more money to lend. They essentially keep the inner workings of our country’s mortgage lending system well greased. If they ceased to exist, lenders would be lending their own money and would probably think a lot harder about who they wanted to lend it to. As such, guidelines would abruptly tighten and rates would shoot up. Probably not the best scenario for a housing market that is circling the drain.
So, investors flip out (as they have been known to do recently) and start vacuuming money out of Fan¬nie and Freddie. Their respective stocks plunge and appear to be headed for zero. Markets brace for the impact. This is all happening on the heels of our country’s third biggest bank failure when Indy¬Mac went ka-boom (in large part due to arguably sloppy mortgage lending) and got taken over by the government. And when things seem bleakest, who do we see rise up to meet the challenges of our frightened and failing markets?
It’s a bird! It’s a plane! It’s...Treasury Secretary Hank Paulson? I kinda expected someone in a cape.
Yep. Hank shows up with his unbounded ability to spend money and suggests a governmental bailout of Fannie and Freddie. To save you a pile of political jargon, here’s essentially what he is proposing: allow the federal government the infinite opportunity to buy equity in the companies (to bolster stock prices) and dramatically increase the credit lines available from the Treasury and the Federal Reserve Bank (to provide capital liquidity). Also, a 300 billion dollar fund under the Federal Housing Admini¬stration is being created to help troubled homeowners.
So, with such an aggressive plan, you’d think there would be a ton of strings attached, right? Wrong. Aside from approval authority over executive pay plans and the Fed adopting a “consultative role” in overseeing their capital (whatever the heck that means), not much worthy of noting is going to change.
The House of Representatives passed the bill Wednesday and Senate followed suit on Saturday. Bush has already stated he’d sign it into law. Awesome to the max.
What this means for Mr. and Mrs. Mortgage Consumer is that the worst case scenario of sudden and ridiculous rate hikes and guideline alterations has been stemmed, at least for now. If the government is successful in their attempt to temporarily prop up the lending system, then we can expect a slow and steady decrease in rates as confidence crawls back into the mix. However, if the government gets their claws too deep into the current system of lending and overhauls the whole sha-bang OR if inflation worsens, expect growing pains through overly-cautious borrower requirements and fear-driven higher interest rates.
So, unless I missed something major (which is entirely possible), we’re gonna get stuck with the bill. It’s the lesser of two evils, I assure you. But it still stands as a monolithic event showing that we are not out of the credit crisis quite yet.
Sunday, July 27, 2008
Thursday, July 10, 2008
If you want help from Big Brother, you take orders from Big Brother
I’m pleased to announce that the news relating to mortgages and economics has gotten a lot more interesting for everyone this week. Lots of reasons to feel positive about where rates may be headed.
At least in the short-term.
First off, Fed Chairman Ben Bernanke announced earlier this week that the Fed governors were con¬sidering extending the time that investment banks would have access to the Term Securities Lending Facility. This means, amongst other things, that these ailing institutions can post their questionably valued mortgage-backed securities as collateral in exchange for loans from America’s central bank. This news prompted a renewed interest from the investment community in mortgage-backed
securities and sent mortgage rates roaring down.
Good news from this move: it helps to break up the log-jam in the mortgage financing industry. From a completely selfish perspective, this is a huge plus. It’ll bring more investment, help real estate prices to reach a solid market bottom and lower the interest rates that consumers pay. Yaaaaaay!
Bad news from this move: the doors are remaining open for the Fed to take on a ton of bad invest¬ments that have the distinct potential of getting worse. They can only do this for so long before these actions would bring forth higher taxes (because the central bank has gotta get money from somewhere) and would usher in a new era of political intervention and regulation to our financial markets that could strangle America’s international competitiveness right out of the system in the name of stability. Translation for the consumer: qualifying for a loan would get even harder than it is right now. Boooo!
This process is already starting to play out. Fannie Mae and Freddie Mac, two giants in secondary market mortgage financing, saw their stocks nosedive after former Fed President William Poole stated “(Fannie and Freddie) may need to be bailed out from the rising pressure of the greatest housing slump since the Great Depression.” This came on the same day that Treasury Secretary Hank Paulson and Ben Bernanke were testifying to House Financial Services Committee, pushing hard for a regulatory overhaul to “reduce the circumstances that require government intervention”.
Soooooooo…we’re going to bring in a ton more regulators and intervene…less?
This is one of those good-in-theory types of things that will probably help in the short-term and hurt in the long-term. I’m not suggesting that the system doesn’t need to change or that we should let Fannie and Freddie fail. I’m just suggesting that the We will bail you out as a “last resort” message that the Fed has sent out could prove to be detrimental to the economy if more institutions take advantage of it.
Israel and Iran continue to politically poke each other in the chest. Now Iran has tested some mid– to long-range missiles capable of reaching Israel. Aside from the whole potential threat of mass genocide international incident thing, this rising tension has caused oil to rebound higher, bringing inflation concerns back to center stage.
On the lighter side of politics, the Reverend Jesse Jackson was caught on microphone saying in reference to presidential hopeful Barack Obama that he “wants to cut his nuts out”. There are only so many things in this world that make me physically hurt from laughing. This is one of those things. Classy.
At least in the short-term.
First off, Fed Chairman Ben Bernanke announced earlier this week that the Fed governors were con¬sidering extending the time that investment banks would have access to the Term Securities Lending Facility. This means, amongst other things, that these ailing institutions can post their questionably valued mortgage-backed securities as collateral in exchange for loans from America’s central bank. This news prompted a renewed interest from the investment community in mortgage-backed
securities and sent mortgage rates roaring down.
Good news from this move: it helps to break up the log-jam in the mortgage financing industry. From a completely selfish perspective, this is a huge plus. It’ll bring more investment, help real estate prices to reach a solid market bottom and lower the interest rates that consumers pay. Yaaaaaay!
Bad news from this move: the doors are remaining open for the Fed to take on a ton of bad invest¬ments that have the distinct potential of getting worse. They can only do this for so long before these actions would bring forth higher taxes (because the central bank has gotta get money from somewhere) and would usher in a new era of political intervention and regulation to our financial markets that could strangle America’s international competitiveness right out of the system in the name of stability. Translation for the consumer: qualifying for a loan would get even harder than it is right now. Boooo!
This process is already starting to play out. Fannie Mae and Freddie Mac, two giants in secondary market mortgage financing, saw their stocks nosedive after former Fed President William Poole stated “(Fannie and Freddie) may need to be bailed out from the rising pressure of the greatest housing slump since the Great Depression.” This came on the same day that Treasury Secretary Hank Paulson and Ben Bernanke were testifying to House Financial Services Committee, pushing hard for a regulatory overhaul to “reduce the circumstances that require government intervention”.
Soooooooo…we’re going to bring in a ton more regulators and intervene…less?
This is one of those good-in-theory types of things that will probably help in the short-term and hurt in the long-term. I’m not suggesting that the system doesn’t need to change or that we should let Fannie and Freddie fail. I’m just suggesting that the We will bail you out as a “last resort” message that the Fed has sent out could prove to be detrimental to the economy if more institutions take advantage of it.
Israel and Iran continue to politically poke each other in the chest. Now Iran has tested some mid– to long-range missiles capable of reaching Israel. Aside from the whole potential threat of mass genocide international incident thing, this rising tension has caused oil to rebound higher, bringing inflation concerns back to center stage.
On the lighter side of politics, the Reverend Jesse Jackson was caught on microphone saying in reference to presidential hopeful Barack Obama that he “wants to cut his nuts out”. There are only so many things in this world that make me physically hurt from laughing. This is one of those things. Classy.
Wednesday, July 2, 2008
Speak loudly and carry a small stick
Last week, the Federal Reserve Open Market Committee met and decided to leave rates unchanged. This marks the official end of their non-stop rate cut spree that started back in September of 2007. They coupled this decision with some hard language about inflation, stating that “uncertainty about the inflation outlook remains high.”
No kidding.
Leaving rates alone was the right thing to do. You see, Bernanke and his posse are staring down the double-barrel of an anemic economy and rapidly mounting inflation. They have already cut the Fed Funds Rate by 3.25% in a historically short period of time and implemented every sort of liquidity-providing measure they could think of. So, long story short, they basically have no tricks left up their sleeves. Another rate cut would have accelerated inflation and heaped up inflation expectations, mak¬ing it a self-fulfilling prophecy. Hiking rates immediately after cutting them would have shown that we do not have this country under control. Staying put was the best decision.
So, they tried big talk as a method of soothing the markets. Guess what: it didn’t work.
The Dow Jones Industrial Average has been pounded into an almost official bear market (defined as a 20% total valuation loss), mortgage rates have been rising, inflation fears are growing, and the dollar is weakening. Bernanke said in his statement that “inflation pressures are expected to ease throughout the rest of the year,” citing hindered consumer spending as the primary cause. I would agree if we were isolationist. But, if American companies can sell overseas at higher prices, we’ll see inflation regardless of what our local yokels are or are not buying.
The time has come, in my opinion, for the Fed to start hiking rates at their next meeting. Like a mother eagle pushing her eaglets to the edge of the nest, the Fed needs to send a clear message to the banks that the low-rate coddling is soon coming to an end and that they had better clean up their balance sheets now or face extinction. It would be bold, but in the face of unabated fuel and food price increases, I think it’s necessary to strengthen the dollar, reign in oil prices, and return legitimacy to our international presence.
Some good news: a wage-price spiral (where workers who anticipate more inflation demand higher pay and, as a result, end up causing wage-driven inflation) does not appear to be forming. We have the jobs report coming out this week, which should be weak but not dismal. That is in part due to busi¬nesses maintaining lean staffs and inventories since the tech bubble of 2001. Because they didn’t over-hire when things were going well, they do not need to do a ton of firing when things are going poorly.
Another force waiting to revitalize our economy is all the money that is going into emerging markets. International Monetary Fund director Dominique Strauss-Kahn recently was quoted as saying “If food prices further and oil prices stay the same, some governments will not be able to feed their people and at the same time maintain stability in their economies.” And when investors get spooked and cause a ‘flight to quality’, where do you think they’ll bring their money? Right back to big, safe Mama USA.
No kidding.
Leaving rates alone was the right thing to do. You see, Bernanke and his posse are staring down the double-barrel of an anemic economy and rapidly mounting inflation. They have already cut the Fed Funds Rate by 3.25% in a historically short period of time and implemented every sort of liquidity-providing measure they could think of. So, long story short, they basically have no tricks left up their sleeves. Another rate cut would have accelerated inflation and heaped up inflation expectations, mak¬ing it a self-fulfilling prophecy. Hiking rates immediately after cutting them would have shown that we do not have this country under control. Staying put was the best decision.
So, they tried big talk as a method of soothing the markets. Guess what: it didn’t work.
The Dow Jones Industrial Average has been pounded into an almost official bear market (defined as a 20% total valuation loss), mortgage rates have been rising, inflation fears are growing, and the dollar is weakening. Bernanke said in his statement that “inflation pressures are expected to ease throughout the rest of the year,” citing hindered consumer spending as the primary cause. I would agree if we were isolationist. But, if American companies can sell overseas at higher prices, we’ll see inflation regardless of what our local yokels are or are not buying.
The time has come, in my opinion, for the Fed to start hiking rates at their next meeting. Like a mother eagle pushing her eaglets to the edge of the nest, the Fed needs to send a clear message to the banks that the low-rate coddling is soon coming to an end and that they had better clean up their balance sheets now or face extinction. It would be bold, but in the face of unabated fuel and food price increases, I think it’s necessary to strengthen the dollar, reign in oil prices, and return legitimacy to our international presence.
Some good news: a wage-price spiral (where workers who anticipate more inflation demand higher pay and, as a result, end up causing wage-driven inflation) does not appear to be forming. We have the jobs report coming out this week, which should be weak but not dismal. That is in part due to busi¬nesses maintaining lean staffs and inventories since the tech bubble of 2001. Because they didn’t over-hire when things were going well, they do not need to do a ton of firing when things are going poorly.
Another force waiting to revitalize our economy is all the money that is going into emerging markets. International Monetary Fund director Dominique Strauss-Kahn recently was quoted as saying “If food prices further and oil prices stay the same, some governments will not be able to feed their people and at the same time maintain stability in their economies.” And when investors get spooked and cause a ‘flight to quality’, where do you think they’ll bring their money? Right back to big, safe Mama USA.
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