Fannie and Freddie Have Been "Saved" -- Now What?

The former Goldman Sachs employees -- err, the government -- have decided to bail out Fannie and Freddie and the race to call another bottom in equity markets, not to mention housing, is on.

Reality, however, is not a friend of these hopeful bulls.

Let's take a quick scan of the economic landscape and see what issues the latest bailout has solved:

• The unemployment rate seems to only be going up, and unless the new federal agency charged with keeping tabs on the two mortgage giants is hiring en masse, there won't be much of a change here.
• The dollar could see its recent rally erased after our trading partners and investors around the world come to terms with the $200 billion the Treasury department just dumped into the blender to cut 50 bps off mortgage rates. And, take note, those are prime, Agency rates, and that's it.
• The unfortunate reality is that most Americans are still in debt and cannot afford a down payment on a house, a requirement that's yet to be removed.
• Gas prices have fallen, but not by as much as crude prices. Hurricane season is alive and well, threatening most of the gulf oil rigs. Oil companies are already under pressure from tumultuous markets for their black gold and are not likely inclined to lower prices further.

As painful as it is to admit, Fannie and Freddie probably needed to be bailed out to keep the entire financial market from collapsing but it doesn’t mean we are at “the bottom.”

It takes awhile for a fundamental shift in lending to play its way out and that is what we are in the middle of. The middle class is being squeezed more than ever and consumer credit quality on the whole is not going to start improving tomorrow.

More important than any of these points is we do not know what our friends at the government are going to do with Fannie and Fredie and how long it is going to take them to do it. In fact, trusting the very folks who ran these companies into the ground -- albeit under different leadership -- to turn them around is hardly a comforting proposition.

In the end, we need to remember that you need a good credit score and a down payment to buy a house in the real world. So no matter what a television analyst on TV who makes $500,000 a year tells you, this credit crisis is far from over.

A Housing Solution that Focuses on (Gasp!) Houses

This post first appeared on Minyanville and our sister site, Dawn Patrol.

Every once in a while, the most important news story of the day is the one the Wall Street Journal allots a mere 200 words.

In a move that will soon be greeted with quiet mutterings of “I should have seen this coming,” British Prime Minister Gordon Blair announced today a shift in the focus of initiatives aimed at reviving the ailing housing industry, and by extension the rest of the economy.

Until this point, much of the government-directed efforts to fix broken housing markets -- both here and abroad -- have focused on the mortgage side of housing transactions.

This should come as no surprise, as Wall Street banks like Goldman Sachs (GS), Merrill Lynch (MER), Lehman Brothers (LEH) and Bear Stearns -- er, JPMorgan (JPM) -- had staked their reputations -- and balance sheets -- on those mortgages.

Foreclosure prevention has attempted to preserve the integrity of the loan by extending its ability to keep generating cash for the lender. If a family or 2 were helped in the process, all the better. But with trillions of dollars in securities propping up the world's financial system based on unreliable monthly payments from struggling American consumers, the mortgage was saved in favor of the property itself or its inhabitants.

HOPE NOW and Project Lifeline have been our bureaucrats’ best effort at leeping people from being kicked out of their homes. Anecdotally and by the numbers, the results have been less than awe-inspiring.

As part of a larger economic reform package, Brown is taking a decidedly different approach. Any homeowner behind on his mortgage and facing the risk of repossession will have his situation evaluated by a “money advisor,” who, according to the Guardian, will determine whether nor not the loan is worth salvaging.

If this guru of the economically unfeasible gives the thumbs-down, the borrower gets a rescue package; the government gets the house. A housing association or other publicly funded group can then lease the property back to for the former homeowner or otherwise rehab the property for new tenants.

The lender can either be made whole or can retain some of the risk (and therefore potential return) in the property, staying in the game a bit longer.

This focus on the raw asset -- the house -- rather than on a flimsy deed of trust represents a step in the right direction in the "war on foreclosures." The mere fact that Washington (and London) are dipping their tentacles this deep into housing markets should rightly disturb anyone with even half-hearted capitalistic ideals - but some government plans are better than others.

The problem with mortgage-focused foreclosure prevention is that it prolongs a borrower’s agony by keeping him in a loan he or she should never have taken out in the first place. The house itself bears the brunt of this strategy's shortcomings, since homeowners forgo maintenance, landscaping, trash removal and other value-preserving services to survive another month.

By stepping in and taking control of the property before the copper pipes can be ripped out and the repossession process can further erode the home's resale value, the plan could slow some of the economic hardship and community decay caused by abandoned, vandalized homes.

Although the business of buying and selling distressed mortgage assets -- including bank-owned homes -- is hacking its way through the world of troubled properties, the scale of the problem and the challenging nature of the transaction itself mean that the crisis will take years to work through.

If the government is going to use taxpayer dollars to try to get us out of this mess, land banks and direct funds for rebuilding communities isn't a terrible place to start.

It sure beats bailing out Wall Street.

NAR At it Again: Spin Control

The National Association of Realtors (NAR) released monthly housing data today that shows existing-home sales in July increased by a seasonally adjusted 3.1%. While this number may seem exciting and could be interpreted as a thaw in the housing crisis, most other data point in the opposite direction.

Deeper into the report, the NAR mentions that inventories, which currently represent 11.2 months of supply, are at highs not seen since the 1980’s. Additionally, the report states median home prices have fallen 7.1% year over year and sales volume is down 13.2% year over year. The NAR doesn’t provide month over month median price data, citing “mix of homes issues” that are conveniently overlooked in the positive sales volume data.

While this report falls short of “calling the bottom” in the housing market (a tack often taken in NAR economic reports), the NAR has once again obfuscated the true state of real estate markets by focusing on the single positive datum in the entire report.

Yes, there was a blip in sales in the past month, but in the larger picture things remain bleak. Almost 40% of sales were distressed transactions, which is hardly indicative of a market that's poised to rebound. It will take more than a single month of increased volume to convince any rational observer that things are truly on the mend.

National Association of ... Really Really Good Liars

Housingwire.com reports that pending home sales levels have fallen significantly since this time last year, according to data released by the National Association of Realtors (NAR). The NAR report on the same data is titled “Pending Home Sales Rise, Wider Gains Anticipated….”

So where’s the discrepancy? How can the exact same data tell one group that things are getting worse while another group sees it as an improvement? The answer is all in how you look at it. While the NAR points out that their pending sales index was up 5.3% in June relative to May, Housingwire.com thinks it’s more appropriate to compare apples to apples and compare June data to June data. This comparison shows a 12% decline from this time last year.

Who’s right? In this case, we strongly agree with Housingwire. Home sales always make a move up in the summer months, simply as a result of cyclical pressures on the market. By comparing May to June data, the NAR has successfully pointed out this fact. However, in claiming that this increase represents a reason to project overall improvement in the housing market, the NAR is grossly over-exaggerating the importance of that particular statistic. Such spin is commonplace for the NAR, which has been propagating the “buyer’s market” fallacy since the credit crunch began by whatever means available to it. (witness the NAR's chief economist Lawrence Yun's insistence the turnaround is just around the corner ... since January 2006.)

In the uncertain waters of today’s real estate markets, it’s hard to know who to turn to for objective information and analysis. Many in the media will stake a claim to objectivity, but such claims are often exaggerated at best and ludicrous at worst.

In reality, objective information is not easily found and does not come cheap. In some cases, however, it is easy to see when a particular organization’s interests do not align in the least with anything remotely approaching objective analysis. This is clearly the case with the NAR, who’s analysis and reports should be avoided like the plague by anyone actually interested in the true state of the housing markets.

Morgan Stanley Latest Band-Aid Over Fannie, Freddie's Bullet Hole

This post first appeared on Minyanville and our sister site Dawn Patrol.

It looks like all those short-sellers might have been on to something.

Freddie Mac (FRE), the beleaguered mortgage giant that was just weeks ago on the brink of collapse, released second quarter results this morning that were nothing short of abysmal. Along with the financial backing of you, me and all the other US taxpayers, the government-sponsored enterprise now has:

• $831 million loss or $1.63 per share, compared with net income of $729 million a year ago.
  
• Revenue fell 28% to $1.69 billion compared to last year.
  
• $2.5 billion in credit loss provisions and $1 billion in mortgage-related writedowns.
  
• Board approval to slash dividends from $0.25 per share to “$0.05 or less”.
  
• The intention to raise $5.5 billion or more in fresh capital.

Although the company currently meets capital requirements demanded by its regulator, the Office of Federal Housing Enterprise Oversight, it may fall below those levels if the housing and credit markets continue to deteriorate.

Last month, shares plunged on fears that Freddie and its larger cousin Fannie Mae (FNM) would crumble under the weight of mounting losses in their massive mortgage portfolios. The Treasury Department tried to shore up confidence by demanding Congressional approval to support the 2 companies, should the need arise.

Treasury announced this week it had hired Morgan Stanley (MS) to help sort out the mess and assess the two companies’ financial positions.

It takes a very active imagination to think a company capitalized with just $37 billion to support more than $2 trillion in U.S. mortgage debt is anything resembling stable.

Although Fannie and Freddie managed to avoid buying the worst of the subprime mortgages originated during the housing boom, many equally toxic Alt-A and other non-prime loans made it onto their balance sheets. Even marginally savvy originators were able to exploit their automated underwriting and risk systems, resulting in the loss of billions of dollars from questionable loans.

Fannie and Freddie are now paying for their transgressions - or rather, the American taxpayer is paying, since Congress gave Treasury Secretary Hank Paulson what amounts to a blank check to bail out the two failed companies.

The only questions left are: When will Fannie and Freddie collapse, and what form will they take thereafter?

Many advocate for privatization, splitting the firms into several publicly traded companies. Others, mindful of the Federal government’s tendency to privatize profits and socialize losses, expect outright nationalization.

One near-certainty, irrespective of the outcome of their current crisis, is that Fannie and Freddie's ability to keep mortgages rates artificially low will be greatly reduced. That doesn't bode well for anyone considering buying a house in the next 20 years.

Housing Woosh, Part Deux

This post first appeared on Minyanville and on our sister site Dawn Patrol.

Reports are out this morning opining that Stockton, California represents a new hope for housing recovery. Hoping Stockton will lead the housing recovery is about like saying Alex Smith will lead the niners to the Super Bowl. It lacks a link to reality.

The recent rise in home sales transactions, especially in high foreclosure areas, is primarily attributable to the billions of dollars raised by hedge funds and other distressed investors. They're starting to get pressure to put the money to work. It's not evidence homebuyers are stepping back into the market.

Funds are trying to arbitrage the house, buy it at 60 cents on the dollar from a desparate bank and sell it for 80 on the open market.

The problem is, the marginal homebuyer in those areas does not have the 20% down payment it now takes to buy a home, even at 'discounted' prices.

Transactions may rise, but mortgage backed securities don't pay bond holders with realtor sales commissions.

If the bottom is called by the right media outlets, sellers still waiting on the sidelines will flood the market, trying to get out in a market that's not completely frozen.

Woosh, part deux, coming to a housing market near you in early 2009.

Housing Inventory Eases, But No Recovery In Sight

This post first appeared on Minyanville, and our sister site, Dawn Patrol.

Another month, another attempt to use a single data point to foretell the bottom in the housing market.

On the same day the Case Shiller Home Price Index reported the fastest drop in home prices on record (again), the Wall Street Journal released analysis indicating beaten down markets are beginning to work through inventory overhangs.

Shrinking supply in the most troubled markets is likely a blip, however, as volatile trading in distressed assets is driving the real estate market in these areas.

According to the Journal, metro areas like Sacramento, California, Denver, San Diego and Las Vegas actually reported a decline in housing inventory from a year earlier. Supply is still well above historical averages but, the report argues, if this trend continues it could usher in the end to the real estate slump.

But in cities like Portland, Oregon, Seattle, Charlotte, North Carolina and New York, where home price declines are just beginning, the backlog of unsold homes is piling up. Supply in New York and Portland is up 31% and 28% respectively. Stagnant prices and swelling inventory are signs of a market that's about to crack.

Even in markets poised for a correction, real estate brokers desperate for sales commissions are frantically pounding the table, calling this the buying opportunity of a lifetime.

Meanwhile, back in a world still loosely based on reality, easing inventory is a result of changing market dynamics, not an imminent bottom.

First, in troubled areas like California’s Central Valley and Inland Empire, (east of Los Angeles) Phoenix and Las Vegas, foreclosure and other distressed sales account for almost half the total transactions. As vulture funds and other investors swoop in to purchase delinquent mortgages and abandoned houses, such opportunistic buying has reduced inventory.

Small boutique investment firms, big hedge funds and Investment banks like Lehman Brothers (LEH), Goldman Sachs (GS) and Merrill Lynch (MER) are driving these markets. Some are buying foreclosed homes en masse, while others are snapping up delinquent mortgage at a deep discount. As the new owner of the loan tries to sort things out with the borrower, homes previously for sale come off the market.

The majority of these properties, however, will just end up for sale again: Almost half the delinquent mortgages traded in this market ultimately end up in foreclosure. Investment banks and hedge funds aren’t in the business of owning portfolios of residential real estate, so in a few months they’ll start punting homes at further discounted prices.

Second, year-over-year comparisons for real estate and mortgage data are about to get a lot easier. Think back to the beginning of the credit crunch last summer - the mortgage market all but shut down. Real estate transactions ground to a halt, inventory spiked and price declines began to accelerate.

For as bad as the real estate market is today -- and while prices have certainly come down -- activity last year around this time was even worse.

In the next few months, new calls for a bottom will ring out. But given that so-called experts have been calling for a bottom since, well, the top, Minyans would be wise to continue to wait patiently for real signs this has occurred.

New Countrywide Suit Tries To Foreclose Foreclosures

This post first appeared on Minyanville.

When Bank of America (BAC) agreed to buy Countrywide, it didn’t just take on a mountain of questionably valued mortgage-related assets. It also took on huge legal liability.

San Diego City Attorney Mike Aguirre, who has a penchant for punitive lawsuits that rarely result in much more than a media frenzy, is accusing Countrywide of defrauding thousands of San Diego homeowners. A lawsuit has already been brought at the state level by California Attorney General Jerry Brown, as well as in several other states, including Washington and Illinois.

San Diego's suit takes aim at Countrywide’s alleged practice of coercing borrowers into risky adjustable rate mortgages (ARMs). Aguirre hopes to make San Diego a “foreclosure sanctuary” by preventing foreclosure proceedings on any property secured by a subprime ARM where the borrower owes more than the home is worth. (For more on what the glut of upside-down homeowners means for the future of the housing market, please read Finding the Bottom in Housing.)

The litigious City Attorney isn’t satisfied with just taking aim at Countrywide (and, by extension, Bank of America). Aguirre said he’s planning similar suits against Washington Mutual (WM), Wells Fargo (WFC) and Wachovia (WB).

While Aguirre’s heart may be in the right place, foreclosure moratoriums aren’t part of the road to recovery for the housing market. Opportunistic mortgage market participants are buying delinquent mortgages on the cheap, forgiving some part of the debt and giving borrowers a fresh start. Government intervention in this process will simply scare off lenders, since they'll have limited recourse if the loan goes sour.

At best, such suits will simply drive up the cost of new mortgages. At worst, they'll bring the recovery process to a standstill.

Foreclosures are nasty, painful and tragic. They are, however, a necessary part of the mortgage process, enabling lenders to recoup losses on bad loans.

Mandating an end to foreclosures is like telling the IRS it can’t go after tax evaders or preventing cops from chasing down burglars. This is not to say victims of foreclosures are criminals or necessarily deserve to be thrown out on the street, but living in a law-abiding society means that contracts must be enforced.

The moment we waive one group’s obligation to honor their collective word, the floodgates are open.

This certainly isn't the last lawsuit we’ll see following the collapse of the mortgage market. In fact, it’s just the tip of the iceberg. A couple years from now, when Option ARMs begin to reset, class action lawsuits will bear down on lenders like a rumbling avalanche rolling down a steep slope.

Banks would be wise to get long some lawyers.

Don't Be a Hero, Wait it Out

The San Diego Union Tribune reports that San Diego home prices have fallen over 25% in the past year, reaching levels not seen since mid-2003. The median home price in San Diego County now sits at $370,000. Monthly sales volume is down 12.3% from this time last year.

These numbers are a stark reminder of how bad things have gotten in the residential real estate market. Many brokers, television personalities and media outlets are hailing the drop in prices as a once-in-a-lifetime opportunity. Conventional wisdom says its a buyer's market.

Nothing could be further from the truth.

The downward trend in prices these numbers represent is still in full swing, and the underlying forces that caused the downturn show no sign of amelioration. Foreclosures are still occurring at rates not seen for 20 years, meaning that real estate markets will remain flooded with bank-owned properties for the foreseeable future. Lending practices are tight and will remain as such as banks continue to lose money on their loan portfolio's and other real estate investments.

Only those fortunate enough to have saved a sizeable down payment will even be able to consider a home purchase. These conditions alone mean supply far outstrips demand in most markets around the country.

What does all this mean for anyone thinking about buying a home but without any compelling reason to do so immediately?

Wait.

The bottom has been wrongly predicted for months, with each successive group of brave buyers wading into the market, only to be upside down the moment they receive their keys.

It is impossible to call the bottom and predict when home prices will return to a more natural, upward projection. But what is certain is that this “bottom” is many months away at the least, and with the exception of a few well-connected and well-provisioned investors, now is certainly not a buyer’s market.

House of the Day Results: Saint San Ramon

Click here for details on this House of the Day

Value: $1,750,000
Projection: Depreciating

San Ramon is a desirable part of the East Bay that is located conveniently close to business centers and Pleasanton and Walnut Creek. In recent years, it has attracted Silicon Valley executives looking for bigger homes that they could not afford or are not available in the San Jose area. The subject is specifically located in one of the more desirable locations within San Ramon.

The subject is a large home located in a high end Toll Brothers (TOL) development, where most houses exhibit a high pride of ownership. Area property values are declining, due to the overall decline in the local economy and the lack of available credit. There are two equivalent properties listed within 0.5 miles for less than $1.9 million, which would represent the maximum value for the house.

There are 7 properties listed in the subject's development, with only 2 sales in the past 6 months. The lack of comparable sales in the development suggests a lack of qualified and willing buyers in the area.

Due to the large amount of supply and few sales in the area, even though the property is one the nicer homes in the development, it will still have a hard time selling. We value it at $1,750,000, the lower bound of recent listings, although higher than recent sales, which are all of inferior quality.

Click on the image below for the CLEAR for this property.