Mortgages, Fannie/Freddie and the Government

[Krazy P]

I have been a CEO in the financial services industry for 27 years. I have founded mortgage companies and investment companies. I made mortgages before Fannie and Freddie were even players in the industry.

For the past year I have been doing quite a bit of analysis of current and past events in this market.

Here are a few facts that I will share together with my own conclusion...

In 2000, government issued mortgage securities comprised 35% of all mortgage originations. In 2007, that number had increased to 95%.

During the same period the value of homes increased far beyond the long term trend, a housing bubble ensued and we are dealing with it now.

So, in effect, the government was creating artificial demand.

Today, you can't get a jumbo mortgage. Period. That's because the only player in the mortgage market is the government - and they are only buying "conforming" loans (non-jumbos). So, the "real" demand for jumbo mortgages is close to zero.

Who would buy a 30 year investment with a return of 4.75%? Nobody. Everyone knows that inflation is coming - and soon. The only entity buying mortgages is the government. So, what is the real demand in the market for mortgages? I wonder. Close to zero is my guess - at least at 4.75%.

So, think about it. Over the past 8 years the government has taken de facto control of the mortgage industry (95% is effective control). The result? I'll let you be the judge of that (insider payoffs, misallocation of capital, poor risk management, political payoffs, speculative bubble, etc.).

Now the government is moving to take complete control of the health care industry. It is also planning to take indirect control of most other industries through its effort to control the price and use of energy (via "environmental" protection).

So, how do you think that will work out?

Kinda like the mortgage industry is what I expect. Politicians will use their increased power to enrich themselves through special deals (see Fannie and Freddie), capital will allocated inappropriately, risk will be managed stupidly and political payoffs will be the order of the day.

This is uglier than my worst imagination.

The worst combination of crony capitalism and socialism.

[RBM]

@ Krazy P

I am reading arguments that inflation will come, but after deflation.

crony capitalism + socialism = lemon socialism ;-)

[Tenacious B]

I agree 100%, Krazy. The government is the cause of this problem, not the solution. God forbid bankers should use criteria such as income and credit history to determine who gets loans, good thing they put an end to that.:rolleyes:


As far as healthcare is concerned, seeing the post office, Amtrak, and the DMV make me want my health care to be controlled by anyone but the government.

The non-pollutant cap/trade system is nothing short of an effort to have total control over the population. If you can't travel freely, what can you do?

We've been conquered and are about to be enslaved.

[qwerty123]

It's OK, we'll have social security to fall back on.

This might be off topic, but:

Any money I pay in taxes to social security is a charitable donation (I'm 24). Unlike with most charitable donations, I don't have a choice, and I don't even like the charity.

Obama hawked change. Sadly, no amount of loose change is going to pay off the rising national debt.

Taking in account your George Soros thread, we're in choppy water now, but it's going to fade to a long period in the doldrums. While this happens, a few other countries will surge ahead. They'll wreak havok on the environment, and we'll clamor for our position at the top. I don't know how it will end.

It makes me think about Warren buffet's cartoon about two islands with one buying vast amounts of debt from the wealthy island. Soon the poorer island owns much of the wealthier island..

Oops

[Indy]

Here are a few facts that I will share together with my own conclusion...

In 2000, government issued mortgage securities comprised 35% of all mortgage originations. In 2007, that number had increased to 95%.


So, think about it. Over the past 8 years the government has taken de facto control of the mortgage industry (95% is effective control). .

Krazy P, I agree that Freddie and Fannie, and all the relevant regulatory agencies, have screwed up, but about your stats:

So you take one point (2000) and another (2007), and assume that during that period, 8 years as you say, it has been on the 2007 level, as in 'it had effective control of 95%'?

Please elaborate on the stats, maybe a graph, because this doesn't seem right to me.

And nobody here believes that the issuance of subprime mortgages isn't something that can be regulated in a better way? Just say, screw it, fine, let the market issue mortgages to NINJAs (No Income No Job, no Assets) the next time time around. Is that the only lesson we can learn from this?

More generally, you have the most expensive healthcare in the world, at around the same quality as Cuba (though I don't trust their statistics one bit either) and still have 40 million people without health insurance. So I don't think that system is working so well. The prospect of universal healthcare isn't exactly the danger I would be most worried about.

[Visum]

It's OK, we'll have social security to fall back on.


Actually, you may have a choice.
S.S. opt out (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.).

[qwerty123]

Actually, you may have a choice.


I looked it over, and I'd be more afraid of filing the paperwork than giving money away. Unfortunately, I can't claim I'm amish. But it's nice to know that there is some way to get out of it.

[deinotes]

I have been a CEO in the financial services industry for 27 years. I have founded mortgage companies and investment companies. I made mortgages before Fannie and Freddie were even players in the industry.

For the past year I have been doing quite a bit of analysis of current and past events in this market.

Here are a few facts that I will share together with my own conclusion...

In 2000, government issued mortgage securities comprised 35% of all mortgage originations. In 2007, that number had increased to 95%.

During the same period the value of homes increased far beyond the long term trend, a housing bubble ensued and we are dealing with it now.

So, in effect, the government was creating artificial demand.

Today, you can't get a jumbo mortgage. Period. That's because the only player in the mortgage market is the government - and they are only buying "conforming" loans (non-jumbos). So, the "real" demand for jumbo mortgages is close to zero.

Who would buy a 30 year investment with a return of 4.75%? Nobody. Everyone knows that inflation is coming - and soon. The only entity buying mortgages is the government. So, what is the real demand in the market for mortgages? I wonder. Close to zero is my guess - at least at 4.75%.

So, think about it. Over the past 8 years the government has taken de facto control of the mortgage industry (95% is effective control). The result? I'll let you be the judge of that (insider payoffs, misallocation of capital, poor risk management, political payoffs, speculative bubble, etc.).

Now the government is moving to take complete control of the health care industry. It is also planning to take indirect control of most other industries through its effort to control the price and use of energy (via "environmental" protection).

So, how do you think that will work out?

Kinda like the mortgage industry is what I expect. Politicians will use their increased power to enrich themselves through special deals (see Fannie and Freddie), capital will allocated inappropriately, risk will be managed stupidly and political payoffs will be the order of the day.

This is uglier than my worst imagination.

The worst combination of crony capitalism and socialism.
Seems like fascism.
Is it the government that controls the company's or the company's that controls the government ? There is more and more a merger between corporations and the government ,just take the example of the too big to fall attitude.
If the government wasn't in bed with big corporations they would let them fail and let the market provide a solution and if necessary provide some relief for the layed off workers.

[Krazy P]

I am sorry, I have the graphs at work.

They did not have effective control in 2000, they slowly gained it over time. It really ramped up in 2004 - 2006 (that was at the same time they were doing the subprime thing).

The subprime thing spawned the CDO market which grew to $43 trillion! That's twice the size of the entire stock market - and you can look this up yourself - I know the $43 trillion sounds unbelievable.

What that did was give a huge incentive to Wall Street to find mortgage product to securitize - any product - no matter how risky. THe reason was transaction fees and speculation. That's where the crony capitalism comes in. The fees were incredible.

The Wall Street guys knew it was unsustainable, but since the government (Fannie - Freddie) was buying the securities and SAID they wanted to help low income people, why not? THey were making a killing and the government was supporting the whole scam.

This is why government in the markets is so bad. You can take a bad idea, put a government guarantee on it and the smart guys will figure out a way to take you to the cleaners.

You may not like Bush, but he and McCain tried to stop the craziness and were unsuccessful (Republicans at the trough and Barney Frank and Chris Dodd killed every attempt to stop the gravy train).

Frank is the real slime ball - his "partner" worked for Fannie during the period of the ramp-up and developed "new products" at the same time Frank was stopping any attempt to slow down the train.

I hope you understand how frustrating this is for me. I was seeing this all unfold in real time, writing letters, contacting everyone I knew to tell them how bad this was and that we needed to stop it.

Now we have this and the principals are all still in place - the R's the D's and the Wall Street guys.

Blackrock, PIMCO - look them up. THey will make a killing with this latest PPIP program.

Insanity!

Krazy P, I agree that Freddie and Fannie, and all the relevant regulatory agencies, have screwed up, but about your stats:

So you take one point (2000) and another (2007), and assume that during that period, 8 years as you say, it has been on the 2007 level, as in 'it had effective control of 95%'?

Please elaborate on the stats, maybe a graph, because this doesn't seem right to me.

And nobody here believes that the issuance of subprime mortgages isn't something that can be regulated in a better way? Just say, screw it, fine, let the market issue mortgages to NINJAs (No Income No Job, no Assets) the next time time around. Is that the only lesson we can learn from this?

More generally, you have the most expensive healthcare in the world, at around the same quality as Cuba (though I don't trust their statistics one bit either) and still have 40 million people without health insurance. So I don't think that system is working so well. The prospect of universal healthcare isn't exactly the danger I would be most worried about.





Krazy P added to this post, 13 minutes and 28 seconds later...

On health care, we have government in now - that's why it is so screwed up. The facts are - rich people get better health care than poor people. Period. Health care is a product, like any other.

Government health care means rationing. Pure and simple.

Health insurance started during WWII as a means for employers to compete when there were price controls on labor.

Listen, I am an employer - I know what health care costs. Our company has very good health benefits. We use it to compete.

Did you know that in one hospital in the US 9 people visited the emergency room 2600 times over the course of a year. The reason was because it was free.

[Lucid]

Did you know that in one hospital in the US 9 people visited the emergency room 2600 times over the course of a year. The reason was because it was free.

I'm sorry... while 2600 times for 9 people is ridiculous... what are you suggesting here, exactly? That between 9 people they each visited the ER an average of twice a day every day of the year because... they didn't have anything better to do? This just doesn't sound realistic to me. Whatever one's stance on socialized health care, I have a lot of trouble believing this. Could you perhaps explain this a little more if you know more about it?

The reason I ask is because this kind of claim is the sort that we really need more information about to be meaningful. Why was it free for these 9 people? Was it free for others? 9 people out of how many? What hospital? How many times did each person go and for what kinds of issues?

[RBM]

@Krazy P



Something doesn't smell right to me, thus I agree with Lucid ...

Anyway I just visited the ER last Thanksgiving. My circumstance - student with no heath care. Event - household chemicals were involved.

It cost me $300 !!

[Lucid]

It cost me $300 !!

That's all? Last time that happened to me it was $1500. :(
It was an issue of bleeding though, not household chemicals.

[deinotes]

On health care, we have government in now - that's why it is so screwed up. The facts are - rich people get better health care than poor people. Period. Health care is a product, like any other.

Government health care means rationing. Pure and simple.

Health insurance started during WWII as a means for employers to compete when there were price controls on labor.

Listen, I am an employer - I know what health care costs. Our company has very good health benefits. We use it to compete.

Did you know that in one hospital in the US 9 people visited the emergency room 2600 times over the course of a year. The reason was because it was free.
Don't think that's the prime reason healthcare is so bad in america because the government went in.
Compare it with other country's and you will find out that health care is cheaper and better organized with other country's where health care is total in Government hands.
I think this is 1 of the field that has to keep in government hands. Competition in health care has many bad side effects.

[boldbidder]

I'm going to beg to differ on a portion of your point, specifically regarding Freddie and Fannie. Freddie and Fannie have taken a beaten in the media, some of just most of it not. Freddie and Fannie are in the secondary mortgage market, meaning they do not originate (actually do the writing) of any mortgages. They're job is to buy mortgages off of originators so they can keep originating them. Fannie and Freddie got a lil creative by creating mortgage backed securities and they were successful at doing so. The variety that Fannie and Freddie issued involved ZERO mixing of subprime mortgages as subprime borrowers wouldn't qualify to have either of the GSEs buy those mortgages. The entire MBS debacle started when other financial firms started making their own MBS comprised of god knows what, that's how the you go to that 95% level of mortgages being tied up into MBS. That was not caused by Freddie and Fannie, there are strict limits on how many assets they can control, they've never even remotely controlled 95% of all mortgages.

[phej]

1) deinotes, define what "bad healthcare" is? If you mean that healthcare in the U.S. is expensive, that's because we practice expensive medicine. According to Aaron Kling in Crisis in Abundance and Shannon Brownlee in Overtreated the U.S. medical care is capital intensive (for example with increased radiography) and human resources intensive (lots of specialists). With the kind of healthcare that Americans expect, if the government were in charge of it, there would be a shortage of medical care: an expansion of Medicare would make it less profitable for a doctor to practice medicine and the further insulation to costs will drive up consumer demand.

2) boldbidder, Fannie Mae and Freddie Mac do deserve a beating. Maybe not from the media, but from the public. The Federal Reserve has at least two working papers[1] that shows that FNM and FRE have used their implicit (now explicit) backing of the government to increase profit and not lower the spread between a U.S. Treasury and the prevailing mortgage interest rate. In other words, they did not satisfy their mission to make housing cheaper: they just made it easier to funnel money to the managers of the company. (Also, their regulatory history isn't too great: they got caught cheating with their books a few years ago. Now, you may say that it was ok that they were reporting less income than what actually happened, but that's an interesting cockroach to find.)

In the best case, FNM and FRE represent a subsidy on housing. Subsidies do nothing but distort pricing because it changes supply and demand. In this case, with a propensity to increasing house prices (but, it was of course unsustainable because income wasn't rising alongside housing costs.)

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[RBM]

@ phej

I am alive because of capital intensive healthcare.

I have no affordable health care now. I call that bad. Doctor's pay I think is distorted. I call that bad.

[phej]

@ phej

I am alive because of capital intensive healthcare.

I have no affordable health care now. I call that bad. Doctor's pay I think is distorted. I call that bad.

I never said that anything was wrong with capital intensive healthcare. I'm merely pointing out one of the reasons why it's so expensive relative to other countries. The question of whether costs are warranted or not, as a society, we feel that it is. (Now, since you can't get affordable health care, that's an example of one of the problems with medical care in the U.S.)

Is a doctor's pay too high? Maybe, maybe not. Remember, a Dr. has to continue his education until he's almost thirty years old. That's almost 12 years with no income, so the present income needs to cover any school debts. (No, I'm not an MD)

[Latro]

Actually, you may have a choice.
S.S. opt out (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.).
I'm practically drooling...my dad and I have been talking about this for freaking ages and wishing they'd let us do this...I definitely need to do this as soon as I file my first tax return. Screw patriotism, I'll put my money in self-sufficiency instead.