FedUpUSA

Archive for December 24th, 2009

On Christmas Eve one would think you could have a nice evening with your family.  Little did I know what Timmy Geithner had up his sleeve:

The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.

I see.  But I thought housing was getting better?  That’s what I heard on CNBS Tuesday when existing home sales came in "above expectations."

But then Wednesday came around and, well, new homes?  They’re just not selling.

Purchases dropped 11 percent to an annual pace of 355,000, lower than the lowest estimate of economists surveyed by Bloomberg News, figures from the Commerce Department showed today in Washington. The median sales price decreased 1.9 percent from November 2008.

Wait a second.  How come the disparity?

Two reasons, really.  The first, which the pumpers cite, is that "the tax credit was maybe going to expire."  Uh huh.

No, folks, that’s not the reason.  The reason sales fell is that they’re still falling everywhere.  What’s happening in the "existing home" sales numbers is that foreclosure sharks are taking a bite here and there, in many cases generating double counts in the "existing home sale" category, never mind the alleged data source in the first place.  But even the NAR acknowledges that 33% of existing home sales were foreclosures, not actual organic "meeting of the minds" transactions!  Take those out and existing home sales didn’t rise 7.4%, they instead did their best imitation of a cliff-dive, with organic sales being a mere 4.38 million units (annualized), which is a mid-to-late 1990s print (and then again around the 1978 time frame!)

The Obama administration is “beginning to realize it’s not getting better and it’s not likely to get better” soon in the housing market, said Julian Mann, who helps oversee $5.5 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles. “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.”

No, really?

Mark Hanson has been on this since the beginning: if you haven’t read his stuff, here’s a nice treatise of why we are nowhere near recovery in the housing market.  Read it and weep – Timmy has.

By the way, if you’re wondering what sort of trash Fannie and Freddie are holding, here’s what Mark says about their "underwriting quality" during the boom years:

Many lenders, especially the big banks, had in-house DU and LP underwriting ‘trainers’ that would go around to the various mortgage branches and teach underwriters how to ‘trip’ the systems in order to achieve automated loan approvals when a declination was certain, or simply get fewer approval conditions on a loan that was borderline. Getting a loan approval out of DU/LP on a borrower with a 100% DTI — with limited documentation required on the automated findings — was not uncommon.

Got that?  A DTI – that is, debt-to-income – of one hundred percent – was quite possible, along with limited documentation as well!

Now let’s remember that most people turn over their home about every seven years (that’s the average "holding time"), so an awful lot of Fannie and Freddie’s paper – quite possibly as much as half – is contaminated. 

Still feeling good about a housing recovery? 

If you’re wondering how bad this is in the so-called "prime" loans the Mortgage Bankers Association lays it all out:

6.84% of prime loans are now delinquent (at least one payment behind but NOT in foreclosure) and 3.20% are in foreclosure.  This means that almost 1 in 10 PRIME LOANS are either late or in foreclosure.

FHA loans are running close to 20% between delinquent and foreclosure-in-process.  That’s one in FIVE.

And of subprime loans, 41% are either delinquent or in foreclosure.  Forty one percent!

A mortgage that is at least two payments late almost never "cures" – that is, once you miss a second payment you’re virtually assured to eventually be foreclosed.  (Some one-payment misses are legitimate errors or very temporary cash-flow disruptions.)

So let’s ask a few questions here:

1. What’s the bond market going to think about a literal $5 trillion guarantee (for three years anyway) on MBS?  Might some people have known about this in advance, with that being the reason for the bleed in the long end of the bond curve this last week or so?  One wonders – of course nobody would ever trade on inside information, right?
2. Why wait until the market closed on Christmas Eve for this?  Oh, that’s to stop a sell-off in bonds, right?  Yeah, we’re playing "American Idol is on, and you’re too stupid to remember this for three days."  Got it.  We’ll see how that works out.

Oh, and if that’s not enough to make you vomit, get a load of this:

The government announced Thursday that it had approved Wall Street-style, multimillion-dollar compensation packages for top executives at Fannie Mae and Freddie Mac, the two mortgage companies that have become little more than arms of the federal government.

The two top executives at the companies, which have received $121 billion in federal aid since they were seized last year, could be paid up to $6 million each for their services this year. In total, the top 12 executives at the two firms are in line to receive up to $42 million in 2009 alone.

Cost the taxpayer an unlimited amount due to shoddy underwriting and lax (or absent) risk controls and not only do you get bailed out, you also get paid $6 million a year.

One final question: Does this force consolidation of Fannie and Freddie onto The Government’s balance sheet?  I’d think so – what say you CBO?

Where’s my pitchfork?

Treasury uncaps credit line for Fannie, Freddie

WASHINGTON (Reuters) – The Obama administration pledged on Thursday to back beleaguered mortgage finance giants Fannie Mae and Freddie Mac no matter how big their losses may be in the next three years.

Housing Market

Treasury also said it would not require the two agencies to reduce their portfolio size next year, in a move that would allow them provide even greater support for the housing market as it begins to recover from its worst slump in decades.

The Treasury Department said it made the changes to assure markets it was fully behind both Fannie and Freddie and to give the agencies more time to reduce the size of the portfolios.

The two agencies each had a credit line of $200 billion. Combined, the two have thus far tapped about $111 billion.

Under the arrangement established under the previous administration, Treasury Secretary Timothy Geithner had until the end of this year to increase the limit without asking Congress for approval.

Treasury said it still hopes that Fannie and Freddie will reduce the size of their portfolios “in the future.” Under the newly announced rules, Fannie and Freddie will have to reduce their portfolio to $810 billion by the end of 2010 and annual increments of 10 percent thereafter.

The two agencies each hold portfolios in the high $700 billion range, officials said, meaning that they would not be forced to sell assets next year.

The 2010 reprieve was designed in part to avoid putting too much strain on the mortgage finance companies just as Treasury and the Federal Reserve were wrapping up their purchases of mortgage-related securities.

As part of Thursday’s announcement, Treasury said it was ending its mortgage-backed securities purchase program as of the end of 2009, and will have bought around $220 billion.

The Fed had previously said it would winding down its more than $1 trillion in mortgage asset buys in the spring of 2010.

The government’s hope is that private sector buyers will step in. By putting an unlimited guarantee behind Fannie and Freddie through 2012, the Obama administration hopes investors will feel more confident and will step up to fill the void left by the end of the Treasury and Fed buying programs.

Without healthy demand for mortgage-backed securities and the finance companies’ debt, mortgage interest rates would likely spike, sending a chill through the still-shaky housing market, which could derail the economic recovery.

(Reporting by Corbett B. Daly and Emily Kaiser; editing by Leslie Adler)

First, the Grinch known as Harry Reid did everything he could to steal our liberties by nationalizing healthcare – 1/6th of our economy. Next up, take money from our children and grandchildren, including those not yet conceived, to pay for his overspending. This is all about control, not helathcare, to turn the American citizen into this:

A battery that fuels the federal government and little more. Once you’re old and no longer earning useful wages that the federal government can confiscate, ObamaCare will make sure you die. And the debt will then rest with your descendants to pay. From Reuters: Senate sets Christmas eve vote on U.S. debt limit

The measure, passed last week by the House of Representatives, would increase the debt limit, now at $12.1 trillion, by $290 billion.

Senate Democrats may approve the measure largely by themselves because most, if not all, Republicans are expected to vote against it, Republican aides said. Democrats control the Senate, 60-40.

Republicans have objected to raising the debt limit, accusing Democrats of reckless spending. Democrats counter by noting that the debt exploded during the administration of Republican President George W. Bush, which ended in January.

But it really exploded since 2006 when Democrats took over Congress, but Reuters can’t mention that fact.

Democratic leaders had hoped to raise the limit by at least $1.8 trillion, enough to ensure they would not have to revisit the issue before the November 2010 congressional elections. But they were unable to agree on measures that lawmakers had hoped to attach to the legislation to control the debt. The two-month hike provides more time to reach a deal.

The government posted a record $1.4 trillion deficit in the fiscal year ended September 30 and is on track this year to spend at least $1 trillion more than it collects.

The debt has more than doubled since 2001, due to wars in Iraq and Afghanistan, tax cuts and the worst recession since the 1930s, one that has caused tax revenues to plunge and spending on federal safety-net programs to rise.

Tax cuts? Are they kidding? Didn’t the revenues to the federal government INCREASE after the tax cuts were put in place? Why yest they did! Yet, liberals love pointing to the tax cut boogeyman to blame rather than their own overspending ways.

Senate leaders set the debt-limit vote for Thursday, Christmas Eve, just before lawmakers go home for the holidays.

The vote is to occur after anticipated Senate passage of a bill to overhaul the U.S. healthcare system, a measure that has tied up the chamber for weeks, delaying departure.

There you go folks! Merry Christmas! Not to you, but to the federal government!

Both Obama and the Treasury Department keep talking up the TARP as if it is a money maker for taxpayers, when nothing could be further from the truth. Obama tried this stunt in his anniversary of Lehman speech, and the Treasury continues with the theme, of implying that results for the firms that paid back are representative of what the final results would be.

If this logic were generally true, that would mean subprime bonds were a good investment too. After all, most borrowers did make good on their mortgages. A late September Moodys mortgage survey that a reader sent me estimated that total losses on subprime RMBS will be about 26%, which means that 74% were money good.

The problem with the Treasury/Obama three card monte is that the strongest TARP are the ones that paid off first. Things can only go downhill from here. Do you expect AIG to repay the TARP in full? Or the auto companies?

But you’d never guess that if you took the latest propaganda at face value. From MarketWatch:

The Troubled Asset Relief Program has generated at least $16 billion in profit so far, the Treasury Department said late Wednesday…

Total repayments by TARP banks should top $175 billion by the end of 2010, cutting taxpayer exposure to the sector by three-quarters, the Treasury estimated.

TARP programs aimed at stabilizing the banking system will earn a profit from dividends, interest, early repayments, and the sale of warrants, it added. Bank investments of $245 billion in Treasury’s 2009 fiscal year were initially projected to cost $76 billion, but are now forecast to generate a profit.

Yves here. Did you catch that? This is too clever by half. They are now talking about TARP “bank only” results, which serves to omit the biggest turkeys.

Then we get this bit:

According to a recent Treasury report, 55 institutions that received TARP money are delinquent on dividends they owe the government, as of a Nov. 16 payment deadline.

Yves here. Admittedly, these are smaller banks. Nevertheless, we reported in October that just about no one noticed that 34 banks had missed their TARP dividends. Now we are up to 55. This is an impressive rate of decay.

Submitted by Leo Kolivakis, publisher of Pension Pulse.

Henny Sender of the FT reports that top hedge funds bet on big rise in yields:

The
recent rise in long-term US interest rates comes as good news for
several leading hedge fund managers, including John Paulson, who have
positioned their trading books to benefit from higher yields on US
Treasury securities.

 

Mr Paulson, who
made big gains earlier this decade by betting against the subprime
mortgage market and whose firm, Paulson & Co, manages $33bn, has
said he believes that government stimulus efforts would inevitably lead
to higher inflation and a corresponding rise in rates.

 

“It will
be difficult for the government to withdraw the economic stimulus,” Mr
Paulson said in a speech. “An increase in the monetary base leads to an
increase in the money supply, which leads to inflation.”

Bond
prices fall as yields rise, and Mr Paulson told the Financial Times
last week that he has been hoping to benefit in the Treasury market by
buying options that would become profitable if rates headed higher.
TPG-Axon’s Dinakar Singh has been making similar options trades,
according to a person familiar with the matter.

Julian Robertson,
the hedge fund manager, has pursued a related strategy, hoping to
benefit from a bigger difference between short-term and long-term
interest rates, known as a steeper yield curve, a person familiar with
his trades said.

The yield on the 10-year Treasury, which hit a
crisis low of 2.055 per cent last year, has moved from 3.2 per cent
last month to 3.75 per cent on Tuesday.

Hedge fund managers,
however, have been hesitant to engage in short sales of Treasury bonds
to profit from the rising yields – and falling prices – because of the
Federal Reserve’s heavy involvement in the market. This has led some to
buy options – dubbed “high strike receivers” – that would enable them
to profit from sharply higher Treasury yields, hedge fund managers say.
These trades, which are relatively cheap to execute because they are so
out of the money, are based on the thesis that yields could hit 7 or 8
per cent.

“If they are right, and the world ends, they will make
a fortune,” said one fund manager who is sceptical of the idea. “If
they are wrong, they haven’t lost much.”

Some traders are
cautious because many peers lost large sums betting that rates would
rise in Japan in the 1990s – as yields fell to less than half a
percentage point. The trade was termed the “black widow” because it left so many victims.

“Nobody
understood the extent of deflation and economic weakness in Japan,”
said Dino Kos of Portales Partners, a research consultancy, who was
then a Fed official. “More money was lost on that trade than on any
other single trade. Everyone piled in when rates were at 3 per cent and
then at 2.5 per cent and then at 2 per cent.”

So
is it time to place big bets on rising yields? I could easily see a
backup in yields in the near term as economic reports surprise to the
upside, but I don’t believe that bonds have entered a long-term secular
bear market. I think the hedgies are right, best to play interest rate
directional calls though options.

Also, given the increase in
liability-driven investing by pension funds worried about their funding
status, there is an upper cap on bond yields. I don’t know what the
exact magic number is, but at a certain level (say 7%), you’ll have
pensions scambling to lock in rates. Bond bears tend to ignore this
when predicting doom and gloom on bonds. All they do is focus on the
“pending collapse” of the US dollar, which won’t happen .