Don't Bet On It (Mass Forgiveness)


I ain’t taking this bet…

Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion.

 Uh huh.  Ok, let’s do a bit of thought on this.

First, 30% of the people in this country own their homes outright – no mortgage at all.  Of the remaining homes, about 30% are underwater.

So that’s 30% of 70%, or 21% of the total.

Now subtract all those who are not paying (maybe half of the underwater loans?) and you get somewhere around 10% – perhaps 15% at best – of the homeowners.

The other 85% won’t get “helped”.

Politically, this is suicidal.  It is especially suicidal among older voters (who vote more often!) as they’re more likely to have paid-off houses (or houses where they’ve been paying for a decade or more) than younger people.  This wouldn’t help Obama and the Democrats, it would utterly decimate them both come November.  Count on it.

Second, this would trash the hedging that is currently used in the mortgage security market.  That market would become dramatically overhedged, which could lead to an instantaneous and nasty dislocation.

Third, it won’t do anything for prices – in fact, it likely would push them downward, as it would permit “clearing” of homes that currently can’t be sold (and thus do not establish a market-price mark) due to being underwater. 

Finally, where ‘ya gonna get the $800 billion?  We’re already into the bond market for $926 billion this year.  Treasury comes to market with that much again (roughly) and we might see some “interesting” effects in the Treasury market as well – none of them good either.

I don’t buy it.

Yeah, I know, Turbo Timmy allegedly “can” due to his pronouncement and capacity to take “unlimited” losses in Fannie and Freddie through the end of next year.  But he’s still constrained by Treasury’s ability to fund their activity, which means selling bonds.

Now on the back of an equity market crash (and I do mean crash – as in straight down, 25% or more) that scares the living bejeezus out of everyone and drives them into the Treasury curve?  That might give him the room to do it, but there’s a problem with that too – he’s only going to get one more bite at this apple, and I bet he wants it to go after the 401k money as a means of temporarily stabilizing government funding (for a year or two anyway.)  If he squanders that opportunity here he’d be precluded from doing it again.

This sounds like one of those rumors that people start when they smell smoke and are looking for an exit door.

The Market-Ticker