[quote=bearishgurl][quote=CA renter] . . . IMHO, we are going to see trillions of dollars in losses within the next 5-10 years, and the taxpayers will be 100% responsible for these losses, as opposed to the losses being borne by the private industry that took all the risks in the first place.[/quote]
CAR, I would like to study your prediction further when I get a little more time because I am also seeing several recent “refinancings” from “private $$” to “MERS.” This is a disturbing trend to me.[/quote]
The SPAs are the cornerstone of the financial support that the Treasury is providing to Fannie Mae and Freddie Mac. The SPAs effectively provide a very long-term federal guarantee to existing and future debtholders. As amended on December 24, 2009, each SPA commits the Treasury to provide additional support to each Enterprise through the end of 2012 in exchange for senior preferred shares. Treasury’s financial commitment now equals the greater of $200 billion or $200 billion plus cumulative net worth deficits experienced during 2010, 2011, and 2012, less any surplus remaining as of December 31, 2012. Treasury’s commitment protects the credit interests of all holders of the
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Enterprises’ senior and subordinated debt and MBS with no expiration date.
On Tuesday, the Department of Housing and Urban Development (HUD) released its annual report on FHA issues to Congress. Among other things, the report stated that FHA loans accounted for nearly 40 percent of all purchase mortgages, for the period of November 2009 – November 2010.
The Ups and Downs of FHA Market Share
In 2005, the FHA’s market share of purchase loans was closer to 5 percent (when measured by households served). So they are clearly insuring more loans today than just a few years ago. But if we go back even further, we can find a similar pattern. In 1993, FHA’s slice of the purchase-loan mortgage market was around 15 percent.
[Incidentally, this also shows what I’ve long been saying…the peak of the credit bubble was fueled by the PRIVATE lending market, not the govt-backed market. -CAR]
The Congressional Budget Office calculated in August 2009 that the companies would need $389 billion in federal subsidies through 2019, based on assumptions about delinquency rates of loans in their securities pools. The White House’s Office of Management and Budget estimated in February that aid could total as little as $160 billion if the economy strengthens.
If housing prices drop further, the companies may need more. Barclays Capital Inc. analysts put the price tag as high as $500 billion in a December report on mortgage-backed securities, assuming home prices decline another 20 percent and default rates triple.
Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, said that a 20 percent loss on the companies’ loans and guarantees, along the lines of other large market players such as Countrywide Financial Corp., now owned by Bank of America Corp., could cause even more damage.
“One trillion dollars is a reasonable worst-case scenario for the companies,” said Egan, whose firm warned customers away from municipal bond insurers in 2002 and downgraded Enron Corp. a month before its 2001 collapse.
Ginnie Mae is entirely owned by the government, while Fannie Mae and Freddie Mac were seized by the government in 2008 in order to avoid insolvency. The mortgage giants purchase loans from mortgage servicers and originators in order to provide liquidity to the housing market and encourage home ownership and lending. Together with the Federal Reserve’s purchase of $1.25 trillion worth of mortgage backed securities, the GSEs helped keep the housing market afloat and mortgage rates low throughout the financial crisis.
The three mortgage giants had a market share of 98 percent of the secondary market in the first quarter of 2010, a decrease from 99 percent in the fourth quarter of 2009. Ten years prior, the three had a 55 percent market share. Fewer and fewer lenders are keeping mortgages on their own books, which illustrates just how little private capital exists in the housing market.
This also shows the enormous risk exposure the American taxpayers have to a downturn in the housing market, which is stabilizing but still in a very precarious position. So far, we have provided $145 billion worth of funds to Freddie and Fannie since their seizure. The Obama Administration pledged an unlimited amount of money to back the GSEs. If anything goes wrong, taxpayers are stuck with the bill.
It isn’t as if regulators don’t understand the problem. Earlier this year they quietly asked Congress to provide up to $500 billion in Treasury loans to repay depositors. The FDIC can draw up to $100 billion merely by asking, while the rest requires Treasury approval. The request was made on the political QT because, amid the uproar over TARP and bonuses, no one in Congress or the Obama Administration wanted to admit they’d need another bailout.
But this subterfuge can’t last. Eighty-four banks have already failed this year, and many more are headed in that direction. The FDIC said it had 416 banks on its problem list at the end of June, up from 305 only three months earlier. The total assets of banks on the problem list was nearly $300 billion, and more of these assets are turning bad faster than banks can put aside reserves to account for them. The commercial real-estate debacle is still playing out at thousands of banks, even as the overall economy bottoms out and begins to recover.
Meantime, even as it “resolves” and then sells failed banks, the FDIC is also guaranteeing the buyers against losses on tens of billions of acquired assets. This is known in the trade as “loss sharing,” which is another form of taxpayer guarantee that taxpayers aren’t supposed to know about. Most of the losses won’t be realized if the economy recovers. But this too is a price of taxpayers guaranteeing deposits. Even as Treasury and the press corps broadcast that the feds are making money on TARP repayments, these guarantees go largely unnoticed.
March 31 (Bloomberg) — The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.
[From 2009, so will try to find more recent data. – CAR]
