The irony is those that understate the foreclosure problem says it’s around 2% or fewer people defaulting. If that’s true why should the other 98% in a sense be punished for being fiscally responsible?
Here’s a seemingly delusional article from a guy who thinks the plan will work:
Bush’s mortgage bailout just might work
If insider buying is any indication, home builders and financial-services providers expect dramatic reversals of fortune in the coming months.
By Jon Markman
With his stunning decision last week to let a federal housing agency guarantee mortgages of distressed homeowners, President Bush appears to have launched a “surge” in the financial markets to match the Pentagon’s efforts in Iraq.
His plan seems straightforward: First, use winks and nods to convince his top Federal Reserve appointee, Ben Bernanke, that it would be in the best interest of both men to slash interest-rate targets by as much as a percentage point, and to do it quickly so the move has time to work its magic before the next election.
Second, use every lever available in the executive branch to provide a direct, emphatic bailout to overstretched mortgage holders at risk of foreclosure.
And third, dump as much of the financial burden for paying for the rescue of voters, aka homeowners, on the nation’s banks, rather than on taxpayers.
If the market comes to believe his plan will succeed — and the plan just might — you can expect a rally in the shares of financial-services providers and home builders that will stun even the bulls, with big-cap banks such as Wells Fargo (WFC, news, msgs) and SunTrust Banks (STI, news, msgs) rising as much as 25% over the next 12 months and some beaten-down home builders doubling in value.
Bush bailout No. 2
Bush’s surge solution for homeowners would, ironically, take a page from his father’s rescue of Latin American governments and bankers in 1989 with a set of financial instruments that came to be known as Brady bonds. In that case, U.S. banks had lent billions of dollars to Latin American companies for use in economy building without obtaining sufficient collateral.
After thousands of loans went into default, it became clear that the money had been siphoned off by kleptocrats and crooks, and there was therefore no cash flow available for repayments. When U.S. banks clamored to be made whole, Latin American governments took over their citizens’ obligations but did not have the ability to make payments, either.
Richard Bove, a banking analyst at brokerage Punk Ziegel, points out that the first Bush administration then had two choices: support U.S. banks and demand that the countries tax their people to pay back the loans, or blame the U.S. banks for making idiotic loans in the first place, force them to forgive the debts and let the crooks keep their booty.
President George H.W. Bush chose the latter in the interest of hemispheric amity and stability, and some creative geniuses in a Treasury Department headed by former Wall Street banker Nicholas Brady figured out a way for the governments of Mexico, Argentina and Brazil to convert the bad loans into dollar-denominated bonds that could be sold elsewhere. In effect, Bush 41 whisked bad credits off balance sheets south of the border with a stroke of a pen.
Now Bush 43 faces the same dilemma, only this time the bad loans are right here at home. His choices: He can thumb his nose at lenders who made stupid loans, castigate brainless homeowners who took out mortgages they could not repay, jail fraudster mortgage brokers who exploited a loosey-goosey system to generate exorbitant fees — and stand smugly by as families in Republican strongholds across the West and South lose their homes. Or he could follow his dad’s Brady bonds solution and basically forgive and forget by launching a mortgage bailout of unprecedented scope.
Ginnie and friends to the rescue
Based on Bush’s announcement last week of a new Federal Housing Administration program to help around 80,000 at-risk homeowners obtain debt relief — an effort modest in scope but stunning in its reversal of prior policy — it’s clear he will go for the latter in the interest of helping his party avoid a wipeout next November.
Bove notes that a precedent for a widespread mortgage-assistance program lies in the Emergency Home Finance Act of 1970, which established these mechanisms to help challenged households:
• Banks would originate mortgage loans with 1% interest rates.
• The Federal Housing Administration and Department of Veterans Affairs would insure the loans against loss.
• The Government National Mortgage Association, aka Ginnie Mae, would buy the mortgages at par from the banks, allowing the banks to make a small profit.
• Ginnie Mae, taking a sizable loss, would then sell these loans to Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) at a discount so that the buyers would earn reasonable yields.
• Fannie and Freddie would fund these purchases with low-cost, government-guaranteed debt.
As a result, Bove speculates, tens of thousands of at-risk homeowners would get to keep their homes. Ginnie Mae would lose tens of billions of dollars that would be repaid by banks and taxpayers at a pace and in a manner similar to the Iraq reconstruction effort. Fannie Mae and Freddie Mac would end up with huge increases in the sizes of their portfolios. And, most importantly, the nationwide housing collapse would disappear as an election theme for Democrats.
Although this may seem a bit far-fetched, insiders in the financial services and home-building industries are buying their own companies’ shares these days at a record pace — essentially betting that something like this scenario will transpire. Home-building companies’ executives bought $15.9 million worth of their firms’ annihilated shares in August, the largest monthly purchase in the sector since Thomson Financial started keeping track in 1990.
The last time that insiders even came close to this level of buying, in September 2001, the sector rose 55% in value over the next six months while the S&P 500 Index ($INX) advanced 10%. Thomson analysts suggest raw valuation is a factor in insiders’ zeal for their stocks — as the price-to-book value of the sector hit 0.75 last month, the lowest since October 1990 — but clearly a larger motivating force is at work.
The bottom line is that Bush has ample tools at his disposal to make the foreclosure crisis vanish if he is willing to make a financial and political commitment on a par with his pledge to stabilize Iraq. With almost one in every 7.5 housing units in the United States empty due to overbuilding during the easy-money years, it would take years for enough demand to emerge under normal conditions to soak up supply. But don’t underestimate the president’s capacity and motivation to speed up the process with a surge of looser credit and check writing.
Fine Print
Wells Fargo, now trading at $36.50 a share, could easily go to $50 in a year in this scenario, as its competition from the likes of Countrywide Financial (CFC, news, msgs) and lesser mortgage bankers and brokers have been thrashed and it has its pick of the best talent fleeing those firms. SunTrust, now trading at $78, could go to $95. . . .
The three home builders with the most insider buying are Meritage Homes (MTH, news, msgs), where one insider bought $12.9 million in shares in August; Brookfield Homes (BHS, news, msgs), where three insiders bought $1.4 million; and Lennar (LEN, news, msgs), where one insider spent $845,100. Shares of these three builders are down 63%, 49% and 46%, respectively.
