Freddie Mac agrees to accept some Alt-A loans = mini bail out = badnews

[schizo2buyORnot]

To soothe market turmoil, Alt-A loans that typically fell short of Freddie’s stricter requirements will be a bigger part of the company’s activity.

http://money.cnn.com/2007/08/15/news/companies/freddie_alta.reut/index.htm

[TheBreeze]

What a kick in the nuts. We all knew this was coming but it sucks to actually see this in print. Notice that the article says that this action was taken at the request of the lenders. It’s a total f#@*@ wall street bailout. I’m sure it will be spun as helping out poor, hapless borrowers though.

[Bugs]

On a national level they’re being foolish but it might actually keep some poor folks in their homes. As far as SD’s regional market goes this is meaningless to us. Conventional loan terms are still conventional loan terms and they’re still more expensive than a teaser rate on an ARM.

The typical Alt-A borrower who couldn’t afford the 5.5% fixed rate on a $600,000 purchase in 2005 isn’t going to be able to afford a 6.5+% rate in 2007, and that $600,000 is more than likely not going to be $600,000 anymore either.

Unlike some of the other loan servicers working with loans sold to Wall Street, the GSEs are well-practiced at foreclosing on delinquent loans and expediting their resale.

[Arty]

Latest news Freddy Mac profit plunge by 45%!

[bobby]

I agree with Bugs. It isn’t going to make a difference for the vast majority of borrowers, especially in CA.
Unless Freddie is going to give a loan out at 1%, a family earning $80K still can’t pay off that $1mil house

[kev374]

As a GSE, it is a privately-owned corporation authorized to make loans and loan guarantees. It is not backed or funded by the US Government, nor do the securities it issues benefit from any government guarantee or protection.

http://en.wikipedia.org/wiki/Freddie_Mac

Freddy Mac losses are not insured for by the US Government, so I don’t see how this is a taxpayer bailout. If they assume risky Alt-A mortgages then they are digging their own grave just like the other lenders that have perished.

[cr]

I think this more of a political feel-good stunt. FMAC is not going to underwrite loans that have any hint at going bad. They’d be foolish not to learn from the countless firms that have gone Chpt 11 on sub-prime and increasingly on Alt-A.

This may help a few refi to avoid foreclosure, but chances are if they got into a loan they couldn’t afford before standards were tightened, they won’t be able to get into one now, unless the lender takes a huge hit, and lenders aren’t in business for charity.

[SD Realtor]

I agree as well that this in itself will not do much to disrupt the Socal depreciation cycle. However I don’t think that any bailout will take the form of some massive one step announcement. What worries me more is death by a thousand needles. A small program here, a state sponsored program there, minority groups claiming that an overwhelming percentage of people losing their homes is in their group and this must be halted. Service agreements being altered to allow modification of rates because investors agree to take a lower return then lose their nut altogether, politicians promising that NO AMERICAN WILL BE PUT OUT ON THE STREET as long as you give me your vote…

Even in the worst case I don’t see anything reversing the trend locally here in town. However in that same worst case I do believe that the trend can be prolonged.

SD Realtor

[SHILOH]

“Half the assets in the entire U.S. banking system—$5.9 trillion of $11.9 trillion, or 49%—are based on commercial or residential mortgages. A simple attempt to bail out those vastly overwatered bank assets with Federal credit and money, while motivated by pressure to help millions of households avoid foreclosure, would be a disaster…

These markets sold off $2.4 trillion in mortgage-backed bonds in 2006, making large profits for hedge funds and banks.”

Article appears in the April 20, 2007 issue of Executive Intelligence Review: Mortgage Crisis Threat to System Dawning on Congressmen? by Paul Gallagher
http://www.larouchepub.com/other/2007/3416mortgage_crisis.html

I posted this just to reiterate the $$ amount involved – whichI think in light of current events, speaks for itself. We are just at the beginning of this fallout.

[LA_Renter]

Thanks for the post SHILOH. Those numbers provide a good context of where we are. Everybody is obsessed with the FED and congress over how they will handle / bailout the housing situation. The truth of the matter is that all of these ideas being bandied about from increasing limits on FHA loans to slashing the Fed Funds Rate will amount to the “Mouse that Roared” if they are enacted. You basically have approximately $150 to $200 Billion in actual credit losses that have contaminated between $5 to $10 TRILLION dollars of CDO derivatives. We have to keep some since of proportionality here, the busting of the credit bubble and the resulting credit and liquidity crunch is like an angry male buffalo beginning to charge, the FED has been charged to stop its stampede armed with a B B gun (no pun intended).

The new paradigm in modern finance of spreading risk throughout the derivatives markets so as to not be too concentrated in one area has hit a major snag. Instead of spreading risk these new vehicles have contaminated the global financial market with toxic waste that no one wants to touch. So who were the freaking geniuses that thought this up?? What were you f*#king thinking?? If the end result of the new paradigm in modern global finance results in a lender giving somebody with no job, no income and no assets a $500K loan then maybe its time go back to the drawing board. I mean these people sounded pretty good on the way up, now they just look Stupid.

[SHILOH]

More FED costs to consider…

“The war in Iraq could ultimately cost well over a trillion dollars — at least double what has already been spent — including the long-term costs of replacing damaged equipment, caring for wounded troops, and aiding the Iraqi government, according to a new government analysis. The US has already allocated more than $500 billion on the day-to-day combat operations of what are now 190,000 troops and a variety of reconstruction efforts.”Analysis says war could cost $1 trillion:Budget office sees effect on taxpayers for decade,By Bryan Bender, Boston Globe 8/1/07

http://boston.com/news/nation/articles/2007/08/01/analysis_says_war_could_cost_1_trillion/

“The fiscal impact of Hurricane Katrina, the most costly natural disaster in U.S. history, shows no sign of ending.
Congress has already approved $122 billion in spending, and is now paving the way for Gulf Coast states to get billions more. As much as $20 billion for coastal restoration could come from offshore-drilling royalties in the next few decades. Louisiana has been seeking $14 billion for that purpose.” Katrina cost continues to swell
By Richard Wolf, USA TODAY, 8/22/07

[bsrsharma]

More FED costs to consider…

Shiloh: You shouldn't confuse FED with the Federal government. Those expenses you mentioned have nothing to do with FED. They are mostly borrowings by Congress that increase deficits (national debt). Treasury sells paper to get money from market. FED plays no role in that. Of course, more treasury borrowings increase demand for money causing interest rates to increase. That has an effect on increasing exchange rate of $ as foreigners will invest in $.  But it is a pain for mortgage and credit card borrowers as interest rates increase. High $ also reduces US competitiveness.

[SHILOH]

bsrsharma: Thanks for correcting me. I don’t understand the relationship between the fed gov. and the fed reserve. I just wanted to point out the other high priced projects that precede the housing “bail-out” and not enough money to go around. Are you saying that the war, hurricane clean-up and a mortgage debt bail out won’t be funded from the same source? I understand that mortgages are packaged in securities, but if the gov starts programs to bailout borrowers, will that be tax money?

[bsrsharma]

Shiloh – FED is really a very mysterious creature. Being the source of all “paper money” it is a very special entity different and distinct from government. Think of it as a “god” of paper money. It has to practice absolute scrupulousness in maintaining the value of paper money – so that people don’t lose confidence in it. That is a very tricky juggling act between economic growth and inflation.
It does not function according to U.S. Constitution – like rest of the governments. {There is no mention of FED in the Constitution!} War, hurricane are government expenses paid by US Treasury. No one knows what the phrase “mortgage debt bail out” means so far. In a worst case scenario – this has to be Great Depression like crisis – FED may buy some weak Mortgage backed securities to forestall a financial meltdown. That is what people refer to as “Helicopter Ben” dropping money. Basically FED loans out money (with no assurance of getting it back) for weak securities to keep the “pump primed”.

But, the FED can play a tricky game of tilting the balance a little by changing interest rates. That shifts the balance between savings and consumption. Higher interest rate rewards savers and hurts consumers that hurts producers causing lower employment. Lower interest rate hurts savers and rewards consumption – hence increases production – increasing employment.

[no_such_reality]

Um, minor nit, this “news” is two weeks old…

[Author]

Posts