Where has common sense gone?

[Jim Brubaker]

I remember back to the ‘70’s when you heard the statement, “A house will be the worst investment you ever make, but it is a necessary one.”

Also there was the fact, that there was an added premium for renting over purchasing a home. You paid more for the option to rent a house over buying it. You could pick up and leave at any time, so to rent meant paying more than a homeowner would pay.

There is also the concept of saving money for retirement. Savings means that you surrender buying now, for buying later. This saving, is how humanity as a group, finances retirement and investment.

Now when a house appreciates 400,000 dollars, where do this savings by not consuming now, enter into the picture? It doesn’t.

If everyone can buy a house and sell it to someone else for more money, what would you call it? A chain letter might be a good label.

Now, turn on your radio, and listen to “have you recently had a bankruptcy and need to refinance….” Somebody is buying these loans, and you and I know that they are probably very high risk if (or when) the housing market drops.

You want to buy someone’s house and the price is outrageous, say 800,000. You may get back 80,000 dollars from the seller, and zero down, what a deal. The joke is in qualifying for a loan, can you fog a mirror?

There is a problem here, I studied the Great Depression, and I was always confused as to why people would finance a home for only 5 years back then. Then when you read a little further, you discover that these were interest only loans. What the hey, they will be worth twice as much tomorrow and then we’ll flip them. The loans were called and NOT RENEWED -—real tough luck.

Now you see where we are at today, a place where we have been before, but there isn’t anyone alive that has first hand experience, and therefore no déjà vu.

The statement, “There is no housing bubble,” could be replaced with “Your house is not going to provide you with a retirement income, rather a bankruptcy you never saw coming.

I’d bet 5 to 1 that Fanny Mae is bankrupt in two years. Not because they haven’t been doing their job, but because they’ve been doing it way too well.

[KingKong]

I do not think so.

With the securilization of the mortgage bonds, the risks are on the mortgage bond holders.

[CharlieG]

You raise some interesting points. The housing market has been converted into a giant pyramid scheme, and the people being punished at the bottom don’t realize it quite yet (because they are just getting out of high school and college now).

The lending schemes have helped prop up that very last level of buyers, but it is close to being done now. It is regretable, because this whole thing should have been shut down a couple years ago with less damage. Now it stands to collapse the economy with it.

[Jim Brubaker]

Right now Fanny Mae guarantees their packages that they sell to the bond holders. I don’t think that that can last.

These Mortgage bond holders, are probably 401k’s, IRA’s and other non Federally insured retirement accounts.

They’ve taken 6 trillion dollars of real estate and revalued it at 12 trillion. Marking that to market could be very painful for everyone of us.

[KingKong]

Jim,

Could you ellaborate on exactly how Fanny Mae works?

Originally I thought they more function as a bond broker that they buy mortages and sell to investors. You seem to imply that they also has a huge mortgage holdings and also guarantee the mortgages they sell. Please shed more lights on this. Thanks.

[Jim Brubaker]

What is Fanny Mae?

Congress created Fanny Mae and Freddie Mac. Their purpose was to buy bank loans made for purchasing a house. A bank or lender only has so much capital. Once its reaches a limit of assets -deposits, it cannot loan any more.

At this point the loan is sold to Fannie Mae and the bank gets their capital back and can reloan the money. They get to keep a management fee say 1% for watching over the loan (I could be wrong on this), but as I understand it, if they can turn over say 1,000,000 10 times in one year they can make 10% on management alone.

Fannie Mae packages these loans in packages of say $10 million and sells them on the open market. Now from what I understand, if the package doesn’t perform as expected, it can be returned or the bad stuff is exchanged for good stuff.

Mind you there is an expected number of loans that will be payed off early and and expected number of defaults.

Now the clincher is, that since it was created by the Congress, there is an implyed guarantee that it cannot go broke. That is why people are so eager to buy the packages. Your 401k is not guaranteed and neither is your IRA.

Now say they get 1% off of each transaction also, every piece of crap that is rubber stamped in a rising economy isn’t going to smell bad in a rising real estate market. It will be sold at a profit and put back into the pool.

With the real estate market going up, their ability to accept all and every loan doesn’t really come into question. Lets make money and lots of it.

Its when the market starts to go down. From what I have read between the lines, is that Fannie Mae’s packages to investors lately have a higher rate of default.

The question that is arising; are they taking their bad loans and throwing them into a new package for investors, giving them a few months of lag time before they are returned as bad? They are being accused of this presently although indirectly. Congress has told them to divest some of their holdings.

There is also another thing they can do since they are so big. They can take an options position on the market, put or call and then sell their package at a loss and make a bundle on the position. (This is not what they are really doing, their method is very convoluted, this is just a way of simplifying it. The Wall Street Journal had an article on how they could lower interest rates that was more definitive).

Hope this is of some help to you

[Anonymous]

Americans are soooo house-crazy. Once they buy a home they then proceed to go shopping and fill their houses with ‘stuff’. I have seen people say that they need to add rooms to their houses because there is no more space for their stuff — one half of the garage is already taken — or they want to buy a bigger home.

Perhaps, until people are willing to settle for their ‘needs’ as opposed to ‘wants’, I guess we will repeat this boom/bust cycle repeatedly…

[Author]

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