While there were many threads of thought that could turn into policy when Congress is presented a proposal in January 2011, I rub my Conjecture Ball and foresee:

The Government sponsored artists currently known as Fannie and Freddie shift from hybrid private/Government controlled entities to straight up Government controlled.  OK, it’s not really speculation when Timmay Geithner states: “We’re not going with a system where private gains are subsidized by taxpayer losses.”  Anyway, they abandon the practice of implicitly guaranteeing (~90% of all) mortgages today in favor of an explicit guarantee that reads like an insurance policy.  So, the Government will provide mortgage insurance for a fee instead of the Freemium model currently enjoyed by financial institutions.  That model didn’t work out real well for anyone except big ass banks.  Our Government hasn’t been real savvy when it comes to financial engineering…free really shouldn’t be the new business model, with all due respect to Chris Anderson.

Government Sponsored Mortgage Insurance (GSMI).  This is interesting, really.  The premiums for something like GSMI would be paid by the individual mortgage holder and the policy would insure the actual asset, not the business entities that hold them…suitably addressing Mr. Geithner’s statement above.  Fannie and/or/nor Freddie can thus go back to performing the duties they were essentially created to carry out: To create affordable housing for the masses and mitigate risk on their behalf.  They could still maintain, even increase their influence on the market whilst scaling back on the actual buying of mortgages…insuring parts thereof instead.  Theoretically this shift would provide enough incentive and security for the private sector to gradually re-enter the mortgage space and fill any vacuum created by the Governments very, very gradual decrease in purchasing mortgages.  A new fee like GSMI means other fees and current tax deductible benefits currently innate to a mortgage take a hair cut…like the mortgage interest deduction.

The powers that be are focused on providing suitable, affordable housing…just not necessarily through home ownership.  As such, rental market dynamics are being primed for adjustments. Multi-family housing loans made accessible and desirable due to favorable GSMI terms seems highly plausible.  There are likely to be other subsidies into the rental market from initiatives like PETRA to help shore up this sector of affordable housing.

If you continue to listen closely and look closer, the landscape is being primed for The Ultimate Fix…

“The only way to fix it is to flush it all away.”

One of my favorite bands goes by the name of Tool.  They create deep, dark, complicated music, but they are an acquired taste…not for everyone.  The following is a verse from one of their songs appropriately named ‘Aenima‘  **Bad Language Warning**  Skip down if you are offended by profanity.

Some say the end is near
Some say we’ll see armageddon soon
I certainly hope we will
I sure could use a vacation from this
Bullshit three ring circus sideshow of  Freaks
Here in this hopeless
fucking hole we call L.A.
The only way to fix it is
to flush it all away
Any fucking time, any fucking day
Learn to swim, I’ll see you
down in Arizona Bay.

So, nix the reference to Los Angeles and ‘Arizona Bay’, fill in metaphors of choice and it sounds like they’re waxing philosophical about the economy, the housing market specifically.   Rather prophetic too since this is whats about to happen…actually its already started.

Over the next six or so months the housing market will continue to tank as financial institutions release huge amounts of distressed (shadow) inventory into the market creating supply that far exceeds the ability to consume.  This will exert extreme downward pressure on property values.  The number of banks will continue to contract.  Homeowners will continue walk away from their houses.  The National Association of Realtors will continue to tell anyone who is listening that its a great time to buy.

These sour conditions will be amplified with the seasonal slowdown to such a point where everyone is clamoring for additional Government ‘intervention’ or stimulus or Print More Money!!  Except I don’t think there will be much, if any, of that.  There really isn’t much left to be done except to allow the existing system to flush itself and prepare for what comes out the other side.

Whats on the other side of this economic enema?  Explicit Government guarantees via the artists formerly known as Fannie and Freddie to keep the cost of credit within reach of the qualified rather than the entitled, increasing private money participation, and a retooled rental market system to support all the displaced homeowners.  Dead inventory will be channeled off through a series of initiatives like HomePath.  The housing market and property values drop below this ‘double dipped’, false floor we’ve been dancing on for almost 2 years…and there is no where to go except up.  Which equates to a real recovery and sustainable growth which will lead to inflation and all those other problems that we can worry about that sometime post 2012, assuming that whole Mayan prophecy thing doesn’t absolve us of any future responsibilities.

This painful process constitutes a necessary de-leveraging of an economic system thats based on a debtor society which has been taught to borrow/spend beyond it’s means.  While it may hurt and otherwise cramp our very American style, its really not the end of the world as we know it.

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The Ultimate Fix

However, there are some interesting facts to consider besides traditional logic…

Contrived Attrition?

The ironic part is that the forces that helped bring this market to its knees may be the same that build it back up.  Let me explain…

Back in July 2008 I questioned whether some of ‘this’ wasn’t a bit contrived…I still do.

These two posts written in July 2008 speculated on possible alternative reasons Fannie and Freddie stock was plummeting…special note to the link citing the  Financial Accounting Standards Board decision to favor a simpler accounting method for Qualified Special Purpose Entities that serviced mortgages into securities for the benefit of adjusting distressed borrowers ARM’s.  What?  In a nut shell, at the end of the day, lenders wouldn’t be able to bury losses from the public’s eyes like they used to and their financial reports would suffer.

Coincidentally or not, on July 6, 2007 the SEC eliminated the ‘Uptick Rule‘ which was implemented in 1938 to curb the type of concentrated short selling of stocks where speculators make money when the stock price drops.

New accounting methods for financial institutions will show increased losses on paper, naturally priming the pump for plummeting stock prices.  Sans uptick rule, speculators smell bearish conditions and short stocks with fervor, driving companies and portfolios values into the ground.

By October 2008 blood was in the streets and investors start shorting financial institutions stocks in historical volume, acting as if they were…going out of business…? Fannie and Freddie are sequestered from the chaos.

Conventional money (401(k), Mutual Funds, regular people etc) got the hell out of the way and out of the market.  Institutional investors ate each other for lunch. Everything went ‘Pear Shaped’.  Many stocks are today worth less thah 50% of their value from 18 months ago.

The Government announces plans that they are going to Bailout ‘the worthy’ using a hodge-podge of methods, some useful others akin to little more than a circle-jerk, including buying preferred and common shares of these floundering financial (and related industry) behemoths that are ‘too important to fail’.

The Return of ‘Favorable’ Accounting and Keeping The Bears on a Leash…

March 10th 2009…The Dow surged 6%+ on the following news (Courtesy Wall Street Journal)

Federal Reserve Chairman Ben Bernanke said in a speech it was important to address the valuation of illiquid assets. Banks want leeway in accounting for illiquid holdings, and investors were encouraged by Mr. Bernanke’s statement, though he said that he wouldn’t support the suspension of mark-to-market rules.

“Bernanke said the magic words — that the Fed was considering looking at accounting standards,” said Fred Dickson, market strategist at D.A. Davidson.

It would appear after looking at yesterdays market swing that the accounting standards that Mr Bernanke is alluding to will favor banks, shoring up value in investors eyes, hence the mini-rally. Were his words transcribed as ‘We’ll let you get back to some creative accounting soon’

Barney Frank also stated the SEC may reinstate the ‘uptick rule’ as early as April, which has to re-establish overall market confidence by keeping the Bears on a bit of a leash, mitigating the extreme volatility.

Is it That Crudely Simple?

Was this all contrived to flush out all of the ‘toxic’ securities faster rather the wade in the muck for years?  Where the floodgates purposely opened only to close them back up when the time was right?

I’m often asked when I think the real estate and mortgage market will bottom out.  My answer usually coincided with the end of the 2-5 year period after NINJA (No Income/Asset/Job) loans were banished from the marketplace…around September 2007…so September 2009 is when support could naturally start to manifest.

There are now a myriad of artificial factors suggesting this ‘time to bottom’ could be ‘moved up’.  Coupled with the news yesterday, it very well could be sooner (end of ‘09) rather than later (end of ‘12).

A real sign that the markets are back on track would be when lenders will get back to sensible underwriting standards.  From 2002 to 2007 mortgage underwriting was as fast and loose as a brothel in Amsterdam.  2008-current, you can’t pull a pin out of a lenders ass with a John Deere tractor they’re so tight.  There is a middle ground, which is a topic for another post…

I’m not here to call the beginning of the end to these crazy economic times, there is still a looong way to go with many details to be worked out and ups/downs in front of us…I just can’t help but wonder aloud if aspects of this ‘economic meltdown’ weren’t contrived to push the crap out of the system quicker, knowing full well there would be (justified? acceptable??) collateral damage…It sounds ridiculous to say, yet resonates as plausible to the (my) mind…

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Contrived Attrition? Washingtons Play in The Fall and Rise of Wall Street

…discussing the Fannie and Freddie Government takeover news…

Image Provided by AgentGenius (Probably Lani)

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I’m Over At AgentGenius Today…

We’ve seen The Flop…which may have been initiated by the Financial Accounting Standards Board almost 6 months ago.

From yesterdays post:

If I’m reading the table correctly, Fannie and Freddie’s stock is plummeting because stock holders are staring at the prospect of getting diluted by capital infusions (for a number of reasons) and dumping accordingly.

Now The Turn…

Read today over at Blown Mortgage:

…Freddie Mac, is mulling a possible $10 billion equity round to raise capital…

I don’t know how you raise that much cash at such a terrible stock price without completely diluting the hell out of the rest of the shareholders; but onward I say.

Is it me, or does this seem a bit contrived?  Stay tuned for The River…

Also See:

Inman News

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More Texas Hold’em With Freddie

If I’m reading the table correctly, Fannie and Freddie’s stock is plummeting because stock holders are staring at the prospect of getting diluted by capital infusions (for a number of reasons) and dumping accordingly.  The financial picture behind these two mortgage giants isn’t exactly rosy and a few moving parts (private mortgage insurance companies, sustained ability to provide short term debt) need to hold steady, but both have enough resources available to weather the storm.

A given corporations stock price related to the performance of the underlying business are disjointed at best.   Case in point:  On April 24, 2002 AOL/Time Warner reported a $54 billion write down, at the time the single largest quarterly loss for a corporation and roughly the equivalent of New Zealands GDP.  On April 25, 2002 the stock price rose almost 1%.

Fannie and Freddie’s stock prices may have been trampled, but this isn’t a direct reflection of whats going on inside the companies and/or their ability to sustain through these turbulent times.

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The Fannie Mae and Freddie Mac Poker Game

From the Baltimore Business Journal…

Under the new code, mortgage brokers will be prohibited from selecting appraisers, and lenders will be prohibited from using in-house staff to conduct initial appraisals, among other things.

Lenders will also be prohibited from using appraisal management companies that they own or control.

Too early to determine what the new protocols will be, but will be sure to update as I find out…

Also See:

Bloomberg

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Fannie Mae, Freddie Mac agree to new appraisal standards