Unlimited Government Bailout Funds for Freddie and Fannie

by | Dec 26, 2009 | Headline News | 3 comments

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    Most companies and individuals have a limited supply of funds, usually based on the decisions they make to generate income and obtain those funds, as well as decisions made on how that income is then spent on labor, manufacturing, marketing and research. Most of us do not have an unlimited ATM that we can draw on when we make stupid decisions.

    If, however, you are government sponsored entities like Fannie Mae and Freddie Mac, you don’t have that problem. The Treasury department has removed the caps on the $400 billion in bailout funds approved for the two main US GSE’s.

    The Treasury Department said Thursday it removed the $400 billion financial cap on the money it will provide to keep the companies afloat. Already, taxpayers have shelled out $111 billion to the pair, and a senior Treasury official said losses are not expected to exceed the government’s estimate this summer of $170 billion over 10 years.

    Treasury Department officials said it will now use a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. Under the formula, financial support would increase according to how much each firm loses in a quarter. The cap in place at the end of 2012 would apply thereafter.

    By making the change before year-end, Treasury sidestepped the need for an OK from a bailout.

    Considering the fact that the GSE’s have used up only $111 billion in aid thus far, and are estimated to only need $170 billion, inquiring minds want to know why the cap needs to be lifted?

    “The companies are nowhere close to using the $400 billion they had before, so why do this now?” said Bert Ely, a banking consultant in Alexandria, Va. “It’s possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets.”

    Not only is it possible, it seems quite probable, considering the fact that 40% of sub-prime borrowers and 10% of prime borrowers are now either delinquent on their mortgages or are in foreclosure. Yes, that’s two out of five sub prime and one out of ten prime borrowers for whom the SHTF as we speak. And we’ve just gone through Wave One of the mortgage fiasco, with Wave Two’s approach imminent.

    Karl Denninger sums it up in Fraudie/Phoney – What Does Treasury Know? :

    Now let’s remember that most people turn over their home about every seven years (that’s the average “holding time”), so an awful lot of Fannie and Freddie’s paper – quite possibly as much as half – is contaminated.

    Still feeling good about a housing recovery?

    If you’re wondering how bad this is in the so-called “prime” loans the Mortgage Bankers Association lays it all out:

    6.84% of prime loans are now delinquent (at least one payment behind but NOT in foreclosure) and 3.20% are in foreclosure.  This means that almost 1 in 10 PRIME LOANS are either late or in foreclosure.

    FHA loans are running close to 20% between delinquent and foreclosure-in-process.  That’s one in FIVE.

    And of subprime loans, 41% are either delinquent or in foreclosure.  Forty one percent!

    A mortgage that is at least two payments late almost never “cures” – that is, once you miss a second payment you’re virtually assured to eventually be foreclosed.  (Some one-payment misses are legitimate errors or very temporary cash-flow disruptions.)

    There is no recovery in housing. This will be evident by the end of 2010. And now, with Fannie and Freddie’s caps being lifted, one must ask the question, “How bad is this really going to get?”

    That prediction is a difficult one to make, but we’ll give you one piece of advice we are adhearing to right now. If you want to buy a home right now, wait about a year or two and you might be able to buy it for 10% – 20% less than what it is selling for today.

    The coming re-collapse in real estate is not going to be pretty, and can potentially get get really bad. It is hard for most people to wrap their brain around because they have not seen this in America in their lifetimes, but the real estate market really can get crushed so hard that prices may drop 50% to 80% from their bubble peaks (in real terms, of course)!

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      3 Comments

      1. Rick Blaine

        This is going to end very, very badly.

      2. Paul

        …..And the band played on  ( during the sinking of the Titanic)

      3. Jeff Green

        We’ll see how this update can affect the mortgage business.

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