Posted by: txtincorporated | May 12, 2008

Your Rock or My Hard Place?

As Real Estate markets across the country continue to plummet, and lenders continue struggling to find investors willing to buy the loans they’ve written, Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac look like almost all that’s left backing consumer home mortgages.  The Federal Housing Administration (FHA) and Veterans Administration (VA) are too specialized to handle the loans most buyers need, and Wall Street is still busy in the ER having its stomach pumped.

Our last, best hope
And now the Times reports that even the GSEs are looking shaky on their pins.  Not that they’ve been paragons of financial health, but what happens if they wind up on life support along with the vast array of casualties that used to be the secondary mortgage market?  Not a pretty picture.  We’re talking a return to the home finance landscape of 1937:  go down and talk to Mr. Potter at the bank, Jimmy Stewart.

Except that now there is no Mr. Potter, because the bank is no longer a small, local institution.  It’s a vast multinational.  When you get turned down because they can’t safely hold loans in portfolio for anyone but high net worth borrowers with credit scores over 780, maybe you can deliver your soliloquy over the 1-800 line to “Anthony” in Bangalore.

And while you’re at it, Mr. Smith, get ready for a taxpayer bailout in the hundreds of billions.

Vandelay Industries
Of course, the prospect is hardly surprising.  The FNMA (Fannie) and FHLMC (Freddie) have not enjoyed a reputation for prudence in the past decade.  For those with memories longer than the usual attention span of the press, it’s easy to remember the clamor with which the two, heavily regulated GSEs begged to attend the subprime party in ’06, even as the festivities went from louche to lurid, and the few sober guests nervously eyed the exits. 

For even hoarier minds able to reach all the way back to the beginning of the millennium (yes, that’s seven whole years), accounting scandals will come to mind that gave stiff competition to Enron and WorldCom in the sheer magnitude of their duplicity.  To paraphrase Jerry Seinfeld, “and you want to be my mortgage-backed securities salesman!”

Hope, indeed
And therein lies the problem facing policymakers and the housing and lending industries.  On the one hand are credit and housing markets barely clinging to stability as liquidity shock and homebuyer anxiety feed back into each other.  On the other hand, a pair of last resorts who inspire as much dread as hope.  

And the companies themselves are as bullish as ever.  In fact, their assertiveness reminds me of nothing so much as a New Century or a Countrywide in the early months of 2007.  They already hold almost $720 billion worth of subprime and Alt-A loans which are now going bad with all the rest; their capital requirements have now been lifted despite reserves that are already less than one fiftieth of their obligations; and they’re demanding that regulations imposed after their last debacle be loosened as Congressional Democrats and Republicans alike wonder where else to turn.  

Is this a good idea?  Do we have a choice?