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Friday, February 11, 2011

The Government Announces: We Need Giant Hot dogs that Cure Cancer and Sing Show Tunes

Today the government sent a shout out to Fannie and Freddie:  We need to reduce your mortgage exposure by almost 50% giant hot dogs that cure cancer and sing show tunes..
Through this reform, the bad twins Fannie and Freddie, will be reduced from 90% of the mortgage market to 50% of the mortgage market.  This will be done by raising down payment requirements and encouraging private investment into the mortgage market installing innovative micro-chips in the hot dogs that sing show tunes in your belly to kill cancer cells.
Timothy ‘Paper Tiger’ Geithner called the mortgage giants ‘Government Backed Hedge Funds’ based on their actions during the subprime mess.  Figures from The Congressional Budget Office estimate that the tax payer cost of Fannie and Freddie will cost $380 billion from 2008 until 2020.  From Geithner, this reform Hot Dog Treatment will take some time make smiley faces appear out of nowhere if you are riding a unicorn on the moon, and will need the support of the private securitization market robot monkey people that turn human farts into bacon cheeseburgers.
If you can’t tell, I think this reform idea of Fannie and Freddie is the most ridiculous idea from the newly formed department of absolute mania… I love watching politicians try to control capitalism.  I thoroughly enjoy it when reform is presented (like this) that has not been thought out what-so-ever in real terms.  Saying that you can reduce Fannie and Freddie to 50% of the mortgage market from 90% of the mortgage market is about as realistic as telling Pfizer that they have 12 days to make giant hot dogs that cure cancer by releasing cancer fighting micro-chips that sing show tunes.  Mania!
Housing is as fragile as it has ever been right now—the market continues to depreciate despite massive intervention from the government in terms of interest rate manipulation and tax credits.  You would think that housing would magically pick-up when rates fell, but there is ONE catalyst that has been left out:  MORTGAGE CREDIT IS HARDER TO SECURE THAN PURE COCAINE AT A MORMAN PICNIC
The #1 reason that housing boomed in the 2000s was expansion of credit—that is it.  Nothing else. 
Private market securitization 101:  How we created the housing boom:
1)      We gave 100% LTV (loan to value) loans to tweekers with no income from 2003ish to 2007ish.
2)      We game 125% loans to people with or without income from 2003ish to 2007ish.
Today it takes an act of god (not the 2005 housing appreciation gods) to get a loan at loan at 80% LTV with fully documented income and an anal probe.
HOUSING BOOM MAIN ISSUE:) lending standards were only as strict as the rules at a divey strip club.  I have seen some sh*t and heard some stories about people at strip clubs.  Everyone can see the bouncer that tells the guys, ‘Hand’s off,’ as they cop a feel while trying to stuff $2 bills down some acne-faced hoe’s garter belt, but what happens behind the closed doors of the lap dance room are not to be discussed, nor are the actions to be run by the manager in regards to the house rules (or so I have heard…).  Lending in 2003 – 07 was done in the same fashion.  On surface, the loans looked good—they were almost all packaged as highly rated loans and the credit scores were all in the upper realm, or they were sold as lower grade loans. 

This, like the bouncer, is what lenders wanted the investors to see.  When the doors were closed, the real mortgage machine was being worked.  Many loans were brokered to one lender and turned down on a full doc, to be quickly turned to another and written as a stated doc or no doc loan.  If 28 year-old Suzy 2nd grade teacher could only prove $45,000 yearly with bank A, then screw bank A!  All you needed was bank B to accept $90,000 on a stated income deal and Suzy could GET THAT INTEREST ONLY ARM LOAN on a $600,000 house that she deserved!  I mean why not!  Suzy has been out of school for 5 years, and for 3 of them she didn’t even have to have a roommate to split the $800 rent.  And if bank B didn’t like the inflated salary then the lender simply raises the middle finger to bank B and sends the deal to bank C with no income, assets, or job history.  All bank C requires is a credit score and Suzy never missed a single payment on her Victoria’s Secret card (mind out of the gutter boys—Suzy remarried in 07 after the foreclosure).  Think those banks are all out of business?  Some of them are, but you trust your checking and savings today with some of the same players that handed Suzy the keys to that home in Las Vegas. 
This was the PRIVATE SECUURITIZATION MARKET during the housing boom. 
And that was how the game was played with the Non-GSEs.  We opened the flood gates to borrowers who should never have qualified for homes… and you know what—they bought like CRAZY.  If you have ever watched Caddyshack II, you have seen what happens when you let anyone into an exclusive club—shit gets ugly when the have-not’s try to mingle.  With more buyers than ever before, the market took off… high rates or low rates… didn’t matter. 
The #1 reason the housing market rose in the fashion it did was due to the availability of easy credit, high LTV loans to people that should have never gotten loans in the 1st place.  When this spigot was turned off due to massive defaults and tighter lending guidelines in 2007, the pool of never ending buyers (middle school janitors that overnight became $100,000 earning sanitation engineers) went ‘poof.’ And so did the housing market.
I say bring it!  I know that there will never be a housing boom like the 2000s again, and I know that crazy-whack-funky Subprime loans will not return, but if the government WANTS private market securitization they better ACCEPT that there will be some further pain in the housing market because of it.
Private securitization will not lend money for 30 years at low rates.  This is why most subprime was written as Arm loans, or the fixed rates were 2-3% over market rates.  Private money cannot tie up all their funds for eternity.  If the government wants private money it will be in the terms of short term ARM loans from 1-3 years, written with heavy prepayment penalties with massive adjustments after the fixed period.
Private securitization will not accept these losses again.  Do we not learn from our mistakes?  Private money will do the same thing to mitigate the losses of loans—they will slice and dice portfolios and sell them to insurance companies and pension funds. 
Private securitization will leave the market again when (not if) the market turns further south.  First and foremost I think it is ridiculous to think ANYONE will get into housing right now under private market securitization, but when the market turns again in the future, players will just get out again.  New Federal Reserve lending laws for originators and Dodd-Frank rules make is near impossible to be a heavy hitting private lender as it is, but if the boat hits an iceberg, the captain will be the first (and only person) on the one and only lifeboat. 

Good luck with this one government—your uphill battle of housing just became hiking Everest in the dead of winter in your gym shorts.  I can’t wait to see what magical reform giant hot dogs that cure cancer and sing show tunes does to the continual decline of housing.
$380 billion in Fannie/Freddie losses will be NOTHING compared to the $2-4 trillion that will be wiped out in home equity when credit becomes ever tougher due to the reduction of the GSEs…
So, next time you are at the gas station filling up the sedan after a 13 hour day at the office to earn a wage that barely affords you the HD channels for your new flat screen TV (that you paid for with cash because the monster bank that holds your HELOC cut the balance in 08), and you see some tweekers huffing down menthols by the Diesel pumps, remember that in 2005 they probably would have been approved for a 100% LTV mortgage and could have been your neighbors (and may have been) that foreclosed after 18 months, and if the government has their way, forcing private money back into the market, they will be your neighbors again in the future...  And the resulting foreclosure will be the same. 
"And if all others accepted the lie which the Party imposed—if all records told the same tale—then the lie passed into history and became truth. 'Who controls the past' ran the Party slogan, 'controls the future: who controls the present controls the past.'"
- George Orwell, 1984
R and R Feb 11, 2011

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