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Tuesday, March 1, 2011

Building A Bridge to Hawaii: FNMA/ FHLMC Reform

A US President was walking along a California beach and was in deep thought of reform. All of a sudden he said out loud, "Uncle Sam grant me one wish."

At once the sky clouded above his head and in a booming voice Uncle Sam said, "Because you have TRIED to help the economy in so many ways, I will grant you one wish"

The president said, "Build a bridge to Hawaii, so Americans can drive over any time they want to.  The revenue from construction will help the California budget from collapse and we won’t have to save the state from bankruptcy!"

Uncle Sam said, "Your request is very materialistic. Think of the logistics of that kind of undertaking. The supports required to reach the bottom of the Pacific! The concrete and steel it would take! I can do it, but it is hard for me to justify your desire for worldly things. Take a little more time and think of another wish, a wish you think would honor and glorify the entire nation."

The president thought about it for a long time. Finally he said, "Uncle Sam, the house and senate say that FNMA and FHLMC are bloated and impossible to manage. I wish that I could reform these entities and bring private money back into the mortgage market like the good old days of 2005. I want houses to rise in value again and mortgage products to be sexy and mysterious.  I want people to be able to access credit lines on their houses for Escalade trucks and trips to Greece.  Uncle Sam—I want you to reform FNMA and FHLMC immediately so I can achieve this wealth effect utopia!"

After a few minutes Uncle Sam said, "You want two lanes or four on that bridge?"

n  Note—in original joke it is god talking to man about pleasing women.

Another day and more white noise about FNMA and FHLMC reform.  Reforming the GSE's sounds good, but in reality, reform is about as realistic as Building a Bridge to Hawaii.

Please enjoy these links on this ridiculous topic.

House Republicans open to talks on housing reform-- House Republicans Down With Reform Talks nothing surprising here.  The NFL could learn a thing or two from House Republicans.

Timmy G says 5-7 years for realistic housing reform-- Timmy G's 7 year plan.  I suppose this will result in a similar outcome as ‘find an alternative to oil?’ 

Timmy G says 5-7 but WANTS a 2 year plan-- Timmy G: Not 7 years... 2 years! Two years just sounds better.  
Timmy G says rates will be ‘modestly higher’ with reform-- Timmy G says plan to open your check book I suppose this is better than dramatically higher with QE2?

Housing attitudes changing at the consumer level-- Consumer: 'Housing Blows'.  Only 64% of people see a home as a good investment (buy).  Couple this with rising rates and impossible underwriting and you have the next leg down.
Treasury undersecretary Goldstien wants private money for mortgages -- Private Money would be swell! . I’m sure he is willing to provide HIS own capital to secure mortgages, right?  Everyone WANTS private money Goldstein-- HOW will this be done?

The real problems with GSE reform relying on private money:

1)    Private money will NOT lend money for 30 years at low rates.
2)    Private money is not cheap.
3)    Private money is not stupid.

You can lead a horse to water, but you cannot make him drink.
The same can be said about driving private money into mortgages again.  While the HOPE is that private money will come in and return he market to the 2003-2006 hey-day of Wild West lending, this is not the case.  When (and if) private money comes back into mortgages, it will be in the form of high down payment, high rate financing and short term money that will NOT be attractive to homebuyers.
Maybe next month, instead of arguing WHEN to reform FNMA and FHLMC, the government will offer some ideas on HOW to reform.

Then again, they may just say screw it and start building the bridge. 


  1. excellent.
    Canada--being 1/10th the size of America actually did this bridge thing. :)


  2. Thanks Fibocycle.

    I guess this PROVES that building the bridge will be easier than reform!