Bernanke's big idea

Much of the attention of Fed Chairman Ben Bernanke's testimony before Congress on Thursday was focused on his remarks about the economy. Ben's bottom line: The slumping housing market won't derail the economy.

But the Fed chairman also suggested a bold new idea: government-backed mortgage guarantees for home loans of up to $1 million.

From MSNBC.com: "Bernanke proposed the so-called 'government-sponsored entities' like Freddie Mac and Fannie Mae pay mortgage insurance fees to the federal government. These GSEs would then guarantee loans that are larger than the current $417,000 limit on so-called 'conforming' mortgages."

New York Democrat Charles Schumer endorsed the idea and said he might back it with legislation.

Bernanke's plan would certainly quiet those who believe the conforming loan limits should be raised to jumbo status to help solve the current credit crunch. And Freddie and Fannie would pay mortgage insurance fees to the government. Ben also says he would want the new loan guarantees to be temporary.

Is it a good idea?

Big Ben also told Congress that the Fed plans to issue a proposal by year's end that would create new standards for all lenders that issue sub-prime loans.

About time.

Comments? Thoughts?

-- Posted by Annette Haddad

Photo credit of Jumbo the elephant: Melville Munro (1935)

P.S. A shoutout to reader Xtine for calling attention to a N.Y. Times article today about a hapless real estate speculator who lost it all. Enjoy.

Comments

[Susan]

I propose a "bail out" funded by heavy fines placed on mortgage companies, wall street, appraisers who over valued homes, etc...

And the kind of"bail out" I want is structured so that people who took mortgages they couldn't afford don't get to keep the houses they can't afford. They can rent.
.

[original thinker]

Raise the limit it to $1 million, $2 million, $5 million... That all means nothing if you have to put down 10-20% and be qualified to handle the payments.
The root of the problem is people living in homes they can't afford and
will never be able to afford. This proposal doesn't change that by one inch. It has little to no bearing on the market issue. You have to be able to afford the home you bought. Period. All the Fannie Maes, all the Freddie Macs, all the economic horse and all the economic men aren't going to put this back together, again.

[waitingitout]

A little off topic, but only a little.

For those who claim this RE crash won't look anything like the early 90's because the economy is still strong and everyone has a job:

http://www.marketwatch.com/news/story/could-california-recession/story.aspx?guid=%7B663B7DEA%2DA93C%2D42C3%2D8180%2DF7CE099373DC%7D

The chief economist for GS believes we're (California) heading for a recession. The second shoe ain't dropped yet, but the laces are untied.

Just a thought.

[Susan]

The federal reserve bank is a quasi-private/quasi-government entity. When the quasi-private side exerts control over the quasi-government side (as it looks like here) it's called Corporatism. Corporatism is fascism. My vote is for the quasi-private side to cut their losses even more.

Instead of giving Stan O'Neal $160 million, why not put that in a bail out fund?

Unfortunately, votes don't count in corporatism.

Now there's a whole lot of fear mongering about "doom and gloom, if there is no bail out" keeps spinning itself back into the media. Good lord, can we get beyond the politics of fear and shock?

[Stan]

sounds like a way to waist taxpayer money and prop up artificially high home prices at the same time. Just another way for the fiscally responsible among us lose while the reckless spenders win.

[producer 08]

Lets get back to reality 5300 sqft mansion hollywood hills 1.5 MM not 10MM or 15MM....... 1.5 MM

Wednesday, September 20, 2000

Inman News

Actor Nicolas Cage, who stars in the upcoming movie "Captain Corelli's Mandolin," has sold his Hollywood Hills home, the Los Angeles Times report. The asking price was just under $ 1.5 million.

Cage, 36, started shooting the movie "Windtalkers" this month. He also stars in "Family Man," due out in December. "Captain Corelli's Mandolin" finished filming in August.

The Oscar-winning actor ("Leaving Las Vegas," 1995) put his Hollywood Hills home on the market in June, 1999, after he moved into a Bel-Air house that he bought in 1998 for about $ 7 million. Cage had owned the Hollywood Hills home since about 1990.

Built in 1928, the three-story walled and gated house, on a knoll overlooking the city, has five bedrooms, a circular library, a wine cellar and a humidor in slightly more than 5,300 square feet. There is a hydraulic lift in the garage to park an extra car.

[Stefano Gallai]

The bottom line is that if you make $50K a year, you shouldn't be buying 700K houses. Why don't give government backed loans to everybody to buy BMWs as well?

People should live within their means, buy houses and cars that they can afford. If they want a nicer or more expensive one, they should go back to school and earn it, not get cheap money guaranteed by the government (i.e. you and me that pay taxes).

[Enlightenment]

Why did LA Times remove "LA Land Blog" link from the front page? I checked the other blogs on the current front page, and none of them had as much traffic as the "LA Land Blog" did.

So are Too many realtors and housing bankers not happy how the population is very ticked off about the housing mess, and so did they put pressure on the LA Times to quiet the blog?

[allsouledout]

"Raise your hand if you make close to $240,000 annually. Where do I sign up?"

Hundred of lawyers in Century Cty, investment bankers downtown, hedge fund managers in Santa Monica, agents at ICM/CAA and others have arms that are getting tired. Can they put their hands down now?

[Economic Crisis]

I think the Fed will do something like this. In fact, I predicted as much in a September 9th posting on my blog, "Economic Crisis: A Former Fed-Watcher Looks At the Real Estate Meltdown." The posting is titled "Crisis Basics: What Else Can the Fed Do?" Here is the money quote:

"Want to get freaky? Well, one thing the Fed could do, at least in theory, is become a mortgage lender in its own right, most likely by refinancing existing mortgages at lower rates. A more plausible 'radical idea' would be for Congress and/or the federal regulators to raise the limits on the mortgages that can be held by Freddie Mac and Fannie Mae, and encourage them to buy busted mortgages. (If that works like, say, Medicare Part D, the prescription drug benefit, they'd even forbid Freddie and Fannie from buying bad loans at a discount!) Then, as those loans go bad, the Fed would bail out Freddie and Fannie."

One way or the other, the Federal Reserve WILL bail out the banks, or at least try to. Every time they state their intention not to do so, I am further convinced that this is entirely their intention. There are a variety of reasons for this, starting with the obscure fact that the Fed is in fact owned by the banks themselves. Beyond that, the banks have everyone over a barrel, and they know it. A bailout is inevitable, so everyone should prepare for it.

[Enlightenment]

There is around $1Trillion worth of Risky House Loans, yes with a "T", which is a miliion times a million. http://radar.planetizen.com/node/61522

How much is a $1 Trillion dollars? That is a stack of $1 bills that is 67866 miles high, yes miles. The approximate distance to the moon is 238900 miles, so $1Trillion is over 1/4 the distance to the moon!

[Justin McCarthy]

Nice post Economic Crissis, I agree. The gov't can either step in now and aid borrowers who overextended in trying to keep their homes or bail out the banks later, after the economy's been dragged through the mud, at taxpayer's expense-- like S&L bailout....I'd rather try to meet overextended borrowers half way now.

Great article link, waitingitout. Perhaps myopic fools like Johnny B will read this article as well....No, wait, he's probably too busy spinning whacko conspiracy theories and losing the forest for the trees-- Try to "keep it real", Johnny B.

[Economic Crisis]

Justin, after posting here I reworked my comments into a post on my blog entitled, "Bailout V: The Fix Is In." You and others might also enjoy "A Curmudgeon's 50th Birthday Rant."

[arroyogrande]

"But the Fed chairman also suggested a bold new idea: government-backed mortgage guarantees for home loans of up to $1 million."

And this will help the housing market...how? The market has priced Jumbo loans at only 60 to 80 basis points over conforming loans; that means if you can qualify for a Jumbo, you are getting an interest rate that is only 0.6% to 0.8% more than if you were getting a conforming loan (one that the GSE's can currently handle).

So suck it up! That 0.6% to 0.8% is the risk premium that the market wants for taking a chance on your big loan (as opposed to having the government implicitly guarantee it through Freddy and Fannie). Saving $1,000,000 borrowers that 0.6% to 0.8% WON'T save the housing market, and it WILL put the GSEs (and the American taxpayer) at much greater risk with much larger loans to cover!

Why should the taxpayer guarantee a million dollar loan when one can be provided through market means, at an interest rate that is only 0.6% to 0.8% more? THINK PEOPLE! Some of you are so frightened of economic Armageddon that you are looking at burning live taxpayers on funeral pyres in the hopes that the gods will stop an oncoming tsunami.

Well, thanks for the extortion (pay the price for other peoples' excesses, or else they will tank the economy and you along with it), but I think I'll take my chances with the tsunami, rather than have you burn me as well.

- arroyogrande

[Economic Crisis]

arroyogrande, the proposal is not about reducing the rates for jumbo loans. It's the first step in having the agencies (Fannie and Freddie) buy up the bad loans. Then they'll be concentrated in one place, and the Fed and others can then bail out Freddie and Fannie.

I think this is virtually baked in the cake. The alternative is to let the various bonds default. That would cause a depression. Now, I can imagine the powers that be moving slowly enough to push off the day of reckoning into a Democratic administration so Fox News and the rest of the "independent" media can do what they do best and Blame Hillary, but one way or the other they're going to at least try and bail it out. You can kick and scream and stamp your little feet to your heart's content, but that's what will happen.

The only real questions are these:

1. Can it work? Ever since the U.S. production economy peaked in the early 1970s, we've been characterized by beggar-thy-neighbor finance and politics, with an escalating series of financial failures. Each one of them (Latin Debt, commercial real estate, hedge funds of the '90s, Internet bubble) has been rescued by Uncle Fed, but has Uncle Fed finally met his match?

2. If a bailout is possible, on what terms will it be done? One way or the other, this bailout is going to be a lot more visible than the rest of them. The public will be paying marginally more attention this time, although the media are so terrible at figuring it out and so easily manipulated by entrenched criminal interests that there'll still be a lot of opportunity for diversion.

But no one should kid themselves into thinking that there won't be a bailout. It is baked in the cake, so get used to it.

[investorguy]

Drew: Foreclosure as a process doesn't cost the homeowner anything in terms of cash -- just in emotions, embarrassment and a huge credit hit.

It costs the lender $25K to $60k or more to foreclose.

[arroyogrande]

"the proposal is not about reducing the rates for jumbo loans. It's the first step in having the agencies (Fannie and Freddie) buy up the bad loans. Then they'll be concentrated in one place, and the Fed and others can then bail out Freddie and Fannie."

So let me get this straight...way too many people bought houses they couldn't afford using loans they couldn't afford, for half a million dollars or more, adding hundreds of thousands, millions, and billions of dollars to the pockets of real estate agents, loan brokers, banks, loan servicing operations, the GSEs, and hedge funds, and when they can't pay up in the end, "The Fed and others" get the bill. Who is "the Fed and others"? When Ben Bernanke says "explicit federal guarantee", he isn't talking about "the Fed and others" paying the bill, he's talking about THE US TAXPAYER. The Federal Reserve is not responsible for "explicit federal guarantees"; that's the sole responsibility of the US Taxpayer.

"The alternative is to let the various bonds default. That would cause a depression. "

How do you come to that conclusion? The worst off would be institutions that were betting on highly leveraged instruments backed by residential mortgages...and that's already happening. Witness the huge recent asset write-downs of the banks and the big brokerage houses, as they change "mark-to-make believe" pricing on their highly leveraged derivatives to "mark to market". Not fun for them, but hardly financial Armageddon.

Or are you referring to a consumer lead spending pullback due to declining housing prices causing a recession/depression? If so, then maybe "the Fed and others" can just send checks to those *not* involved in spending more than they could afford, and us *responsible* people will *promise* to use the hundreds of thousands of dollars to keep buying consumer goods and keep the economy humming. By the same logic, you could just send *everyone* a $100,000 check, and *really* keep the economy humming for quite a while. Wouldn't that be nifty?

The point is, if you are just going to use the magic of the federal government and the money printing presses to "wish this debacle into the corn field", why not print up extra checks for $100,000 for every family in the US? Or is the bail-out only targeted to the banks, brokerage houses, hedge funds, and people who took out loans they couldn't afford? If it's that easy to print our way out of this mess (as the US taxpayer surely doesn't have the money to give), why not spread some of that easy money to us responsible people?

- arroyogrande

[Charles Wilson]

So let me get this straight ...when they can't pay up in the end, "The Fed and others" get the bill. Who is "the Fed and others"? When Ben Bernanke says "explicit federal guarantee", he isn't talking about "the Fed and others" paying the bill, he's talking about THE US TAXPAYER. The Federal Reserve is not responsible for "explicit federal guarantees"; that's the sole responsibility of the US Taxpayer.

Yup, you've got it. One way or the other, we'll all pay. I don't like it any more than you do, but it doesn't matter what I like and it's not going to matter what you or anyone else likes, either.

The worst off would be institutions that were betting on highly leveraged instruments backed by residential mortgages. ... Not fun for them, but hardly financial Armageddon.

That's what everyone wants to think. The reality is very different. Those bad bonds aren't owned by someone on Neptune. They are spread throughout our economy. If they go bust, that sucking sound you hear will be everyone being dragged into a black hole of deflation. Banks will fail and so will insurance companies. Projects of all kinds will stop, and people will be thrown out onto the street. The Fed isn't going to let it happen if they can help it. Their ideal solution will be to palm this off on the next president, who is almost certainly going to be Hillary Clinton. This will allow the Republicans and their friends in the media to blame her for everything, but one way or the other we're on an oceanliner headed for an iceberg dead ahead.

Or are you referring to a consumer lead spending pullback due to declining housing prices causing a recession/depression?

That much is already starting to happen. Just wait until the numbers come in for this Christmas. It's going to be an absolute bloodbath, and then it's going to get worse.

Or is the bail-out only targeted to the banks, brokerage houses, hedge funds, and people who took out loans they couldn't afford? If it's that easy to print our way out of this mess (as the US taxpayer surely doesn't have the money to give), why not spread some of that easy money to us responsible people?

For one thing, we are not "responsible people." Get over that illusion right now. We are fat, lazy, stupid, insular, and hopelessly naive. We believe in magic, and magic shows always end. The reason they'll bail out the financial institutions is because, first, people always help their family first. It's tribal. Secondly, the banks are the key to credit, and credit is the key to business. Bail out the people themselves and it will be too inefficient.

Besides, it would be "moral hazard." You can't actually help people out. You help banks out. It's the American Way. Always has been, always will be.

If so, then maybe "the Fed and others" can just send checks to those *not* involved in spending more than they could afford, and us *responsible* people will *promise* to use the hundreds of thousands of dollars to keep buying consumer goods and keep the economy humming. By the same logic, you could just send *everyone* a $100,000 check, and *really* keep the economy humming for quite a while. Wouldn't that be nifty?

It could come to that, but I doubt it will. For one thing, it would be too openly inflationary and would postpone the inevitable for, oh, about a nanosecond. The Fed generally is in the credit creation business. That's what their additions to the money supply do: make more funds available for lending. Problem is, the Fed cannot create the ability to service the loans. This is the underlying problem, just as it was in the last depression.

We have a huge income distribution problem in not only this country but the world at large. The media, as usual, is blind to it. In the past 20 years or so, corporate return on equity has risen from 11-12% to 19%. This represents an utterly massive transfer of not just wealth but day-to-day income from working consumers to investors. Then, if you look into that which still goes to workers, you'll find that the compensation pyramid has become much steeper, so you are left with a middle class that's been living on credit for the past 15 or 20 years.

This is exactly what happened in the 1920s. First the farmers went belly up, then the urban middle classes went belly up when they couldn't service all those (sounds quaint now) "installment plan" payments that were all the rage. The standard explanation that the depression was caused by the Fed being too tight is wrong; it was caused by the lack of distribution of the gains of industrial productivity. Same thing's happening right now. We've tried to escape it by running up credit cards, home equity lines of credit, and going to Wal-Mart and Costco for stuff made by Chinese dollar slaves.

I think the game is up, but we'll see.

[investorguy]

Just a reminder, folks: Fed action on interest rates will have no impact on sub-prime loans. Most of those are based on LIBOR or other indices that are NOT prime-rate driven.

[tthgcontractor]

My ex wife had been an office manager for an Orange County Water District making approximately $22 p/hr plus benefits for 12 years. Three years ago, she moved to South Carolina to be near her aging father and discovered top pay for her extensive work experience was about $13 p/hr.
Last summer she decided to move back to SoCal and after searching for three months, found an office job for the city of Long Beach making $14 p/hr with no benefits. Her rent is $1850 p/mo. Million dollar houses? I smell revolution in the air.

[arroyogrande]

"Banks will fail and so will insurance companies. Projects of all kinds will stop, and people will be thrown out onto the street. The Fed isn't going to let it happen if they can help it."

The truly sad part of the proposed strategy is that allowing the GSEs to increase their loan limits to $1M will not save the day! Raising the conforming loan limit to $1M doesn't mean that people can start refinancing again out of their resetting teaser rate loans. Can Fannie and Freddy buy up the Option-ARMs that people have been using here in California to afford their houses? Can Fannie and Freddy handle teaser rates that these people need in order to afford the payments? Can Fannie and Freddy bail out homeowners with loans that are 110% (or more) of their homes appraised value? In other words, if Fannie and Freddie can't consume (and ultimately hide) the same crazy sub-prime and Alt-A loan programs (and even prime option arms) that are causing the loan default tsunami, then raising the conforming loan rate will do almost nothing to save the big financial institutions; it's just political posturing to make politicians look like they are "doing something". In other words, it will put taxpayer dollars at risk explicitly guaranteeing million dollar loans without a hope of "saving the day", just so that our political leaders can tell us "well, at least we tried".

If you truly think that financial Armageddon is coming because of loan defaults, then well, the sad news is that you need to get ready, because Ben Bernanke's proposal will barely make a dent...so get the bomb shelter stocked, and the ammo loaded.

Maybe politicians can burn $1000 bills in front of news crews, and claim that that will help as well.

- arroyogrande

[Charles Wilson]

This is not about bailing out homeowners. It is about bailing out the holders of bonds backed by non-performing mortgages. If the bad mortgages are concentrated in one place, i.e., the agencies, then the Fed can bail out the bondholders. The occupants of the homes? Immaterial. If you think that the Fed or anyone in power cares about them, think again. This is about the money, and nothing but the money.

[Johnny B]

Justin McCarthy wrote: “Nice post Economic Crissis, I agree. The gov't can either step in now and aid borrowers who overextended in trying to keep their homes or bail out the banks later…

…“Perhaps myopic fools like Johnny B will read this article as well....No, wait, he's probably too busy spinning whacko conspiracy theories and losing the forest for the trees-- Try to "keep it real", Johnny B.”

Hey Justin… moronic fools like you are part of the problem, not part of the solution. Keep pedaling your mortgage bailout support... I’m not buying.

I should sympathize - being a little fish such as yourself in a shrinking puddle of murky water (a mud bath of your own making), with a huge debt hook in you mouth can’t be a good thing – but, why should I (Johnny taxpayer) help YOU out of your self-inflicted financial bind? YOU overextended… because you’re a moron, I did not…

It’s tough to realize that you’ve been a moron... it’s tough for anyone to feel they’ve been duped, chumped, scammed, hoodwinked, bamboozled, etc.

Saying I’m spinning “conspiracy theories” because I understand the fraud and financial shenanigans behind the housing bubble (and the current unsustainable housing values) for what they are just reinforces your IGNORANCE... as does your own self fulfilling prophesy of debt and financial servitude.

If you could not see this mess coming, YOU did not see the “forest for the trees”… to spin your misplaced phrase right back atchya pal.