Friday, November 6, 2009


Our generous government is at it again! I'll drop these comments into the November Update, but figured that they needed to be separate as well as I couldn't help but rant.

Extension of first time homebuyer credit of $8,000 and now other homebuyers may attempt to receive a credit of - $6,500

The give aways continue. President Obama will sign a new bill in the coming week that will extend the new homebuyer bill that provides an additional $8,000 to new home buyers. If that wasn't enough, our CONgress is now providing more of your money to your friends and neighbors by allowing all potential homebuyers to get in the action and get some free money! Of course these giveaways do nothing but use government money to prop up the housing market and reward homebuyers that would buy homes anyway. Just like Cash For Clunkers we end up overpaying for the impact this and ultimately homebuilders and bankers will profit. As I have contended for some time, the supply of housing is just too high and prices must fall to compensate. Measures like these interfere with the market's price adjustment and simply delay the reductions in price. Buyers today that capture the $8,000 incentive will end up losing more than the $8,000 when prices reflect reality.

Only one question - WHO'S MONEY IS IT?

FHA Lending - FHA IMPLODING - Please click on the link. This is a link to a yahoo page with an article detailing the default rates on FHA loans are out of sight. Probably more important and entertaining is the video interview that starts on the page automatically in the upper left corner. This interview details that the FHA is the new Fannie Mae and is essentially the entire mortgage market and is taking on all of these new bad loans.

To wrap up our thoughts on housing we need to mention that the FOMC statement also mentioned that the FED would begin reducing its purchases of agency securities with the goal of stopping in March of 2010. These agency securities are the securitized market for mortgage loans. As I've mentioned above, FHA has become the only home lender and the FED has been buying FHA debt in securitized form and is really the only buyer of this garbage. As the Fed exits the market we will see a rise in the cost of debt for these securities meaning that residential home loan rates WILL rise. Perhaps we won't only see a rise in the cost of the debt (interest rates) we may see the housing mortgage market freeze completely. This is the problem when a market participant becomes the market, when they want to stop or reduce their impact the ramifications are huge!

So take a moment here and think about this. When a homebuyer applies for a home loan they use a mortgage company or bank to obtain the loan. As the process is completed your lender will decide to keep the loan or resell it to the FHA. As long as the loan meets all the requirements, the FHA buys the loan from the provider and now you, the taxpayer ,are lending money directly to homeowners.

Put yourself in the position of Bank of America or another lender. Would you keep ANY loans that seemed anything less than perfect? If you perceived ANY risk or potential trouble with the borrower wouldn't you sell it? Of course you would, in fact, you'd actually try to find as many borrowers that were marginal and then sell those loans you never intend to keep to the US government! You'd make loan origination fees and other income and take none of the risk! WE'VE LEARNED NOTHING!!!! But the banks have learned to make money at taxpayer expense and are getting rich doing it!

Ok, so we've established that the banks sell the loan to FHA and then they securitize the loans (bundled lots of them up and package them) and then sell these to the FED. In doing so, the FHA takes enormous risk by incenting the bankers to make bad loans, the FHA doesn't do a good job of scrutinizing the loans because they are an inefficient non-profit government entity that exists to destroy tax payer money, and finally the Fed buys these loans or essentially funds the operations of FHA and keeps interest rates well below what they should to reflect the risk and real cost of borrowing! Sounds like a great system huh?

We are doing all of this to prop us housing costs and make us FEEL better. The only problem about doing short term fixes and simply trying to "feel better" is that we often end up making the problem bigger and the resolution worse. The prescription is to address the problems and work through them as a responsible person would. When the government ultimately extracts itself from this market we will see that there are no buyers of this debt and the cost of loans for home mortgages will adjust MUCH higher.