Soft Landing too much for Indy Mac...and exposes lack of cushion for Freddie's Fannie
It is no secret that all the real estate experts were correct, we are experiencing our soft landing. This soft landing is merely weeding out the small and weak companies such as Indy Mac, and possibly 2 even smaller companies that only the most astute financial analyst has probably heard of: Fannie and Freddie.
I don't have time to rehash all that has happened, but I want to ask some questions, give some insight, and offer some solutions.
Could somebody please tell me where in the Constitution it says that the US Taxpayers are responsible for financing, 'guaranteeing' mortgages, or bailing out anybody (private or institutional) that cannot make their debt payments? I think it is an absolute 'scam' that a 'private company' (which is NOT backed by the government, yet given special 'treatment' by the government in the form of a GSE) can reach out to the taxpayers to cover their irresponsible behavior while providing liquidity to the mortgage market.
Here is the thing, if there is not an investor in the US or abroad that will buy a pool of mortgages, why should the taxpayers of the United States buy those mortgages? Let me tell you something, 100% of mortgage companies were guilty of knowingly and/or unknowingly committing and/or passing along fraud. Some were victims of unscrupulous mortgage brokers and couldn't catch every attempt at fraud, others 'knew' it was going on, but applied the 'if I don't do it, somebody else will' logic. Besides, who cares, real estate only goes up...right?
It is bad enough that the government (READ TAXPAYERS) is looking at a $300 billion bailout, an $8 billion dollar FDIC bailout of Indy Mac, but now they are looking at possibly taking over Fannie/Freddie too??? Looks like a socialized bailout in my opinion.
So why on earth is a 'company' that is supposed to be private, and NOT tied to the taxpayers (directly...but as a GSE) have exposure to over 50% of the mortgages in this country? And since they are 'private', why don't the have to follow the same rules as other private companies do? Why do the GSE (government sponsored enterprises) get special tax rules (the don't pay any state/local income tax)? If they are truly a private company, they need to have the same rules other private companies have. They need to survive on their merits, not the fact that 'we are too big for the government to let us fail'. Another problem is that because Fannie/Freddie are GSE's people perceive that they ARE backed by the government, even if it is blatantly stated otherwise. If they make bad decisions, they should reap the same consequences of other business. It is OK for regular businesses to fall by the wayside or go bankrupt, why not a bureaucratic juggernaut that has made terrible financial decisions the past few years? I am sure plenty of banks made crappy loans knowing that Fannie and Freddie would take them off their hands and 'guarantee' them. Yes, I know they have special standards, but you would be shocked if you saw some of the loan programs those entities offer.
Let me ask you another question: why should the government have any role in helping people buy a home? To me, it is pretty simple. You save your money for a downpayment, and then you find a house where you can afford the monthly payment on your current income levels. If you don't make enough money to buy a place, you keep saving, or you purchase a less expensive place that you can afford. I don't think it is the taxpayers job to guarantee your mortgage. If there isn't a private institution in the free market that finds your risk acceptable, why should the government or GSE (again READ TAXPAYERS)??
This is from the Fannie website: "Fannie Mae has a federal charter and operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates." Why should people be given artificially low rates?
I know it 'feels good' to help the 'poor' buy a home they wouldn't be able to afford, but is it really the best thing? By giving poor people, or people with bad credit artificially low interest rates, you are in a way making the problem worse. I know it is 'noble' to give a borrower a 5% loan rate when they should have a 9% loan rate, but that is not the best thing for the markets and certainly not the best thing for the responsible people that pay taxes. CNBC asked the question today: is capitalism in trouble? Capitalism is NOT in trouble, government interference with capitalism IS. For example, with a 9% loan rate, a borrower might be able to afford only a 100k place, but with a 5% loan rate, the might be able to afford a 115k place. Great for that borrower, but not so great for all of the other people in the 6-8% loan rate range that want that 115k house, but cannot afford it without some 'charity'. Besides, what is the incentive to clean up your credit, save some money, or earn more if you are going to get what amounts to a 'taxpayer funded' special interest rate?
This brings me to another point. We NEED to determine the REAL value of real estate. The only way for that to happen is to have a HANDS OFF approach so we can determine where property values really are. This will be based on income, and what people can afford with a real fixed rate mortgage. Propping up property values only makes things worse in the long term. Foreclosures are NOT a bad thing, they are a GOOD thing. For every 'ex-homeowner', that has to go rent for a while, there is another person that has saved money and is looking to buy a house at a more fair market value. One persons foreclosed house, is another families new residence. Sucks to be the bank or investor that bought the loan, but they are all 'big boys' and should be able to take their losses the same way they take their profits. They made a loan to a bad borrower, or they loaned too much on the value of the property, but often they did both.
This is going to sound bad, but I don't think 70% home ownership is a good statistic. Owning a home is a great responsibility, along with having children, and voting. Honestly, I don't think 70% of the population is responsible enough to own a home. If they were, then we wouldn't have the wave of foreclosures we are currently experiencing. Let me put it to you this way: what if I said we had 70% neuro-surgeon-ship. That means that 70% of the population could be neuro surgeons. Do you think that is a good thing? Does it cross your mind that the standards (what's that?) might just have to be lowered to get 70% of the population to be neuro-surgeons? I think we are all in agreement (or should be) that 70% of the population doesn't have the ability to be neuro-surgeons. This is not a good or bad thing, it is just a fact. I know this example is extreme, but I am using it to make a point. Using artificial methods to inflate statistics will NOT last in the long term as evidenced by the 'soft landing' we are currently experiencing.
Sadly, we are now living in a time where people would rather look to government to solve all of their problems instead of taking responsibility for their actions. Because the masses are this way, the politicians are all to eager to pander to them, hence the bailout, and about 90% of all government programs that are proposed today.
So, what is my solution. It is actually pretty simple. I didn't say it was painless, no REAL solution will be painless. Take 100 billion of that bailout money (just pulling a number out of the air...just like government likes to do) and contract with a civilian company (I will help start it if necessary) that has the job of going through ALL of the 'bad loans' out there. They will then work back through the loan applications to find the fraud that was committed. They will look not only at mortgage brokers, they will look at underwriters, appraisers, property management companies, CPA's, 'employers', etc. All of these people have at least one piece of 'key' information that is needed to get a loan approved. I know there were CPA's selling CPA letters 'stating' income for people. I know property management companies were supplying false VORs (verification of rent). I know appraisers were inflating the price of property. I know underwriters were 'working' with some or all of these people to push loans through. After all, nobody gets hurt right?
Once an individual has their name come up on X-amount problem loans, they start being investigated. Same with companies. The amount can be tied to volume, or just an arbitrary number for individuals. Then you go after these people, and make their lives absolutely miserable. I am not talking about some gray area stuff, I am talking about the repeat offenders, the people that were knowingly building their business on committing fraud and doing bad loans. Go after these people. Take their homes, cars, assets, etc. The money taken from them can be used to 'reimburse' the taxpayers for any or all of the money spent on the investigations. If they need to have a license, they obviously get it pulled. Go after the people at the ratings agencies, go after the liars on Wall Street. Go after the people that KNOWINGLY committed fraud and profited hugely from it.
Take their Bentley's, their mansions, and their fabulous lifestyles that were financed (literally) through fraud and lying. Until there are consequences for fraud and lying, along with consequences for making bad financial decisions, nothing is going to change. Pushing it off on future generations of taxpayers is NOT the answer. How are they going to be able to afford their own homes when they have to pay high taxes to pay off the irresponsibility of previous generations?
Second, Fannie/Freddie lose all their 'special' government perks and have to become like every other private company out there. This will allow other companies to enter the business and provide liquidity to the markets. If companies want to provide 'low rate' loans to certain borrowers. Then fine, but there will be ZERO taxpayer connection to those transactions. We cannot have 5+ trillion dollars worth of loans held by 2 companies where the 'fail safe' is the American taxpayer. We need competition. We need companies to go back to assessing risk because there isn't a 'taxpayer parachute' if things go bad. Loans need to be made on ability to repay the loan, not some PC criteria that sounds good. Make people earn it. I know this sounds bad, but all these government programs have gone too far. We need to get back to the basics. We need to get back to a straight forward standard that applies to everybody.
Just try not to think too hard about the TRILLIONS of dollars that could potentially become the responsibility of the taxpayers of the government decides to rescue their own fanny by saving Fannie...and Freddie.
That said, this financial mess is NOT over. Look for another wave of bank failures when the A-paper borrowers start feeling the pain in 2009/2010 when those 5 and 7year ARM's start to reset. Hard to refi to a fixed rate loan when you are upside down on your property, or have so little equity to qualify for the good rates at lower LTV (loan to values).
I know his was a little long, and I jumped around a bit. I am on the road for 2 weeks and keep losing my train of thought as I answer phone calls and respond to e-mails. Just be glad that I am posting! :)
I look forward to the comments.