It has been almost a decade since the birth of subprime mortgage loans. It has been six years since the bursting of the real estate bubble. It has been over three years since the GSEs were placed under conservatorship. It seems forever since policy makers launched HAMP, QE1, QE2, HARP, tax credits, carry forward loss deductions for builders, fiscal stimulus plans and a great many foreclosure prevention road blocks.
The interventionists seem to have decided that none of the interventions to date have worked to their satisfaction. More interventions are therefore needed. At the moment the next round falls into two categories: massive refinancing and the REO to rentals plan, which includes bulk sales to investors. These policies will likely be supported by some type of QE3 from the Fed.
The nation has no leadership in housing. Not only is there no housing policy, no one is working on a plan. Real estate financing has been nationalized and survives only because the Federal Reserve is throwing endless amounts of money at it and the Treasury is guaranteeing all the debt. No one has any idea how the conservatorship of the GSEs is going to be terminated.
At a time when tough decisions need to be made with regards to 90% of real estate financing (GSEs & FHA combined), the country is operating in a vacuum. This vacuum is quite vulnerable to manipulation by special interest groups whose motives have little to do with the health of the overall real estate market. All the upcoming events pertaining to the GSEs are mainly force fed by a few bureaucrats for the enrichment of a few fat cats.
Instead of wasting time analyzing the latest ideas, this post takes a look at the people behind the ideas. I'd like to know who is going to fix the GSEs, real estate financing and the real estate crisis. I have no clue what the precise consequences of this mess may turn out to be. As taxpayers we can only helplessly wait to see how much it is all going to cost.
Here is the cast of clueless characters:
The Executive Branch
With regards to fixing the GSEs, the buck stops here. Obama needs to provide leadership and find the people to execute his vision, assuming he has one. Starting with his chief of staff, Daley just resigned after one year on the job. His replacement is Jack Lew, a budget guy.
It is doubtful that Daley spent much time thinking about real estate last year. It is equally doubtful that Jack Lew will be working on anything in the upcoming months aside from Obama's re-election campaign.
Next in line in the administration is Tim Geithner. He is reported to have been working on his personal exit plan for quite some time. He is the point man for GSE reform. He has not done anything in the last three years, and I don't think we should expect anything other than a resignation announcement from him in the near future.
Starting with the past leadership, there were Richard Syron and Daniel Mudd, the last CEOs at the helm of Freddie and Fannie when they were taken down. They are now both being for understating the subprime loans held by the firms. Not that Syron and Mudd should not be sued, but they serve as a warning to any future CEOs who may actually have good intentions. These are examples of what can happen if things turn out bad.
Thinking with his feet, David Moffett was the first to leave, after trying out Freddie's CEO job for just six months back in 2009. I think that is what they call a "thanks, but no thanks". Halderman then took over the helm and he too decided to take a hike last October after just two years, along with chairman of the board Koskinen. I think Halderman is still acting as CEO until the next sucker can be found to take the job.
Over at Fannie, Michael Williams has been with the company for over 20 years, the last three as CEO. On the eve of the implementation of all these grand plans, Williams resigned. He is only 54, certainly not of retirement age. I think that is what they call "throwing the towel".
Incidentally, Halderman and Williams are at the receiving end of compensation for two years of work totaling $17 million.
Conclusion: There is no-one running Fannie or Freddie.
The FHFA (Federal Housing Finance Agency)
Supervising Freddie and Fannie is the FHFA, with acting director Edward DeMarco at the helm. DeMarco has been in this acting capacity since August 2009, over 2 years ago. Here is an example of how much he has accomplished. This is the (pdf) posted on their website.
It is still shows James Lockhart as the director, along with his photo. The "Message From the Director" is still signed by Lockhart. It would not be as pathetic if Lockhart had not gone over to the 'other side'. He is now with Wilbur Ross, one of the top sharks circling the GSE carcass.
So here we have the three agencies, Freddie, Fannie and FHFA with no management at a time when strong leadership is desperately needed. If there was ever an ideal time to consolidate these duplicating agencies, this is it.
The Legislative Branch
Congress is busy condemning how much these GSEs pay their executives. Conservatives are complaining that the GSEs are doing too little and spending too much money. Liberals are complaining that they are doing too little and not spending enough. There is plenty of blame, but nothing constructive. Senator Corker is the only one we hear from once in a while on the subject of GSEs. His plan is at best sophomoric, if it can be called a plan at all. Personally, I do not know who on Capitol Hill or the Senate is actually responsible for the GSEs. Can you name them? Fortunately, we know Barney Frank is going to be gone. Who is going to be his replacement, Maxine Waters? Now if that does not scare you, you are fearless.
The Federal Reserve
Finally, we have the Bernank and the merry pranksters at the Federal Reserve. I think it is best to let their wisdom speak for itself.
First, a few quotes from Ben Bernanke himself:
(July, 2005) "We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though."
(October 20, 2005) "House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals."
(February 15, 2006) "Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise."
(February 15, 2007) "Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low."
(March 28, 2007) "At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."
(May 17, 2007) "All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable."
From the recently released 2006 FOMC transcript:
Bies, cont. " However… let me just say that the bottom line is that overall mortgage credit quality is still very, very strong. "
Bies, Oct. '06: "We are also seeing in a small way increased predatory activity with loans…"
Yellen, Oct. '06: "Of course, housing is a relatively small sector of the economy, and its decline should be self-correcting."
Stern, Oct. '06: "The housing situation notwithstanding, I remain somewhat more optimistic about our prospects for real growth…"
Mishkin, Sept. '06: "The excesses in the housing sector seem to be unwinding in an acceptable way… I'm actually quite positive."
Warsh, Sept. '06: "Capital markets are probably more profitable and more robust at this moment… than they have perhaps ever been."
Geithner, cont. "If we see a more-pronounced actual decline in housing prices, will that have greater damage on confidence and spending?"
Geithner, Sept. '06: "We just don’t see troubling signs yet of collateral damage, and we are not expecting much."
Guynn, stepping down from the FOMC: "I’m counting on all of you to protect the buying power of my hard-earned retirement savings."
Lacker, Sept. '06: "I’m still fairly skeptical of large indirect spillover effects on employment or consumption.”
Minehan, cont. "So it is hard actually for me to see that residential investment will be that hard hit that long."
Minehan, Sept. 06: "Buyers should recognize housing [is] more affordable & resume purchases, perhaps w/out further major price declines."
Yellen, cont. "Houses [in Boise]… are now being dressed up to look occupied… so as not to discourage potential buyers."
Yellen, Sept. '06: "The speed of the falloff in housing activity and the deceleration in house prices continue to surprise us…"
Fed staff, Sept. '06: "We are not projecting large declines nationwide in house prices."
Fed staff, Aug. '06: "We forecast single-family starts will bottom out at annual rate of 1.43m units." [Actual low (so far): 445k in '09]
Bies, cont. "…rather than being a drain going forward and that will also get the growth rate more positive."
Bies, June '06: "So I really believe that the drop in housing is actually on net going to make liquidity available for other sectors…"
Geithner, June '06: "We see a pretty healthy adjustment process under way… The world economy still looks pretty robust to us."
Guynn, June '06: "…Of greater concern to me, however, is the inflation outlook."
Guynn, June '06: "We are getting reports that builders are now making concessions… even throwing in a free Mini Cooper – [LAUGHTER]."
Fed staff report, June '06: "We have not seen—and don’t expect—a broad deterioration in mortgage credit quality."
Bernanke, March 2006: "Again, I think we are unlikely to see growth being derailed by the housing market."
In conclusion, I think the occupancy rate will skyrocket in 2012:
Occupy Wall Street.
Occupy the Fed.
Occupy the White House.
Occupy vacant REOs.
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
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