Good video. Well presented. He makes a great point that this effectively doubles the federal credit trade and forces home prices down significantly. He also points out that on Monday F/F will only take loans with at least 20% down on the loan.
Respectfully, I think you are conflating what the video advocates SHOULD be done with what this bailout IS LIKELY to do. I humbly suggest you watch it again.
Yes, I agree with you, this effectively doubles the Federal debt.
But the central conceptual notion the video advocates, as I see it, is whether this bailout/takeover/seizure, whatever you wish to call it, is a “market clearing” move or is a “preserve biz as usual” move.
I suggest it is the latter, and not only that, it is an explicit and extra-Constitutional and taxpayer-funded ratification of the latter.
Housing prices are influenced by many things, of course, among them; supply and demand; prevailing wages/earnings; desirability of living in a given area; recent comparable sales [”COMPS”] and the availability of mortgage credit.
The ready availability of mort credit is IMO the fundamental mandate/purpose of F & F. Supporting the operations of F&F is a triad of factors; the biggest of which IMHO was the (formerly) very high quality of the debt instruments resold into the secondary market. The fact that F&F debt traded only slightly higher than risk-free Treasury debt indicated the universal high regard the market placed upon such instruments. This was proven by the very small spread that used to exist between Treasury and F&F debt. F&F at one time ONLY purchased “confoming” loans; which meant that the loans had pretty darn rigid underwriting requirements: The ability of the borrower (homebuyer) to service the payment stream from verifiable sources at no more than 36% front-end and 28% back-end load; the loan-to-value of the loan relative to the value of the collateral (the house’s appraised value) and a 20% down payment which guaranteed that the borrower had a serious stake in the game and would not casually default. These lending guidelines had been established by longtime banker experience. There was a time (in fact MOST of the time in histories of F&F) that if the debt service on a home loan consumed 28.4% of your after tax income YOU DIDN’T GET THE LOAN. If the loan was more than 80% LTV, YOU DIDN’T GET THE LOAN. Period!
But then, F&F went into the business of fudging their own rules, and did so big time. Fast forward to now, and the giant rise in home prices has undermined the LTV factor in the soundness of a great many of the loans now sold into F&Fs’ book of biz. In other words, they are holding a tremdous load of crap, to put it bluntly. As if that weren’t enough, the recasting of the variable-rate loans has placed many, many borrowers into tenous positions as to their ability to service the loans. You will note that mortgage rates, in general are HIGHER than they were before the Fed began its latest round of rate cuts. You may say “big deal, rates went from 5.75% to 6.375% and that’s still low by generational standards and I remember 18% mortgages...” and etc; but the point has to be made that PREVIOUS MOVES by “Bazooka Hank” and “Helo Ben” haven’t quite had the desired effect, have they? So maybe these guys aren’t the geniuses they tell us they are? And just to add some additional topping to this melting sundae, the forced liquidations of surrounding homes has further tarnished the collateral value of subject properties, because as you probably know, homes are sold based upon those COMPS I talked about earlier. 5.75% to 6.375% may not seem like much but in the world of bonds & morts it’s more than a 10% move; meaning, payments on adj-rate morts are set to rise almost 11%! Figure your own mort payment (or rent) into that equation and I think you’ll agree, that’s a non-trivial move; especially when apparently, housing values are continuing to fall.
So, it was a bubble, and these guys are at fault and those guys are at fault and it all started when blah blah blah.
Point being, here we are. Do we now seek to engineer a market clearing process or do we ensure the survival of the purveyors of the fraud and questionable dealings that got us into this mess; ON THE BACKS OF the 90+% of taxpayers who not only DIDN’T benefit, their homes lost value {via the COMPS mechanism] plus their savings lost value plus the purchasing power of their dollars lost value. Just how much flesh is there supposed to be on the taxpayer bone? Just how far do we trust these guys whose financial engineering helped get us into this jam and whose palliative moves have so far made the problems WORSE?
This seizure is NOT a “market clearing” event. It is yet another a hot-potato handoff to the gullible taxpayer, IMHO. NOTHING is to be done about all the folks who bought F&F debt thinking it was good as Tsys when the prospectus clearly, clearly stated it wasn’t. It WON’T lower house prices; it will synthetically attempt to PRESERVE home prices (but it won’t work)
Most galling to me, is that when F&F work to clear their books of the underperforming and defaulted loans (AND: the underlying foreclosed properties) IT WILL BE NONE OTHER than the banks themselves, recapitalized by this taxpayer handout, who will be in the optimum position to cherry-pick and self-deal (remember; Morgan Stanley is the advisor/consultant on this deal) themselves the best deals.