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“I don’t think it is either. I see it this way: The feds and the markets have conspired for various reasons using various means over a number of years (75+) to create a housing market by which people must take loans or else least be unable to afford a house. Now that those practices have resulted in a negative outcome for both the markets and the feds, we are treated to the announcement that credit shall be dried up considerably and that we must now pay the price; not the markets pay the price, homeowners and taxpayers will pay the price.’

Well, I am not one for ascribing blame so much. There’s just too much to go around.

Also, I am not so much an absolute purist on the very existence of F&F. Having to borrow to afford a home is not, in and of itself, that much of a bugaboo for me. I WILL say that the process was allowed to run utterly amok. And further, concurent with the gross relaxations of underwriting standards was the wholesale toss-out of nominal debt-servicing guidelines. Which amounts to pretty much the same thing: Homes have sold, before the insane runup of the past 5 or so years, for roughly 3x the median income for a given area. Of course, there are fancier and more spartan homes in any particular area, and that’s how it should be, I’d say.

If we can agree that homeownership is generally a net positive to society, for a pile of fairly obvious reasons, I don’t have a problem with the secondary mort mkt created by the “invention” of F&F. As I’ve said (may have been in another thread) I think most would agree that within nominal bounds the creation of F&F have been net positives. Enable homeownership; free up lending capital on the part of local banks; give investors something good and solid to invest in; Help build up townships & cities. Up to now, they have been a fairly transparent game that offered those benefits to borrowers and lenders, and under good supervisory guidelines (LTV, debt svce ratios, etc) were probably responsible for much of the growth in the country’s housing stock. Yeah, a little bit socialistic, but nothing’s perfect.

By seizing F&F, though, I still believe this is a “biz as usual” move. Because under the plan, per what I’ve gleaned so far, until 12/09, F&F will actually EXPAND their book of business by about 20-25%; and thereafter REDUCE their book of biz by 10% per annum.

Why do I think biz as ususal?

1: Because the Tsy and Fed have effectively given the banks the above deadline before which they will be able to make final determinations as what loans they should dump into the cesspool. Together, F&F are intended to increase their books by $144 billion over the next 16 months.

2: The CURRENT holders of preferred debt are being subordinated (the ol’ switcheroo) behind newly issued preferred shares, which the government will own and which will yield 10%. This in a sub-4% rate environment. The Govt will assume control of 80% (actually 79.9% but let’s not quibble) of the books of F&F. Roughly 9% of current mortgages are in arrears in various forms; but few think that the bondholders would take more than 5% haircut if F&F were liquidated. A loss, sure, but not a catastrophic loss. How this is expected to “strengthen” F&F is totally beyond me. Between the preferred divs old and new, F&F are going to have to earn something like 10.5% to pay that vig on the new shares. I have no idea of the composition of F&Fs’ current book as to adj vs fixed morts, but suffice it to say that nobody with functioning neurons who was able to refi in the 5% range hasn’t done so. So, let’s say 25% of their books average 5.5% fixed and 75% are variables. Maybe my wild-ass guesses are way off, but I see NO BLOODY WAY F&F can pay the Feds 10% interest without forcing fire sales of distressed assets, which, again, I say will be snapped up by “insiders”. And thus, this formula seems specious from the very beginning, meaning it will be forced to change again. And again. Per which side of the bed the Hankster woke up on. The WAY it is likely to change, IMO (which could be 100% wrong) is to FORCE SALES which will drive down collateral values and endanger reserve ratios in the regional banks. So, I kind of see this as a self-built-in “Trojan Horse” defect with its own built-in-from-the beginning failure mode which will force this whole plan to be adapted again and again as time goes on and RE values decline.

3: And so, the originating banks will end up the beneficiaries NOW by getting rid of their worst crap, and THEN; by being both able (recapitalized) and clued-in to the best deals during the post 2009 cleanup phase.

My bottom line is that the seizure IMMUNIZES the banks (and the Chinese and Japanese) against preferred-share default yet guarantees NOTHING to the taxpayers (flowery language notwithstanding) because there is only most outlier case that the new preferred will be able to support a 10% coupon without scavenging the soundness of the current preferred and current debt. But THAT debt, despite being peddled as NOT backed by the Feds, is NOW BACKED by the Feds! So IMO, the seeds are, as we speak, being sewn for this running sore to get worse and worse. But Paulsen will be kicked out of office by then and someone else can play janitor.