Things that make me go hmmm…. Geithner: No change to Fannie, Freddie until 2011 (AP)

To the average person the mounting debt being accumulated by the Federal Government is a clear and present danger. According to nationwide polls this is the second most important issue confronting voters. One of the biggest spending areas that appears out of control is the subsidies for the mortgage market. At present most of these costs are being kept off of the Federal books despite the complaints of the CBO and Republican legislators. Ironically sometime before March 31st the Federal Reserve needs to convince someone other than the Federal Reserve to buy the mortgage backed securities. I doubt Mr. Geithner reassured prospective investors with these explanations. It should be interesting to see how high an interest rate will be required to move these securities. Will they resort to selling these securities at speculative rates just to move the securities into private hands? How could a fund manager consider investing in these speculative mortgage backed securities when the Obama administration’s plan is to ignore critical mortgage problems until 2011?

Treasury Secretary Tim Geithner, right, and IRS Commissioner Doug Shulman talk to the media after taking a tour of the damaged Echelon office building in Austin, Texas, on Monday, Feb. 22, 2010.  (AP Photo/Jack Plunkett)AP – The Obama administration will wait until 2011 to propose an overhaul of mortgage giants Fannie Mae and Freddie Mac, Treasury Secretary Timothy Geithner said Wednesday, arguing that he wanted to put some distance between a new system and what he called "the worst housing crisis in generations."

Geithner: No change to Fannie, Freddie until 2011 (AP)
Wed, 24 Feb 2010 21:27:04 GMT

Obama’s Bank Tax: Missing the Target

I must give a hearty thanks to the Heritage Foundation for this article. I have been pursuing a better understanding of Fannie Mae subsidies ever since the Wall Street Journal published Katrina’s no-brainer idea that everyone should rally around the idea to tax the big banks to recoup the taxpayer-funded bailout. In an interesting twist of word meanings I agree with Katrina that taxing the big banks is no brain idea. It is difficult to understand how the average person finds the wisdom of picking a fight with commercial banks while we ignore the continuing financial disaster at Fannie Mae and Freddie Mac. So while the CBO and the Administration quietly debate when to recognize the increase in the national debt due to Fannie Mae and Freddie Mac and the Federal Reserve frets who will buy the mortgage backed security debt in April, the average person is presumed to be more interested in taxing banks rather than efforts to fix the biggest financial crisis of our generation.

In his State of the Union address Wednesday night, President Obama repeated his call for a tax on banks, calling it “a modest fee to pay back the taxpayers who rescued them in their time of need.” That sounds good, everyone agrees the taxpayer’s money should be paid back. But there’s a bit of misdirection going on here.

As shown in the chart above, most big banks have already paid back the government money they received, with interest. On the other hand, most of the big companies that still owe billions to taxpayers, including Fannie Mae and Freddie Mac, and auto firms GM and Chrysler would not be subject to the tax. Only two big firms, AIG and GMAC, owe the government and would pay the tax. Even in these cases, the “modest fee” won’t add anything to the government’s coffers ”” any taxes they pay would simply reduce the amount the amounts they pay back.

The plan will do nothing to help taxpayers or get bailout money returned to the Treasury. It makes for good rhetoric ”” what politician doesn’t want to sound anti-bank nowadays? ”” but is no substitute for real policy.

Obama’s Bank Tax: Missing the Target
James Gattuso
Fri, 29 Jan 2010 14:51:59 GMT

Real Estate Appreciation

Here is my latest version of the Real Estate Appreciation chart. This chart displays the real estate appreciation as reported by the S&P/Case-Shiller Home Price Indices. This graph differs from the previous graph in that it shows the monthly values versus the annual values. The $64 question is whether the 2009 uptick will continue. There are a lot of mixed signals in the real estate market.RealEstateAppreciation

RE: housing_projection.jpg |

Here is my latest version of the Real Estate Appreciation chart. This chart displays the real estate appreciation as reported by the S&P/Case-Shiller Home Price Indices and the Consumer Price Index from the U.S. Bureau of Labor. I decided to update the chart since my boss at work told me that housing prices had already reached 1996 levels. At least according to the Case-Shiller index the bulk over the metropolitan areas are still well above 2000 levels.


I did notice some interesting things about this chart.

  1. The twenty city index(SPCS20R) is 25.3% above 2000 levels. Despite the declines this level is still above the CPI(22.8%). If the 2000 level is the projected bottom of the real estate bubble, we still have a lot more pain before the bottom.
  2. Los Angeles appears to have avoided the real estate pain experienced by both San Francisco and San Diego. This is either good news or really bad news for Los Angeles. Considering the problems plaguing the California economy, the Los Angeles results looks really odd.

Housing Projection V2

Although it may seem from the recent housing headlines that the decrease in housing prices is accelerating, my Excel graph of the S&P/Case-Shiller Home Price Index shows a continuation of the same trend lines established in 2007. In a previous post I included a chart Robert Shiller made that predicts that the housing market will bottom out in 2011 at a price level somewhat below the 2000 level based on previous downturns in real estate. His prediction continues to look likes its on track. A recent Bloomberg headline, California Home Prices Decline 41 Percent on Foreclosures, leads me to believe that some selected areas such as California will go much lower than the 2000 price levels due to the large amount of foreclosure activity in their real estate sales.


INTERESTING MAP: 35 Counties Account for 50% of foreclosures. “And yet, California is, on average,…

On Instapundit,INTERESTING MAP: 35 Counties Account for 50% of foreclosures. “And yet, California is, on average,… , he said:

INTERESTING MAP: 35 Counties Account for 50% of foreclosures. “And yet, California is, on average, the happiest state in the nation. Weird how things work.” Why shouldn’t they be happy? ”” the rest of us are paying their mortgages. . . .

Not to belabor the point but California “used” to be one of the happiest states. They had high paying jobs, good job security, and all of their investments continually increased.  They were living the good life. In one year everything has changed. They were hit with the triple whammy. First their real estate not only stopped appreciating but started to drop quickly. Many home owners soon found that they owed more money on their house than it was worth. Then the job layoffs began as the economy rapidly slowed down. I saw an article published recently that said California has one of the highest unemployment rates in the country. When you combine these employment fears with the free fall in the home prices and stock market and dysfunctional state and local governments, I doubt you will be able to find a recent poll that shows Californians to be very happy. Those laid back Californians just got a wake up call that they cannot ignore. It is time to start work on the new California.



The beneficiaries of taxpayer charity will be highly concentrated in just five states – California, Nevada, Arizona, Florida and Michigan. That is not because the subsidized homeowners are poor (Californians with $700,000 mortgages are not poor), but because they took on too much debt, often by refinancing in risky ways to "cash out" thousands more than the original loan. Nearly all subprime loans were for refinancing, not buying a home.


I linked to this article because I have been telling anyone who would listen that this recession is going to be felt more severely in just a few states. Everyone is going to feel the recession but the tone of the conversation will be dominated by the severity of the problems in just a few states. Meanwhile the economies in the other states will recover quickly since they have less severe problems to deal with. All of the states on this list except for Michigan were the primary beneficiaries of the real estate bubble and the sub-prime lending. I suspect that Michigan’s problems are more closely related to the layoffs in the auto industry. Michigan’s problems will only be resolved when the rest of the country starts to buy cars again.

Thomas Szasz… the wise forgive but do not forget

"The stupid neither forgive nor forget; the naive forgive and forget; the wise forgive but do not forget."

Thomas Szasz

I do not know why I have been thinking of Rep. Barney Frank the last couple of days. I think he honestly cares about low income families trying to put a decent, affordable roof over their heads. It is good to have a legislator in a powerful position who cares about low income families but that concerns me, too.  I do not believe the subprime extravaganza helped out low income families achieve the long term increase in home ownership we sought. In hindsight it will probably be viewed as a wasted effort that primarily benefited “other” people. My gut feeling is that he will forgive and forget and we will be facing another subprime sequel in the nearby future.

What my experience with Habitat for Humanity tells me about the Community Reinvestment Act

I was browsing the feed for Instapundit when I saw this link, Stop Covering Up and Kill the Community Reinvestment Act. Since I view my experience with Habitat for Humanity to be relevant to a discussion about the Community Reinvestment Act, I followed the link. The Investor’s Business Daily article argues for the elimination of the the Community Reinvestment Act because it led to lower mortgage standards and subsequently higher number of mortgage defaults. Here is my argument for modification of the Community Reinvestment Act rather than elimination.

  1. The Community Reinvestment Act in its present form appears to throw money at the home ownership problem in low income areas and hopes that something good will happen. From my Habitat for Humanity experience I can tell you that this does not work. When I look at the low income community we focus on, I can see little effect from the Community Reinvestment Act. Home ownership numbers languish at the same numbers they were at twenty years ago. At Habitat we spend a large amount of time on the front end and the back end of the mortgage to make home ownership work for the families. Building houses is the fun part. Making home ownership work for low income families is hard work and it is not an option for us. We either spend the time or the home owner will fail. We take this personally. When one of our home owner fails, we fail. There is a fine line between between building a home that blesses the family and the community and building tomorrow’s ghetto. Mortgage brokers are reluctant to perform this kind of nurturing even though it is necessary for success. Low income home owners are not like the other home owners, they have more problems. At Habitat we feel we are lucky if we can break the rental mentality in a couple of years.
  2. I think that the Community Reinvestment Act would be more effective if the mortgage originators were not allowed to securitize the mortgages. This places an ownership burden on the mortgage originator that would force a small town banker mentality to this sector of the mortgage market.  The most important number for making mortgages work in low income areas is the home owner’s telephone number. If you have a personal relationship with the home owner, they will pick up the phone and listen to your advice.
  3. When we follow normal mortgage practices at Habitat, it works. When we do not follow standard mortgage practices, we frequently fail. When we get carried away with compassion, we cause more harm than good. The only difference between a Habitat mortgage and a standard mortgage should be the zero interest loan.