20 million American homeowners own their homes outright. No mortgage.

Homeowners With No Mortgage Offer Clues to Recovery
Excerpt:

As federal regulators and banks argue over whether new lending standards will make mortgage credit too tight or too expensive, one important fact about the housing market goes largely overlooked: More than 20 million American homeowners own their homes outright. No mortgage.

This represents just about one third of all homeowners nationwide, according to a new report from Zillow, a real estate information, sales and mortgage website.

Demographics, home prices and geographical location all seem to play into "free-and-clear" home ownership, according to Zillow's survey.

Out of the nation's top 30 housing markets, Pittsburgh, Tampa, New York, Cleveland and Miami had the highest percentage of free-and-clear homeowners. A high number of all-cash, foreign buyers probably plays into New York and Miami. The other cities have relatively low home values, compared to the rest of the nation, making it easier for homeowners to either buy their homes outright or pay off their mortgages more quickly. ([See "free and clear" heatmap in the article].)

Washington, D.C., Atlanta, Las Vegas, Denver and Charlotte had the lowest percentage of homeowners with no mortgage. Las Vegas, hard hit by the housing crash, saw many of its homes go to foreclosure and those homes then go to all-cash investors.

Comment: All of my wife's siblings, one of my siblings and my mother all are "free and clear". One sibling is free and clear on two homes. Another of my siblings will be free and clear within the next six months. Image source is screenshot

John Stumpf on housing crisis

Wells Fargo CEO: Why Americans are saving so much
Excerpt:

There are about 70 million homes in America. Fifty million have a mortgage on them. The average mortgage is $200,000, so you've got about a $10 trillion market. Today about 20% of those mortgages are underwater -- they owe more than what the home is worth. But we're starting to see values come back. I don't know that we'll ever be where we were or should be where we were in the last six, seven, eight years when it was just trading up. But housing is still, for two-thirds of Americans, the American dream. It's not for everyone to own a home. But I'm bullish on housing. I'm bullish on Americans' desire to own homes. It will be slow, but it's healing almost everywhere.

Comment: From December 3rd Forbes.

Metro home prices in decline

Twin Cities home values decline at record pace

Excerpt:

Zillow.com’s latest report on the housing market suggests that home prices are still falling. A lot. During the last quarter of 2010 home values in the Twin Cities metro area fell 12.1 percent, or $22,800 compared with the previous year — the highest quarterly decline on record since Zillow starting keeping stats in 1996. Quarter-to-quarter values were down 5.8 percent. Nationally the annual decline averaged only 5.9 percent and fell 2.6 percent between the third and fourth quarters.
Zillow’s home value index in the Twin Cities during that period was $166,300, down 32.6 percent or $80,500 from the July 2006 peak.

The data is different from the Minneapolis Area Association of Realtor’s sales report that I write about every month. This one tracks the value of all homes, not just those that have sold. It also shows that 42.3 percent of all single-family homes in the Twin Cities with a mortgage were underwater, up slightly from the third quarter and way above the national average of 27 percent. Okay, and there’s one more piece of bad news: 36.1 percent of all home that sold during December sold for a loss — another slight increase from the previous quarter

Comment: Chart is from Zillow for my home. Underwater numbers are vastly different than reported by USAToday yesterday (blogged here). USA today was just for Hennepin CO. "Twin Cities" would include outlying counties.

Hennepin Co ranked amoung lowest Counties with mortgages "underwater"

Chart: Owing more than home is worth

Comment: Good news for Hennepin Co home owners. Chart from USA today. Click through for full chart.

23% of homeowers "underwater"

Home Values to Drop by $1.7 Trillion This Year, Zillow Says

Excerpt:

U.S. home values are poised to drop by more than $1.7 trillion this year amid rising foreclosures and the expiration of homebuyer tax credits, said Zillow Inc., a closely held provider of home price data.

This year’s estimated decline, more than the $1.05 trillion drop in 2009, brings the loss since the June 2006 home-price peak to $9 trillion, the Seattle-based company said today in a statement.

The drop in home values pushed more buyers underwater, meaning they owe more on their mortgages than their homes are worth, Zillow said. The percentage of homeowners with so-called negative equity reached 23.2 percent in the third quarter, up from 21.8 percent at the end of 2009.

“With foreclosures near an all-time high in late 2010 and high rates of negative equity persisting, it does not appear that the first part of 2011 will bring much relief,” Stan Humphries, Zillow’s chief economist, said in the statement. “Government incentives can only temporarily hold back the tide.”

Comment: Good definition of underwater - bolded and red above. Image source: Freaking News. Per Zillow, my own house has declined in value by 20% from mid-2006 to today.

Housing-Stress Indicator

Excerpt:

Financial advisers warn against spending more than 30% of a household’s income on housing costs, as it can crimp other expenditures and savings. It also leaves little room for unexpected shocks to income, such as illness or unemployment. Miami was at the top because it had the highest percentage of mortgage holders spending more than 30% on housing among large metro areas — 57.7% compared to the national average of 37.5%. At the same time, a quarter of the city’s residents are without health insurance — compared to the national average of 15% — making it difficult to deal with a the expense created by an illness and still pay a mortgage.

The problems also can feed on one another. A housing bust can lead to unemployment as construction and other real-estate related jobs dry up, which then pushes more people into foreclosure.

Comment: Sortable list from the Wall Street Journal

Housing: the threshold of affordability

41.7 Million Spend Too Much on Housing

Excerpt:

As of 2009, some 41.7 million U.S. households, or 36.7% of the total, faced housing costs that exceeded 30% of their pretax income — a level typically defined as the threshold of affordability. That’s an increase of 1.5 million from 2007, despite a sharp drop in house prices and policy makers’ extraordinary efforts to bring down mortgage payments.

At first glance, the numbers seem incongruous. By most measures economists and policy makers follow, U.S. households’ finances are getting better. Their debt burden, expressed as mortgage and consumer debt outstanding as a share of disposable income, has been falling ever since September 2007, from a peak of 130% to 119% in June 2010. Over the same period, payments on that debt have decreased from 18.9% to 17.0% of disposable income — the lowest level since 1998. To be sure, much of the improvement is coming as a result of defaults, but it still suggests consumers are getting in a better position to start spending again.

Such measures of household finances, though, are akin to the average temperature in a hospital — they don’t tell you how many people are really ailing. According to the American Community Survey for 2009, released earlier this week, the ranks of the financially ill are growing, at least in terms of the share of the population that is paying too much for housing. That’s particularly unfortunate given the fact that the housing bust, for all the pain it inflicted, should at least have made it cheaper to put a roof over one’s head.

Comment: Back when we bought our first house (1975), the rule of thumb was 25%

A home ... "a ball and chain"

The American Dream of Home Ownership Has Become a Nightmare

Excerpt:

Culturally a decent house has been a symbol of middle-class family life. Practically, it has been a secure shelter for the children, along with access to a good free education. Financially it has been regarded as a safe store of value, a shield against the vagaries of the economy, and a long-term retirement asset. Indeed, for decades, a house has been the largest asset on the balance sheet of the average American family. In recent years, it provided boatloads of money to homeowners through recourse to cash-out refinancing, in effect an equity withdrawal from their once rapidly appreciating home values.

These days the American dream of home ownership has turned into a nightmare for millions of families. They wake every day to the reality of a horrible decline in the value of the home that has meant so much to them. The pressure to meet mortgage payments on homes that have lost value has been especially shocking—and unjust—for the millions of unemployed through no fault of their own. For the baby boomer generation, a home is now seen not as the cornerstone of advancement but a ball and chain, restricting their ability and their mobility to move and seek out a job at another location. They just cannot afford to abandon the equity they have in their homes—and they can't sell in this miserable market.

American homeowners have experienced an unprecedented decline in their equity net of mortgage debt. The seemingly never-ending fall in prices has brought an average decline of at least 30 percent.

Comment: For many it is blessing not a ball and chain. Of course if one buys a home (say in 2005 in Florida) for $ 350,000 and now 5 years later they are forced to sell and the house is worth $ 100K less; that's a ball and chain! Our own home per Zillow is worth 18% less than it's "value" at the end of 2005. But fortunate for us we did not buy it in 2005 AND we are not selling it in 2010.

Deutsche Bank: "dire assessment" on housing

About half of U.S. mortgages seen underwater by 2011

Excerpt:

The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said.

"The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," the analysts said. Prime jumbo loans make up 13 percent of the total market.

Deutsche's dire assessment comes amid a bolt of evidence in recent months that point to stabilization in the U.S. housing market after three years of price drops. This week, the National Association of Realtors said pending home sales rose for a fifth straight month in June. A widely watched index released in July showed home prices in May rose for the first time since 2006.

Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.

The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.

Comment: Deutsche Bank is a credible source. If this is so ... housing will go down before it recovers.

A return of "the projects"?

Obama mulls rental option for some homeowners

Excerpt:

U.S. government officials are weighing a plan that would let borrowers who have fallen behind on their mortgage payments avoid eviction by renting their homes instead, sources familiar with the administration's thinking said on Tuesday.

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.

Officials are also considering whether the government should make mortgage payments on behalf of borrowers who cannot keep up with their home loans, tapping an unused portion of a $50 billion housing aid kitty.

As part of this plan, jobless borrowers might receive a housing stipend along with regular unemployment benefits, the sources said.

Comment: A history of "the projects"

2006 a 'lifetime' peak in home prices?

Why home values may take decades to recover

Excerpt:

The boom in home prices — fueled by heavily leveraged loans built on low or even no down payments — made it easy to forget that housing values had been remarkably stable for a half-century after World War II, rising at roughly the same pace as income and inflation. Prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washington, D.C., and New York — during a brief period of easy lending, especially from 2002 to 2006. That era's over.

So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom.

The price plunge has wiped out trillions of dollars in home equity and caused the worst financial crisis since the Great Depression. Susan Wachter, professor of real estate at the University of Pennsylvania, fears that foreclosures and tight credit could send home prices falling to the point that millions of families and thousands of banks are thrust into insolvency.

Comment: Longer article that is a worthwhile read. Explains how this housing crisis is different than previous.

Homes now undervalued?

U.S. homes now undervalued, economists say: Prices fall in 241 metro areas in third quarter, and are likely to fall further

Excerpt:

Compared with their long-term fundamental values, U.S. homes are now 3.8% undervalued, the economists said.

"With no end in sight to the downward spiral of house prices, it is likely that the long-anticipated market correction will now overshoot fundamental valuations on the downside," said James Diffley, head of regional economics at Global Insight.
"Weak economic conditions and wary consumers continue to hold the housing market back," said Jeannine Cataldi, senior economist in charge of Global Insight's regional real estate analysis. "Although many areas are seeing home sales increase, it is largely due to foreclosure homes being snapped up at significantly discounted prices. As the inventory of these homes is removed from the market, prices will remain on a downward path."

However, another economist said home prices are still too high in many bubble areas.

Comment: They are still falling in Minneapolis and her suburbs. (But property taxes are going up! ???)

Cisneros (Clnton administration) loosened HUD rules

Building Flawed American Dreams

Excerpt:

the National Homeownership Strategy, which promoted ownership as patriotic and an easy win for all. “We were trying to be creative,” Mr. Cisneros recalls.

Under Mr. Cisneros, there were small and big changes at HUD, an agency that greased the mortgage wheel for first-time buyers by insuring billions of dollars in loans. Families no longer had to prove they had five years of stable income; three years sufficed.

And in another change championed by the mortgage industry, lenders were allowed to hire their own appraisers rather than rely on a government-selected panel. This saved borrowers money but opened the door for inflated appraisals. (A later HUD inquiry uncovered appraisal fraud that imperiled the federal mortgage insurance fund.)

“Henry did everything he could for home builders while he was at HUD,” says Janet Ahmad, president of Homeowners for Better Building, an advocacy group in San Antonio, who has known Mr. Cisneros since he was a city councilor. “That laid the groundwork for where we are now.”

Mr. Cisneros, who says he has no recollection that appraisal rules were relaxed when he ran HUD, disputes that notion. “I look back at HUD and feel my hands were clean,” he says.

Lenders applauded two more changes HUD made on Mr. Cisneros’s watch: they no longer had to interview most government-insured borrowers face to face or maintain physical branch offices. The industry changed, too. Lenders sprang up to serve those whose poor credit history made them ineligible for lower-interest “prime” loans.

...
In 2000, Mr. Cisneros returned to San Antonio, where he formed American CityVista, a developer, in partnership with KB, and became a KB director. KB’s board also included James A. Johnson, a prominent Democrat and the former chief executive of Fannie Mae, the mortgage giant now being run by the government. Mr. Johnson did not return a phone call seeking comment.

It made for a cozy network. Fannie bought or backed many mortgages received by home buyers in the KB Home/American CityVista partnership. And Fannie’s biggest mortgage client was Countrywide, whose board Mr. Cisneros had joined in 2001.

Comment: Interesting read. I continue to contend that the current housing (mortgage) crisis has more than one parent. There is much blame to go around!

Joey the upside down homeowner

Comment: More from the Star Tribune article cited in the previous post.

Millions owe more on their homes than homes are worth

Excerpt:

Joey Goldner always approached real estate with a gardener’s zeal. He’d plant his money in a building, patiently care for it and watch its worth grow. For 30 years, it was a brilliant avocation — right up until the heavy thud of the housing market helped flip Goldner’s mortgage upside down.

Facing debilitating health problems, Goldner refinanced his Chicago-area home repeatedly, only to wind up with a $729,000 mortgage on a house that eventually sold for $450,000.

In real estate circles that’s called being underwater — owing more than the value of a home. Goldner is just now coming up for air.

“I kept refinancing it to pay the mortgage,” he said. “I kept hoping the market would level off. I never imagined this would happen.”

Comment: From the comments - "I think most people agree that this nation is financially illiterate". That's it!

Detroit foreclosure meltdown

Foreclosure fallout: Houses go for a $1

Excerpt:

The home, at 8111 Traverse Street, a few blocks from Detroit City Airport, was the nicest house on the block when it sold for $65,000 in November 2006, said neighbor Carl Upshaw. But the home was foreclosed last summer, and it wasn't long until "the vultures closed in," Upshaw said. "The siding was the first to go. Then they took the fence. Then they broke in and took everything else."

The company hired to manage the home and sell it, the Bearing Group, boarded up the home only to find the boards stolen and used to board up another abandoned home nearby.

Scrappers tore out the copper plumbing, the furnace and the light fixtures, taking everything of value, including the kitchen sink.

"It about doesn't make sense to put the family out," Upshaw said. "Once people are gone, you're gonna lose the house in this neighborhood."

Tuesday, the home was wide open. Doors leading into the kitchen and the basement were missing, and the front windows had been smashed. Weeds grew chest-high, and charred remains marked a spot where the garage recently burned.

Put on the market in January for $1,100, the house had no lookers other than the squatters who sometimes stayed there at night. Facing $4,000 in back taxes and a large unpaid water bill, the bank that owned the property lowered the price to $1.
$1 sale to cost bank $10,000

While it's not unusual for $1 to be exchanged when property is transferred for legal reasons, listing a home in the Multiple Listing Service for $1 was surprising and unsettling to Kent Colpaert, the listing real estate agent for the property.

"I've never seen a home listed for $1," Colpaert said.

"But it's been hit hard: It's just a shell."

On Tuesday, Realtor.com listed one other single-family home, one duplex and one empty lot at $1 in Detroit.

Dollar property sales are the financial hangover from the foreclosure crisis, said Anthony Viola of Realty Corp. of America in Cleveland.

Comment: Find other deals here: www.realtor.com. I found others for $ 1. Many others for under $ 1000.

Parade of unsold homes

Overbuilt market creating modern ghost towns

Excerpts:

Scott MacDonald, a 40-year-old lawyer, and his family were among the first buyers of new homes in Kirkway Estates, a residential community in the Detroit suburbs. The MacDonalds paid more than $500,000 in 2006 for a home that would be ready in July 2007. The Colonial-style brick home had four bedrooms, three-and-a-half bathrooms, and designer touches and offered everything they expected in a town known for great public schools and homes fit for Ford execs.

Everything, that is, except neighbors.

When the MacDonalds arrived, there were fewer than 15 homes in Kirkway Estates, where 179 were planned. Their home was the only one built thus far on a cul-de-sac with six lots. They expected more houses to appear soon after they purchased, but instead Kirkway’s builders ran into financing trouble and work on the community’s remaining lots halted, leaving the MacDonalds and their handful of neighbors in limbo.
...
Economists have said that for the housing market to correct itself, inventory levels and sales prices will need to decline during 2009 — which may mean half-built communities don’t get completed and remaining homes are sold at a discount. Tim Newport, U.S. Economist for Global Insights, said in a July 31 housing market report that although the number of newly built single-family homes continues to drop, the market still has an oversupply of about 100,000 homes, based on June’s inventory of 426,000.

Comment: I think that Albertville MN is like this too!

Finding "the bottom" of housing prices

In Their Various Ways, Economists Try to Find Right Price for a Home

Excerpt:

he New York Times asked economists across the country to share the data they use to figure out how much houses in regional markets are overvalued, a calculation that approximates where the bottom may be. Models built on these variables show that while some markets — such as California — are on a road to recovery, others — such as south Florida — have a way to go.

These signs cannot possibly tell the whole story, especially since they point more toward where prices should be valued than where they will be. But these measures are nonetheless helpful to anyone buying, selling or borrowing against their home sweet home.

“Anybody who says they know when it’s going to end with confidence is delusional,” said Karl E. Case, an economics professor at Wellesley College and co-creator of the Case-Shiller home price index. “But yes, you can get a sense of where things are going.”

One way to envision the bottom would be to look back at where prices were five or 10 years ago, before the current price run-up. There are some better ways, though.

Noting that home prices have outpaced inflation in the past, one can calculate how much houses appreciated annually in the decades before the bubble, and then figure out how far out of line prices are now. Edward E. Leamer, director of the U.C.L.A. Anderson Forecast, has crunched these numbers for various regional markets.

In Ocean City, N.J., for example, inflation-adjusted house prices rose about 1.6 percent a year from 1988 through 2002. Compared with what this rate would predict, the city’s houses in the first quarter of this year were overvalued by 51 percent. Over the previous year, they had fallen 0.6 percent; at this pace, Ocean City house prices will be at the right level in about 13 years. The model foretells eternal decline for some cities. It predicts that Kingston, N.Y., will not return to “normal” for almost four centuries.

Comment: Notice this: "Kingston, N.Y., will not return to “normal” for almost four centuries." !!!! Good article with helpful charts

Upside down nation

America's Most In-Debt Households

Excerpt:

Falling home prices and resetting loans have been cruel to homeowner equity: nationwide. Americans' homeowner equity represents 46% of their properties' value; that's down from 60% at this time last year, and a far cry from the 67% high achieved in 2000.

But that was before unproven mortgage products became de rigueur. If you think an average of 19% equity is low, when you consider the loans made post-2004, the picture grows bleaker.

"Most mortgages made between the fall of 2004 and the fall of 2007, the majority of them are underwater," says Mark Zandi, chief economist at Moody's Economy.com, describing negative-equity situations in which more is owed on the home than it's worth.

"There are 9.6 million homeowners underwater, and most of them are those that bought from the end of 2004 through the end of 2007 in places like California and Florida and Nevada."

Price declines, one of the leading causes of equity drops, occur for a wide range of reasons, whether because of basic supply and demand, poor access to credit for potential borrowers, a sliding local economy where buyers have less to spend, or an appraised value inflated by overeager underwriters.

In Las Vegas or Phoenix, where prices exploded in the early 2000s, builders rushed to manufacture as much inventory as possible and lenders were less than judicious with credit. As prices started to fall in 2006, homeowners began walking away from resetting rates, homebuilders couldn't find buyers, and all the jobs that had been created by the construction frenzy melted away.

Price declines, resetting rates and job losses are the leading determinants of foreclosures, which totaled 739,714 in the second quarter of 2008, according to RealtyTrac, an Irvine, Calif.-based brokerage.

If a home is worth more than the value of the loan, for example, and there are buyers willing to acquire it, a property owner who falls behind on payments can simply sell the home at a slight loss. But when the loan exceeds the home's worth and buyers are scarce, homeowners, weighed down with higher than expected monthly payments, have little choice but to foreclose.

Comment: I have a sense that this housing crisis may take 2-3 years before resolved. MSP mentioned: "residents of ... Minneapolis-St. Paul own a dismal 27% of their home's value in equity"

The political monster of combining private profit with government power

Explaining the Mammoth Housing Bill

Excerpt:

Congress is expected to vote this week on legislation that would address the home-foreclosure crisis and shore up mortgage giants Fannie Mae and Freddie Mac. President Bush has reversed his earlier opposition to the bill, saying it is important to increase confidence and stability in the housing and financial markets.

A look at what the bill would do:

— Give the Treasury Department the power to extend Fannie Mae and Freddie Mac an unspecified line of credit and to buy their stock, if necessary, to prop up the mortgage companies. The two companies back or own $5 trillion in U.S. mortgages — nearly half the nation's total.

— Allow qualified homeowners facing foreclosure to apply for lower fixed-rate, 30-year mortgages backed by loan guarantees from the Federal Housing Administration. The original lenders would have to agree to take a loss on their loans.

— Create an independent regulator to oversee Fannie Mae and Freddie Mac. The regulator could establish minimum capital requirements for the two companies and limits on their portfolios. It would also have approval power over the pay packages of Fannie Mae and Freddie Mac executives.

The Fannie Mae Gang

Excerpt:

Fan and Fred also couldn't prosper for as long as they have without the support of the political left, both in Congress and the intellectual class. This includes Mr. Frank and Sen. Chuck Schumer (D., N.Y.) on Capitol Hill, as well as Mr. Krugman and the Washington Post's Steven Pearlstein in the press. Their claim is that the companies are essential for homeownership.

Yet as studies have shown, about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management. According to the Federal Reserve, the half that goes to homeowners adds up to a mere seven basis points on mortgages. In return for this, Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002, and in 2003 Mr. Raines pocketed more than $20 million. Fannie's left-wing defenders are underwriters of crony capitalism, not affordable housing.

So here we are this week, with the House and Senate preparing to commit taxpayer money to save Fannie and Freddie. The implicit taxpayer guarantee that Messrs. Gray and Raines and so many others said didn't exist has become explicit. Taxpayers may end up having to inject capital into the companies, in addition to guaranteeing their debt.

The abiding lesson here is what happens when you combine private profit with government power. You create political monsters that are protected both by journalists on the left and pseudo-capitalists on Wall Street, by liberal Democrats and country-club Republicans. Even now, after all of their dishonesty and failure, Fannie and Freddie could emerge from this taxpayer rescue more powerful than ever. Campaigning to spare taxpayers from that result would represent genuine "change," not that either presidential candidate seems interested.

Comment: True capitalism allows for failure and loss. Propping up Fannie Mae and Freddie Mac engenders waste and inefficiences. I'm disappointed the the President would not veto this bill! More below:

Housing Bill Hammers Taxpayers

Even conservative estimates by the Congressional Budget Office say the cost for this bailout will run to $41.7 billion, with $16.8 billion offset by higher taxes. No one has any idea of the real cost. The most expensive provision gives the Treasury temporary authority to pour money into Fannie Mae and Freddie Mac. The CBO says this could cost $100 billion, or it could cost "nothing." So it threw a dart at the wall and assigned a $25 billion price tag to the Fan and Fred bailout.

Likewise, the bill's $300 billion to refinance and insure distressed loans through the Federal Housing Administration will supposedly cost just a few billion dollars. That assumes few homeowners and lenders will sign up for the program because lenders will have to take a 10% haircut to be eligible. If no one needs this program, why is it there? If lenders do take advantage, they're bound to dump their worst loans on the feds. So as with the Fan and Fred bailout, the FHA guarantee will be either superfluous or much more expensive than we're led to believe.

Fannie, Freddie and You

Fannie, Freddie and You

Excerpt:

The case against Fannie and Freddie begins with their peculiar status: although they’re private companies with stockholders and profits, they’re “government-sponsored enterprises” established by federal law, which means that they receive special privileges.

The most important of these privileges is implicit: it’s the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.

This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.

...
Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.

Comment: I confess that I don't understand the depth or breadth of this credit crisis. There's a lot that that I don't understand about these GSE's too. More below (be sure to view graphics!):

U.S. Weighs Takeover of Two Mortgage Giants

Under a 1992 law, Fannie or Freddie could be put into conservatorship if their top regulator found that either one is “critically undercapitalized.” A conservator would have sweeping powers to overhaul them, but would not have the authority to close them.

The markets showed fresh signs on Thursday of being nervous about the future of the companies. Their stock prices continued a weeklong slide, hitting their lowest level in 17 years. The debt markets, meanwhile, pushed up the two companies’ cost of borrowing — their lifeblood for buying mortgages.

The companies are by far the biggest providers of financing for domestic home loans. If they are unable to borrow, they will not be able to buy mortgages from commercial lenders. In turn, that would make it more expensive and difficult, if not impossible, for home buyers to obtain credit, freezing the United States housing market. Even healthy banks are reluctant to tie up scarce capital by offering mortgages to low-risk home buyers without Fannie and Freddie taking the loans off their books.

Together the two companies touch more than half of the nation’s $12 trillion in mortgages by either owning them or backing them. They hold more than $1.5 trillion of the mortgages as securities. Others are sold to investors in the form of mortgage-backed bonds.