Tuesday, November 13, 2007

Taxpayer Bailout Act 1?

I was reading the WSJ today and came across an article here about how the Federal Government is putting up more of the cash for home mortgages. Now, if you have been reading my column up to this point you know that I have been warning of this for a while and that I am concerned that the taxpayers will ultimately pay for the mortgage meltdown (see my October 7 article and here and here).

I decided to do a little homework and I looked up the portfolio and guarantee growth of Fannie Mae, Freddie Mac, and the Federal Home Loan Bank portfolios from December 2006 to September 2007 (I can’t wait for the October numbers). What I found is that on a combined basis, these three entities (the Federal Home Loan Banks are considered one for this) increased their portfolios (for Federal Home Loan Bank this includes portfolio mortgages and investments) by over $640 billion in that nine-month period. Is this a lot? Well, it is an annualized compound growth rate (compounding monthly) of approximately 16%. In 2006 the growth rate was 7.7% for Fannie Mae, 8.4% for Freddie Mac, and 1.8% for the Federal Home Loan Bank. In September Freddie Mac's portfolio grew at a 23.3% rate, Fannie Mae's portfolio grew at approximately 14%, and the Home Loan Banks grew almost 30% from June 30 to September 30. Add to that the fact that total mortgage originations are expected to be down this year by 15%, and we see the massive shift to government program mortgages.

Of particular note is the Federal Home Loan Bank. Federal Home Loan Bank advances have grown from $619.8 billion at December 31, 2005 to $640.7 billion at December 31, 2006 to $824 billion at September 30, 2007. WOW! Just what are “advances” from the Federal Home Loan Banks? "FHLBank Advances. Advance lending is the FHLBanks' main business line. It currently represents about two-thirds of all the FHLBanks assets. These loans, known as advances, are well-collateralized loans used by members [that would be the banks as we know them] to support mortgage lending, community investment and other credit needs of their customers.” That quote is from here. In other words, secured loans to the banks backed by mortgage related collateral (I think). Now, I know critics will say that these are not subprime mortgages. This is just the government utilizing its tools to get the mortgage market liquidity machine running again. Unfortunately, I could not find any detail describing exactly what collateral is backing those additional $183.3 billion “advances” from the Federal Home Loan Banks or the FICO scores of the recently added GSE (Fannie and Freddie) loans, so for now that is open for uninformed debate. What is clear, however, is that the federal government has funded and/or guaranteed, either implicitly or explicitly, approximately $640 billion of mortgage loans since the 2006 year-end.

(Note: None of this includes Ginnie Mae which as of year-end 2006 had total outstanding government guaranteed mortgage backed securities of $410.5 billion. I have been unable to find any quarterly data on Ginnie Mae exposure. And according to HUD, the total dollar amount of single-family home mortgages guaranteed by the FHA was $342.6 billion at the end of September, up from $336.6 billion at the end of December 2006. Not a substantial increase but lets keep an eye out for the October report. You will find it here when it is published.)

The taxpayers are propping up the mortgage and real estate markets and could well be the ultimate big loser in the subprime mortgage meltdown. The data is not available yet to figure this out (at least not to someone with a computer and internet connection). The really scary thing is that most of the problem loans have yet to refinance. Even worse still (if you can believe it) is the idea floating around the halls of the Senate to back jumbo mortgages of up to $1 million with taxpayer guarantees. This is an outrage in my book, and a complete waste of taxpayer dollars even to be considering such a proposal (not to mention the distortions that such a program would create in the market). If you would like more information on this, go here and click on “stupidity”.

Sphere: Related Content


Anonymous said...

Makes me want to stop paying my mortgage.

Doe to timing I bought a house last year, it would have been nice to wait but I couldn’t. But I did it all by the book I saved enough to put a down payment sizeable enough to make my mortgage payments something that I could afford even in most worse case seniors. So I did everything right, yet if I did it all wrong I would be better off.

Not only that its going to be some of my money that bales out those who did it wrong. The government needs to start prioritizing its actions and stop hurting those who are productive to help those who are not.

Palermo's Blog said...

I understand how you feel. I have friends in the same boat. One purchased a home but lost his sale of his condo to a subprime buyer because of mortgage problems (this was in August). Now he's carrying two mortgages, working three jobs, and can barely make it. No help for him either. I wrote more about this a while ago here.

Thanks for your comments.