Housing Market is Awful

credit, Debt, denninger, economy, Government, Housing, Insolvency, moral hazard, Treasury Tagged with: denninger, Fannie, Freddie, housing market, loan guarantees, Treasury

Dec 282009

Kicking the Can Down the Road

If you believe that the housing market is improving, it might be understandable given the “pumping” provided by main-stream media, CNBC, government officials and Federal Reserve statements. However, you might want to look at government actions rather than propaganda.

On Christmas eve, after the close of markets, Bloomberg reported regarding Fannie and Freddie: “The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under a new agreement announced yesterday, these limits can rise as needed to cover net worth losses through 2012.”

This action is not consistent with an improving housing market. It represents the kind of panic reaction that might be taken in a market that is imploding. In the words of Julian Mann, vice president of First Pacific Advisors LLC: “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.”

Karl Denninger in an excellent post entitled Fannie / Freddie – What Does Treasury Know? provides the following:

What’s the bond market going to think about a literal $5 trillion guarantee (for three years anyway) on MBS? Might some people have known about this in advance, with that being the reason for the bleed in the long end of the bond curve this last week or so? One wonders – of course nobody would ever trade on inside information, right?

Why wait until the market closed on Christmas Eve for this? Oh, that’s to stop a sell-off in bonds, right? Yeah, we’re playing “American Idol is on, and you’re too stupid to remember this for three days.” Got it. We’ll see how that works out.

Oh, and if that’s not enough to make you vomit, get a load of this:

The government announced Thursday that it had approved Wall Street-style, multimillion-dollar compensation packages for top executives at Fannie Mae and Freddie Mac, the two mortgage companies that have become little more than arms of the federal government.

The two top executives at the companies, which have received $121 billion in federal aid since they were seized last year, could be paid up to $6 million each for their services this year. In total, the top 12 executives at the two firms are in line to receive up to $42 million in 2009 alone.

Denninger’s piece is a must-read for anyone interested in what is happening in Fannie, Freddie, the US Government and the housing market. Or for anyone that thinks the economy is recovering.