Fannie “Fires Back”

Fannie “Fires Back”
-US housing said “flatulent”; Fannie Mae full of it

(SEATTLE) 08/23/2004 – In what may amount to an unexpected reversal, new signs are emerging on an almost daily basis that the booming US housing industry is stealing resources away from the economy, rather than contributing to it. That is, rather than going out with a “fizzle” or “pop”, the housing bubble is going out with a dirty economic “thud.” This makes perfect sense—few bubbles collapse simply because they are big; instead, gas under pressure first leaks out. Yet, amidst this natural seepage, comes denial from those who should have smelled it coming, and are sitting on a “big pile” of mortgage debt.

And so it is with one large Fannie--

Four days ago, based on some simple calculations, a story ran on the Liberty Whistle website suggesting that rather than gasoline prices, mortgage payments were beginning to weigh heavily on consumer budgets—a stark reversal from the recent past, in which “cashing out” of homes added to consumer budgets (see “US Soft Patch Only Slightly Slippery” below, 08/18; this story was carried on several web news feeds).

The day after the “Soft Patch” story was published on the Liberty Whistle, Fannie Mae, the largest purchaser of US mortgages, was interviewed in a Bloomberg News story (see “Home Prices To Rise, Fannie Mae Predicts” 08/19). In this story, Fannie specifically commented on changes in mortgage payments over a longer period--in a very qualified fashion--rather than commenting on the negative mortgage payment trend of the last year. In doing so, Fannie is holding back the deeper truth; that being, what was once a fresh boon to the economy is now a stinky bane. Oh, yes, and speaking of stinky--the very next day, 08/20, Fannie Mae was subpoenaed by its regulator (see “Fannie Mae Subpoenaed by its Regulator”, WSJ, 08/20).

Indeed, a housing bubble need not pop simply due to size, or rising interest rates--as almost everyone expects. What if flat interest rates, instead of rising ones, lead to an unsustainable (er, “flat-ulent”?) condition--as housing embarrassingly consumes more and more resources, capital, and attention?

Despite Fannie Mae’s dangerous and misleading statement about mortgage trends, evidence has since surfaced coincident with a national retail sales slowdown and “soft patch.” Indeed, new reports strongly underscore how consumer budgets are being sapped by housing; according to an August 21 report quoting the California Association of Realtors, home loans are now being made assuming a larger monthly payment than ever before (on top of fancy mortgages, no less). In fact, earlier this year, mortgage giants such as Washington Mutual have seen fit to withdraw from lending under these risky conditions. It’s pretty simple--with more being spent on housing, less money is left over for discretionary purchases, so a retail slowdown necessarily follows. Nevertheless, the mainstream press (apparently not having done the math) continues to print smelly stories that suggest gasoline prices are a main factor slowing down the consumer.

But California is not the world. Yet, looking at retails sales nationwide, all the way from the low end at Wal-Mart, to the high end at Nordstrom, shortfalls are cropping up. About the only national retailer left smelling like a rose is trendy Urban Outfitters--and even they had a suspicious inventory jump of late. Moreover, in sniffing overseas, it turns out the “English equivalent of Alan Greenspan” has plainly admitted a housing bubble--even while the UK is in less dire straits than the US. You see, unlike the US, the UK has strong income growth, and is very limited in real estate space. So high housing prices are much more justified in the UK. But they admit a problem over there, and we don’t--this amounts to a “silent but deadly” pressure emerging right under our noses, for which we have no excuse. Di-Gel, Mr. Greenspan?

Finally, as if there was any doubt remaining related to the stench which is so imminent, the most recent edition of Fortune Magazine (08/23, online) has a home builder stock(Pulte) as one of its “Stocks to Buy Now”—a company which sells to high-end home buyers, among others. A person of average intelligence might question why they should “Buy Now” the stock of a company which thrives on capital from recently-subpoenaed Fannie, and whom sells homes to the same high-end buyers who apparently can no longer afford shopping at their favorite retailer, Nordstrom. Indeed, apparently the pressure is high, and surely there is much to let go of--for some, a rather unpleasant Fortune will surely be let loose.

[nolabels]

1. I would say mostly B.S.

The true value in real estate is in the long term. I expect a correction of 15 to 30% in the near future (but it is highly unlikely to fall through the floor). In the long run real estate prices keep up real inflation (the not reported type).

Some sectors of the economy have even had deflation. The coined term stagflation if probably in operation about this time, but the corporate media won't say so because the business sector politicians are also in office now.

The biggest problem I can see is that they have idiots running the levers of government which gives the people no hope to pin their hat on

[benburch]

3. I disagree.

Far too many people are buying what we here call McMansions. People are leveraged out to their last dime to do it, too. It only takes one bad winder of heating bills to push many of these people into default...

6. No BS there...

The housing leverage is not only in a bigger montly payment (California case), which the banks are allowing, but in a higher loan to value ratio nationwide (the amount loaned vs. supposed price of house).

Washington Mutual apparently cut back giving loans for these type of stretched conditions, six months ago.

The math calculations show that the draw on consumer budgets since last year is only 200 odd dollars for gasoline, whereas the draw based on new home prices--assuming a "normal" loan--is one thousand dollars.

So if you now figure that some people are taking out abnormal loans, such as 50 percent of income house payments, on top of things like ARMS AND on top of house prices, you can understand how retail is slowing down because people are so convinced that houses are an investment that will go up. Their money is all eaten up with house payments!

And unlike England, the US won't admit the problem, even though England has a smaller problem...

So no "BS" on that website. Go ahead, do the research on your own. Use the website for reference.

The sad part is the only way to slow it down is to raise interest rates, in hopes that housing will not become a bigger draw on more people in more states. But even there I wonder. The whole east and west coasts are beyond rescue.

Sadder still is the company which sits on the mortgage bubble is only now being subpeonaed, even though problems have been known about for years.

[nolabels]

20. Yea your that was a bone headed post

My post was on the assumption was people would be buying "real estate" not the McMansions. I would not buy one those pieces of crap they are building now either. The builders are putting out a product of poor quality with little actual property under them. I am living in one of those prefabs houses. It has a permanent foundation so qualifies under almost all laws as a normal home (it's really a poorly built piece of crap too). I got two acres sitting under it though, picked it up about 20 years ago. We paid 35k for the property at the time.

Today they are building them McMansions just on the other side of the hill just a 1/4 mile away. Those McMansions are going with one acre for ticket price 600k+. Then just down the street from them 1/2 acre lots for 450k+. I think they are selling them at a very inflated price, but if the market holds and they sell them what can I say? I am not planning on selling anything, might build another house on the property and rent this one out though, but that's all down the road.

[Born Free]

16. I disagree, got cautious when Greenspan recommended ARM

At a time when mortgage rates were low, Greenspan started recommending ARM. It's a sign they are desperate to get people to refinance, which many times pumps money into the economy because people tend to take out any equity built up in their homes. They do this knowing the people will be in terrible shape when the ARM goes up - as it will. These guys are still pushing refinancing to the maximum value of the mortgage, hoping the extra money will keep this anemic economy from stalling completely. However, there is a point where people have maxed out the financing of everything they own, and any drop in income will drive them under. This problem is NOT going away soon, Kerry will be faced with it when he takes office.

[anarchy1999]

18. Well you certainly are on top of it. Good for you.

n/t

Send the warnings out, loud and clear.

[hatrack]

27. When did Greenspan start pimping ARMs?

That's like, creepy - when did Uncle Alan start working for DiTech?

[AP]

2. Where's the link?

4. The link is at the end <eom>

[AP]

5. Your sig link? You wrote that?

I think that doesn't belong in LBN if that's the case.

7. Then move discussion to Editorials?

It is news in that Fannie (the company in question) has apparently answered my earlier news release.

I could also post a link to a news site which might pick up the story in the am...they have picked up my others (do a search on liberty whistle on the page); it is a good web site:

www.bondheads.com

or another in new zealand which often does....

http://www.scoop.co.nz

Then it will be "official" news.

Should play by the rules, no? Here you get a jump on the news by the news writer, no (me)?

23. This story was picked up by the "Bondheads" news

It is now officially news--

www.bondheads.com

It is also on my website

www.libertywhistle.us

[anarchy1999]

8. Here's a fun site for everyone: www.moneyfiles.org

Read up, this is for real folks.

9. I agree, people should read up

There is a lot there which people are not being told.

[anarchy1999]

10. Here is another fun one:

http://www.bankindex.com/

Skip down the page to:

What's New Today?

on and then there is always www.LewRockwell.com

and

www.senderberl.com


"But now it turns out that Bush may not spend a single night in the city that helped transform his presidency. At this point, the unofficial plan is for him to arrive in New York sometime on Sept. 2, the final day of the four-day convention, deliver his acceptance speech that night, then leave immediately for a midnight rally in Pennsylvania. .Campaign officials say the schedule could still change, and that Bush may have a brief New York sleepover in the end."

[cleofus1]

11. so what is the story here?

Are you saying that people are buying houses with either bad credit or with "special" mortgages and as a result have unusually high monthly payments which leaves them with less discretionary funds at the end of the month. Leaving these families in a precarious financial position and the economy with much less fuel to feed growth?

or something like that?

[anarchy1999]

12. Well, that is close, do you find it to be disturbing? Do you see

a potential disaster? Story?

[cleofus1]

13. i think

It falls under seamy business practices. My pal just bought a nice house for under 2000 out of pocket and his monthly will be a little over 2000...Not something I could do...or want to...the broader economic implications are beyond me. I will refer to Paul Krugman for future references.

[anarchy1999]

14. Not a bad idea. Look up Stiglitz while you are at it.

http://www.gregpalast.com/detail.cfm?artid=78&row=1

The Globalizer Who Came In From the Cold
Observer, London
Wednesday, October 10, 2001

JOE STIGLITZ: TODAY’S WINNER OF THE NOBEL PRIZE IN ECONOMICS

by Greg Palast

The World Bank’s former Chief Economist’s accusations are eye-popping - including how the IMF and US Treasury fixed the Russian elections

"It has condemned people to death," the former apparatchik told me. This was like a scene out of Le Carre. The brilliant old agent comes in from the cold, crosses to our side, and in hours of debriefing, empties his memory of horrors committed in the name of a political ideology he now realizes has gone rotten.

And here before me was a far bigger catch than some used Cold War spy. Joseph Stiglitz was Chief Economist of the World Bank. To a great extent, the new world economic order was his theory come to life.

I "debriefed" Stigltiz over several days, at Cambridge University, in a London hotel and finally in Washington in April 2001 during the big confab of the World Bank and the International Monetary Fund. But instead of chairing the meetings of ministers and central bankers, Stiglitz was kept exiled safely behind the blue police cordons, the same as the nuns carrying a large wooden cross, the Bolivian union leaders, the parents of AIDS victims and the other ‘anti-globalization’ protesters. The ultimate insider was now on the outside.

[anarchy1999]

17. Want more?

The Village Voice

The Bush Beat by Ward Harkavy

wednesday, august 18th

Rock the Cash BoxThe Halliburton(s): They not only sing, but they talk economics as good as they rock

You may be going tone-deaf from listening to Bush's band of neocons. Time, then, for the Halliburton(s), protest rockers in Dallas who recently returned from a Lick Bush '04 tour of Ireland, where they played with the likes of White Cholera and Christy Moore. (See the poster for a June 25 Bush Comes to Shove gig in Dublin here.)
This summer, they've also been eagerly plugging it in right outside the offices of Dick Cheney's Halliburton in Texas, and are trying to line up gigs in New York for next week's Bush-league coronation.
This band, promoting what frontman Nat Berg calls "town-hall resistance-rock democracy," has some special numbers: Berg is a 31-year-old economics professor at the University of Texas–Dallas, and he's a prof with chops: He was a jazz-bass prodigy who got rave reviews in New York City when he was a teen playing with Maynard Ferguson, and later turned to Zappa-inspired rock. Along the way, he got a Ph.D. in economics. (Berg is the Cecil and Ida Green Assistant Professor of Economics and Political Economy in UT-Dallas's School of Social Sciences.) As a result, his bullshit detector has a built-in number cruncher.
"The reason I think it’s nice to have economists around," Berg tells me, "is to check that assertions about public policy issues—like taxes, health insurance, and the need for war—hang together." And many of those assertions, of course, don't.

snip to the end:

"Michael Moore is cool for what he is. But in the pundit class, there are so few with both fangs and facts. There are de-fanged, fact-equipped critics who ramble, and there are fun but rather fact-light rabble-rousers who, at best, enliven the left. Who can do it and pack a punch? That’s why I’m an economist. And that’s why I’m a protest rocker."
posted: august 18th at 5:02 pm

http://www.villagevoice.com/thebushbeat/

21. Exactly--

Not only that, but the current economic slowdown is being blamed on a rise in gasoline prices.

And moreover, this is an intractable problem; that is, rates have to rise to fix it, and they might not rise quickly enough.

Finally, note that Fannie Mae--the source of funding for all US mortgages--acted in denial of my earlier story, AND, by golly, is now under subpeonea.

[xchrom]

15. america's love affair with debt

this is a symptom of a bigger disease -- albeit an extremely dangerous facet.
note part of what the article talks about is america's inability to spend it's way out of the doldrums because excessive debt owed to mortgages.
it's rampant materialism combined with america's self identity with wealth that is the underlying problem.
oh yeah all hail ''ownership society'' -- i.e. sell your soul to the company store.

22. Agreed

The problem is, once you start doing the math, the whole mess no longer works out.

Hence, the popular way to avoid doing this(or any other math) is to blame things on high gasoline prices.

This unfortunately has the effect of perpetuating the mess, because recently, the US bond market is convinced bond prices need to go up (and loan/mortgage rates down) as oil prices go up!

Can you say "disaster" in the making?

[benburch]

19. Makes me glad I own a shack...

I have a shack (called a "gable-front cottage" in the city plan) that I bought for $46K in 1983, and on which I pay $383 per month.

I'm told that I could sell it now for $140K... But where could I move to where I could live as cheaply?

24. Just don't borrow 100k against your 140K

Like everyone else.

[KoKo]

26. That's the other "shoe" that will drop. Home Equity Loans to folks

who won't be able to sell the house for enough to pay back their re-fi, home-equity loans if housing prices crash. Put in job loss, illness or some other problem into the equation and and there are millions who would have to default on their loans.

If interest rates rise this will happen. But, Greespan was happy to allow re-fi's so folks would spend, spend, spend to keep our GDP up based on "consumer spending" and not manufacturing.

He's tried to keep our economy from unwinding so fast that it takes everyone down at once. So it will work it's way through slowly hitting those on the margins before it hits the McMansion crowd. (I'm being more generous to Greenspan than the man deserves..:-()

25. Has anyone noticed?

Web links disappear from stories on this thread? Not just to my website--to others linked in...?

Dan