Friday, May 16, 2008

3% down house loans available again, markets ready to fall

i'm gonna post about this story later, because i think it is an insane decision that increases the chances that Fannie Mae will either go bankrupt or be bailed out by taxpayers.

also, i think the next big wave of financial problems is on its way and the losses will be real this time, not just changes in modeling. the 10% rally over the last 60 days or so may be approaching its peak.

later, the next day:

Fannie Mae was created during the Great Depression (funny thing, there was a time when World War One was known as the Great War) to add liquidity to the national mortgage market because dropping real estate values had scared banks away from lending at reasonable rates. on the face of it, then, Fannie Mae should be doing what they can to continue to fulfill this mission.

the thing is, though, there is no shortage of banks willing to lend money at historically low rates to people who can actually afford to pay the loans back. people who should be buying houses - people with a 20% down payment, a verifiably sufficient income, and a decent credit rating - have lenders tripping over each other to serve them. there is no liquidity problem in the traditionally qualified buyer lending market.

the question, then, is whether a government sponsored entity like Fannie Mae should be making loans available to people who are not qualified to buy houses.

the other question is whether the economy-wide pain of not doing so will be more or less than the pain of not doing it. maybe a bailout of Fannie Mae is the cheapest way to stabilize the financial industry.

as for the markets in general, it has been a pleasant rally, but fear is in the air and rightfully so. even if financial stress so far were fully done and digested (which it isn't. not even close. less than half of the loan losses have been revealed so far because of insane accounting rules that allow banks to move distressed assets into the imaginary column on their balance sheets), this kind of stress in the financial sector means that everyone is going to have a harder time borrowing money, which means every company is going to grow a bit slower, which means less jobs created, more disappointing quarterly reports, etc.

but the markets are moved almost exclusively by sentiment and i have virtually no exposure to popular media, so i have no idea what the market sentiment looks like right now or what it would take for people who were down 20% from peak and stuck with it for this 10% rally to become fearful enough to pull out now.

if somebody completely outside the financial or real estate industries, some seemingly strong company, a household name, failed because of financial problems. i think that'd do it.

how's it going over there, Chrysler?

1 comment: