by Anonymous on 9/02/2008 09:01:00 AM

Every time I observe that something or other is the dumbest thing I've ever heard of, something even dumber comes along. You'd think I'd have learned by now. But this is the dumbest thing I've ever heard of:

Here’s a bold idea: Fannie Mae and Freddie Mac should merge.

No; having Fannie Mae and Freddie Mac open a counter-cyclical side line of business mowing lawns on each other's REO would be a "bold" idea. This is just another Wall Street plan to solve all of our problems by laying off highly skilled employees with long institutional memories and a high degree of loyalty to their company in order to goose the damned share price. Oh, and it's easier to do that if you make these costly employees sound like fat cats:

Yes, the big benefits of a merger would come at the expense of some the 6,400 employees at Fannie and nearly 5,000 employees at Freddie. And frankly, that’s one reason, among many, such a scenario may not be palatable to folks in Washington — where, it should be noted, many of Fannie and Freddie employees work and live, some as the neighbors of politicians and their friends.

Yeah, right. All those mortgage quality control analysts and remittance accounting clerks live next door to a Senator and hobnob with the K-Street Boyz. Especially all the ones who work in the regional field offices.

Fannie and Freddie have, in fact, historically paid decent salaries for skilled workers, and their benefit packages tend to be excellent. They are known for having diverse workforces and for recruiting and promoting women. They even offer family leave and flexible work hours and child-care plans and pinko crap like that. Obviously someone needs to teach these people the real meaning of capitalism, which is that we do not deal with big, structural, complicated problems. We "downsize" and collect bonuses in the M&A houses:

By merging them, they would really become too big to fail. And sometimes size can be a strength.

A merger wouldn’t undo the mess that these two companies have made, nor does it erase the billions of dollars in potentially toxic loans they own or have guaranteed. Nor would it address the question of whether these companies deserve the implicit backing of the government in the future. . . .

But let’s get real: no matter what solution is chosen for Fannie and Freddie, pink slips are bound to be a part of any fix.

"Getting real" like this is what happened to the non-GSE part of the mortgage business over the last several years. Wall Street firms bought up mortgage companies, slashed back rooms and highly-paid experts, offshored collections and account management and swarmed all over the "wholesale" model that substituted "independent" brokers for origination employees whose long-term financial best interests were aligned with the company. The synergy, dude. It was really something.

And since that worked so well at outfits like Countrywide or the Street-owned firms, let's try it again on the GSEs? I have had a theory for a long time that the very subject of the GSEs just makes a whole lot of people utterly insane, pretty much regardless of what they do or what the context of the conversation is. Being a hybrid of a private corporation and a government agency, they will always be ideologically intolerable to purists on one or the other side of any of the more annoying political arguments of our time. But this kind of thing is beyond the usual sloganeering about private vs. government sectors and competition and monopoly and so on. This is just a naked appeal to the Street's desire to eliminate skilled jobs to enrich consultants and executives. If you thought they learned anything by the fiasco of the mortgage securitization machine--put any dumb old loan in the deal because someone's got a spreadsheet showing hockey sticks on it--think again.

by Calculated Risk on 9/01/2008 11:00:00 PM

Here is a cartoon on housing from Eric G. Lewis, a freelance cartoonist living in Orange County, CA. This is from 2007:


Click on cartoon for larger image in new window.

by PJ on 9/01/2008 09:20:00 AM

Perhaps one of the more interesting outcomes of the real estate crash has been the reaction of those who bought at overinflated prices in overinflated markets. What we're seeing now is a mix of denial, anger, and acceptance, per the NY Times:

For sale: one newly constructed three-bedroom, four-bathroom home near the University of Miami, with South African wood in the kitchen, marble from India, Egypt and Spain, and a $4,500 top-of-the-line garage door.

Listing price two years ago: $979,000. Listing price now: $599,000.

“I always figured the market trend wouldn’t catch me,” said Rafael Diaz, the owner and builder. He turned down $770,000 more than a year ago, he said, and has come to accept that he will never get the $700,000 he said he needed to break even. “By the end of the year,” he said, “I might just turn it over to the bank.”

Such thinking must be culture shock for an area that believed "prices go up" almost as if it were gospel; after all prices had risen for 21 years prior to this downturn. Diaz is probably typical of more than a few homeowners in the area, who have cut prices dramatically -- but still not enough to beat out the short sellers and REO inventory in the area.

As of last week, 24 percent of the roughly 34,000 single-family homes for sale in Miami-Dade and Broward Counties — and 20 percent of the 47,000 condominiums — were listed as potential short sales.

Homeowners trying to compete say they often feel flabbergasted by the competition. Alexandra Swanberg said she reduced the price of her 1,482-square-foot town house to $245,000, from $287,000 last year, to keep up with the dozens of for-sale signs sprouting throughout her middle-class South Miami neighborhood.

“Everyone has been in a panic,” Ms. Swanberg said. “The Realtors are crazy; they want you to drop the price really low.”

Part of the reason this area has been hit so hard is because so many speculators were snapping up inventory -- regardless of what the original mortgage said:

In fact, it is common for apartments and homes here to simultaneously be for rent and for sale. And rentals, which have historically made up about a quarter of all transactions in the area, have come to dominate. Roughly two out of every three deals in the Miami-Fort Lauderdale corridor since January have been rentals, according to data from the Florida Association of Realtors. [emphasis added]

Which alludes to the sort of fraud that was going on during the boom; two out three properties put on the market are now being rented out. Why? Because they were investment properties to begin with. I'll bet you'd be hard-pressed to find two of three mortgages underwritten in the Miami area in the past three years as non-owner occupied.

(Hat tip, Brian!)

by Calculated Risk on 8/31/2008 11:00:00 PM

Here is a cartoon on housing from Eric G. Lewis, a freelance cartoonist living in Orange County, CA. This is from 2006:


Click on cartoon for larger image in new window.

by PJ on 8/31/2008 03:20:00 PM

I've seen CR refer to some of the woes/speculation regarding the future for Lehman Bros; news today from the WSJ says that CEO Richard Fuld is a man with a plan. Er, or at least, we think so:

The Wall Street firm run by Chief Executive Officer Richard Fuld is still hammering out the final details and it isn't clear when a plan will be unveiled. One sticking point: finding financing in this cash-strapped environment for a spinoff or sale of these assets.

In addition to offloading the real-estate assets, Lehman is trying to sell its Neuberger Berman investment-management unit. Ideally, Lehman management would like to announce both transactions at the same time so it can assure investors that it has a bold plan to navigate its way out of the current credit crisis.

For the real-estate assets, Lehman has set up a so-called good bank/bad bank structure. Such a deal is likely to involve a spinoff of the holdings to shareholders as well as an investment by outside investors.

Details of the plan weren't clear. One option may be a "sponsored spin." That would involve bundling some of the troubled assets into a new entity, which would then be spun off to Lehman holders on a tax-free basis. Also, a new investor or group of investors could take a big minority stake in the new company, thus "sponsoring" it.

There's more in the Journal story, including the admission that Lehman's big plan involves it financing "at least some" of its own spinoffs, a la Merrill Lynch's $30bn CDO sale. Lehman's got about $65 billion in commercial and residential RE "assets" that would be part of the "sale." And with financing tough to come by, the cynic in me thinks that Lehman will end up self-financing more than "some" of whatever is eventually spun off.

And until more details emerge, I'm calling it a "sale," in quotes. Because financing the sale of your own assets to a company you have majority interest in is sort of like letting your brother date an annoying ex: you think you've cut ties, but she keeps showing up at the dinner table anyway.

by PJ on 8/31/2008 10:12:00 AM

Talk about being in the sewer. I lived in Orange County,CA in 1994 when the county went bankrupt; now that BK's standing as the largest municipal bankruptcy in U.S. history is being threatened by Jefferson County, Alabama. Over sewer bonds. $3.2 billion of them, to be exact:

Alabama's largest county offered a plan Friday to restructure its $3.2 billion sewer debt and, at least for now, put off filing the largest municipal bankruptcy in U.S. history.

Gov. Bob Riley said an attorney for Jefferson County proposed restructuring the bond debt at a lower, fixed rate over a longer term, and Wall Street creditors allowed the county to delay any further interest payments at no cost until Sept. 30 ...

The county had the cash to make a $2 million interest payment that was due Friday, but Commissioner Jim Carns said officials must decide whether to continue making payments indefinitely or file for bankruptcy because its obligations far outstrip revenues from the sewer system.

Carns, who did not attend the meeting, said the county must stop the bleeding.

"It's a matter of whether we can get an agreement to stop it or whether we have to get court protection to stop it," he said.

Jefferson is Alabama's most populous county with about 658,000 residents and includes the state's biggest city, Birmingham....

Acting at the suggestion of outside advisers, the county borrowed money for the project on the bond market in a complex and risky series of transactions. When the mortgage crisis hit and banks began tightening up on their lending, the interest rates on the debt ballooned.

Another unforseen effect of the credit crunch.

by Calculated Risk on 8/30/2008 11:00:00 PM

Here is a cartoon on housing from Eric G. Lewis, a freelance cartoonist living in Orange County, CA. This is from 2005:


Click on cartoon for larger image in new window.

by PJ on 8/30/2008 09:23:00 PM

(Note: CR is off hiking, and asked me to help with guest posts. For those who don't know, I run HousingWire when I'm not helping out friends. Anything you want discussed, feel free to shoot an email to pjackson@housingwire.com.....)


Hurricane Gustav is shaping up to be a real problem for the Gulf Coast. Per weather.com, it's now very dangerous Cat 4, and will likely become a Cat 5 hurricane before tonight is up. While CR is West Coast, yours truly is in the DFW metroplex, and we're already seeing an influx of the tens of thousands fleeing the Gulf Coast.....




We're already seeing gas prices get hit. Shell Oil said it will pull all workers off platforms, along with nearly every other producer. More importantly, the Louisiana Offshore Oil Port will halt taking crude this weekend; it's the only deepwater oil port in the nation.

My best to anyone out there running from what appears to be another major U.S. hurricane, but the oil effects appear as if they'll be felt by all of us, too.

Update: some stats on Gustav, after NO mayor Ray Nagin just ordered a mandatory evacuation:

....Gustav, currently a Category 4 Hurricane with winds of up to 150 miles per hour, now has a 900-mile wide footprint. The storm surge it delivers as it powers ashore on Monday could be as high as 24 feet – higher than Hurricane Katrina, Nagin says he was told. [emphasis added]

I worked in the mortgage/default industry after Katrina. Given what servicers are already dealing with, this is just one more straw on the camel's proverbial back, should it come to pass.

by Anonymous on 8/30/2008 12:08:00 PM

Hi all,

My long suffering wife is pulling me away from the computer to a nice BBQ. I'll leave this thread for you to discuss anything (anything is more interesting than Accounting) you want. Have a great weekend.

by Anonymous on 8/30/2008 10:53:00 AM

A pet peeve of mine is analysts. When is the last time you heard one of them speak about cash flows other than in passing? If you do not address the components of the Statement of Cash Flows, you cannot opine on the strength of the Balance Sheet or Earnings. What’s the problem? The Statement of Cash Flows is conceptually difficult to grasp as it’s traditionally taught. The statement might be called “Statement of all the other assets and activities affected cash.” It’s not that one thing is more important than the other 2, it’s that the stool needs 3 legs.
It’s even more important to know this now. Cash is always nice to have, but even more so in a down market when it’s not so easy to borrow cash. If any of you are buying individual stocks, you have to learn how The Statement of Cash Flows works. It is not possible to assess a company’s condition without understanding it. I surfed around a bit and didn’t find anything that was very good. The Wikipedia entry was as good as any.

http://en.wikipedia.org/wiki/Cash_flow_statement

Between long hours and airports, I did not have adequate time to assemble an adequate post on the topic but thought it worth a rant.