I received an email today announcing that the Northern Nevada Builders Association had decided to cancel the 2008 Parade of Homes. Personally, given the state of the high-end market, I think it’s a wise choice: "After careful consideration, the Sales & Marketing Council (SMC) for the Builders Association of Northern Nevada has reluctantly decided to cancel the 2008 Parade of Homes and People’s Choice Awards competition. Given the precipitous drop in new home construction and the challenging business climate in which our builders, subcontractors, suppliers and associate members are being forced to deal with, it was felt that cancellation of the Parade until Spring 2009 was the most responsible choice for BANN and its members at this time."
Reno Ignoramus sent a great article about the Fannie-Freddie bailouts and what they mean to us.
Incline Jim sent a nice NY Times piece suggesting that the fall of IndyMac is just the beginning.
Anyone remember the movie Airplane?
Looks like I picked the wrong week to quit Reno… 😉
Paul
That’s crazy – they need the parade of homes more than ever this year. Its fun, great design and decorating ideas, its really not the end of the world.
DonC
The op-ed piece on Fannie and Freddie (it’s more op-ed than article) is misleading. In fact it’s so misinformed it’s not anything that merits an official link.
Contrary to the claims, Fannie and Freddie did not “place bets on dangerous loans that would make a Las Vegas bookmaker blush with embarrassment.” That’s absurd. By definition, Fannie and Freddie only accepted conforming loans. Loans that were not conforming, loans like Alt-A or subprime, were labeled such precisely because Fannie and Freddie wouldn’t touch them.
So why are Fannie and Freddie in trouble? Two reasons. One is that they had only a thin cusion. Two is that the market declines have been so steep even conforming loans may be upside down, and home owners have shown a great willingness to walk away from such loans.
It’s likewise inaccurate to claim that these “loans are going bad in an unprecedented but not unpredictable way.” This is rubbish. As I mentioned in another thread, Fannie and Freddie are more victims than causes of the downturn. They didn’t get in trouble because they made risky loans, they got into trouble because they made safe loans to people buying houses that didn’t retain their values at historical rates. So the defaults are unprecendented but entirely predictable.
The implications of this claim are far reaching. For if this downturn was predictable, then every realtor who sold a house during 2004-2006 failed their duty to their clients. That’s silly if for no other reason that Alan Greesspan says he didn’t see it coming. If the Federal Reserve Board Chairman couldn’t see it coming, why pile on realtors or Fannie or Freddie?
Sully
DonC – This is a selection from an article by Paul Farrell on Marketwatch:
Just a few weeks ago guys like Countrywide’s CEO Angelo Mozilo said: “Nobody saw this coming.” About the same time both Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke were telling us that the subprime problem was “contained.” Now, suddenly it’s a “contagion” fueling “recession” fears.
The truth is, “everybody saw it coming,” especially Wall Street’s happy-talking bubble-blowers. They love bubbles because they make billions during the blowing — and the popping. Even the chief bubble-blower of today’s housing/credit mess, Alan Greenspan, finally admitted on “60 Minutes,” while discussing his new book “The Age of Turbulence,” that he “really didn’t get it until very late.” He was blowing this bubble for years, praising ARMs, ignoring reset risks and misleading investors by dismissing early signals of the coming housing bust as just a little “regional froth.”
BTW – I saw this coming in late 2004, as one of my kids wanted to change their mortgage to an ARM; my vehement protests stopped that idea in its tracks!
Sully
Entire article:
http://www.marketwatch.com/news/story/three-blind-mice-helm-its/story.aspx?guid=%7B5E6CCC10%2DCE5A%2D4E31%2DA597%2D50DD66428134%7D&dist=TNMostRead
DonC
Sully — I’m not arguing the craziness of the subprimes and the no-docs and even some of the Alt-A’s. Or the craziness of thinking that housing prices could go up forever.
That stuff was predictable. The size and scope of the meltdown is another story. I’ve been surprised at how dramatic the decline has been, how bad it has gotten, and how widespread it has been. (I sure didn’t think European banks would hold so many US subprime loans.)
My point is that Fannie and Freddie didn’t make any risky loans as the piece claims they did. They did what they were supposed to: they made conforming loans which have traditionally been quite safe. Mutual funds like Vanguard always have a fund which invests in this type of paper precisely because it historically has been very safe, safer than corporate debt.
Even assuming that the market meltdown was predictable, what were Fannie and Freddie supposed to do? Say “yes this is a conforming loan but we’re not going to buy it because we envision a country wide market crash of ahistoric proportions”. The outcry would have been enormous. They did what they should have: they bought loans that conformed to the criteria which had historically proved to be safe.
IndyMac and the like are a completely different story. They did make the crazy loans. I’m just pointing out the fallacy of confusing Fannie and Freddie with these guys. The Op-ed piece completely confuses the two, so much so that the entire piece isn’t credible.
smarten
I have to agree with DonC. I think Fannie Mae and Freddie Mac are victims.
These entities establish guidelines which mortgage originators must comply with before they will purchase or guaranty conforming loans. The problem’s not with the guidelines; it’s with their application.
It’s my understanding [and I could be wrong (CommercialLender?)] that originators must certify that pools of mortgages sold to Fannie Mae or Freddie Mac seal actually “conform.” Where it turns out they don’t, society [and investors] are left with exactly what we’re starting to see.
Now do we blame Fannie Mae and Freddie Mac because they didn’t do a good job of auditing the loans they were purchasing/certifying? Maybe. But I think the larger problem is with unscrupulous mortgage originators [many of whom are no longer with us] who fudged the guidelines, or outright misrepresented that the mortgages they were certifying as compliant weren’t. What I suspect happened was one or two questionable loans were packaged together with a number of compliant loans in a large pool. That way the odds of a questionable loan being singled out for audit was low.
On another note, for all you out there who think the stock market isn’t a form of gambling, what do you think now? And what are you thinking about placing your money in FDIC insured savings institutions? And how about Reno/Sparks real estate? I guess the broader question is where’s a really safe place to invest in times like these? It’s getting scary!
MKchick
Wasn’t it ~750 banks that failed in the last S&L debacle in the 80s?
The FDIC doesn’t have enough to guarantee all these banks, and with USB (who I thought had minimal exposure to this mess) reporting horrible numbers today, I’m really worried.
GratefulD
Fannie & Freddie are not victims Nor the culprit. They simply were a tool for the Wallstreet boys to dump their junk that even they were caught holding. Don C & Smarten… you guys are right… but if you go back through the details of the changes last year in limits/max capacity, etc… you;ll see they changed the rules.
Do you remember when the Jumbo loans were such the focus? When it was so important to help the above $417k market? Well they lifted the $417 cap and the overall portfolio limits so Wallstreet boys could package and dump onto Fannie and Freddie…. that’s why the Jumbo rate never changed to the consumer… cause Wallstreet was pushing so hard on the Fed’s that changing the limits at Mae & Mac was the answer to save the market…. well the day it was removed they dumped all their junk and Fannie & Freddie were immediately capped out again.
–The real cliffhanger is what will the rating agencies do this time? When the wallstreet boys dumped their junk on Mae&Mac… Moody warned that if the government had to bail them out… they would down grade the US government itself from AAA. Effecting all our bonds and pressing our dollar to the ground?
DonC
GratefulD – I generally agree with what you’re saying. The regulations were too loose and the oversight too lax. No question about that.
But we can’t turn that around immediately. It would kill the housing market which is already in meltdown mode. It might be a good idea to have a heart by-pass patient up and exercising, but not when they’re on the table or the day after the operation.
I didn’t know about Wall Street firms dumping loans onto Freddie and Fannie. The raised limits allowed Fannie and Freddie to guarantee more loans but that would have been prospective. FWIW where I live just about anything north of a 2 bedroom condo is over $417K, so raising those limits doesn’t seem outrageous to me.
One problem is that we have a president that most people have written off, so the normal pep talk from Washington has the opposite of its intended effect. Best for all that Bush keep his mouth shut. Bernanke is unproven which also doesn’t help. On the plus side Paulson is well respected and very capable. The trioka of Paulson, Bernanke, and Barney Frank actually does seem to inspire confidence. (A little off topic but I’m also impressed with Sheila Bair at the FDIC).
We should be able to work this out.
CommercialLender
DonC and Smarten, you both have it right. Fannie and Freddie were not in and of themselves making these bad bets, they were making loan guidelines for which an originating firm could sell them to. Troubles are however several fold: 1) the guidelines got more lax as competition heated up. I speak with authority on the commercial side here in apartment lending. 2) congress, white house, fed and their own oversight agency pushed hard on them to buy loans from lesser qualified borrowers in ‘challenged’ neighborhoods. Remember their stated goals of ‘increasing home ownership rates’ in the USA from the ~ 50% historical level to the eventual 69% at the peak? how strong were these borrowers? 3) originating firms began selling so darn many loans to them I just don’t see a way they could possibly have audited these loans for full compliance. 4) how much is the collateral really worth today?
So, the markets are reacting to the fear of how much exposure Fannie and Freddie have. I don’t think anyone really knows.
Now, I for one don’t know the answer to the following question. Did Fannie and Freddie buy the ‘senior pieces’ of loans up to 80% LTV where another investor or the originating lender kept the ‘b pieces’ up to 90, 95, and 100% LTV? If they did and did so in large quantities, then all bets on Fannie and Freddie are off, as that whole model is on its ear.
MILLER
CL, that last statement is what has been bothering me about the Mac/Mae deals.
Sure, they backed all of the conforming loans, but how many of those loans were originally conforming, then the borrowers rolled over to Indymac and took out a second mortgage to pull out “equity” a couple years back? Now, the second is adjusting and the borrower can’t afford to pay either loan and Mae/Mac gets the shaft on their “good” loan as well.
Just a thought, but it would be interesting to see the data!
Good topic!!
MILLER
MILLER
Alright Smarten,
I found the list:
http://a11news.com/365/banks-in-trouble-list/
Now, how do I buy a PUT option on these banks!?!
downtownjunkie
Ring ring.
Customer Service: IndyMac Federal Bank
Mua: Yes, I would like to get a loan payoff amount for the end of this month.
Customer Service: Hold please.
5 min… 10 min… 15 min…click.
longerwalk
I’m pretty much fully invested in the stock market. As of today, I’ve lost no more than 2% net value over the past two years, including the hit on my home value, purchased in July 2006. Now, the market has surely been up in between times, but it’s not affected me much at all.
I also submit that panic is the WORST thing that can happen. Transparency is the best.
I have a fair number of well-run companies I’m watching, and will purchase within the next 6 months, as there’s a fire sale right now.
And if it all turns to worms, I can go back to work!
Brian Copeland
This type of cancellation is always a bit unnerving. We’re fortunate in Nashville to not have this kind of crunch, but I certainly can feel your pain. Inman San Fran, Diane? I’ll be in Orlando at StarPower.