Government Control of the Housing Industry

I had an educational moment around borrowing to buy a home this week after inquiring about a V.A. loan. Here was the answer. A short sale (which we had July 2008) is treated the same as a foreclosure, therefore three years have to pass to qualify for any government backed loan. I asked the loan officer of U.S. bank what their bank policy is. He said they sell all of their home loans to Fannie Mae. I asked what Bank of America does and he said they sell their loans to Freddie Mac. I had to smile seeing a bigger picture of the widespread influence the government has over the housing market.

Fannie Mae wants another $15B of the emergency funds which is the 4th request this year for additional money. Both this company and Freddie Mac are insolvent and only held up by government intervention and ownership.

The $8k housing credit was extended to June 2010 and a new $6500 tax credit is now available to all who have owned and lived in their home for at least 5 years. I wonder if that means they have to sell their home to buy another, or just own a second home with this credit.

10.2% unemployment announced today, highest since 1982. In that year, I was working in the defense industry and the cold war was a major focus. I didn't experience any fallout from that recession.

I will continue following the housing situation closely since I see that as the realistic measurement that the recession is over.

Irrational Exuberance

As Greenspan coined, 'irrational exuberance' this is certainly happening in the banking and insurance industries this week led by AIG, FNM, FRE, and C. All of these companies are owned to some degree by the taxpayer i.e. AIG 80% (note: A draft of the Treasury document that was left out in the final version called AIG "highly speculative"). The word is that hedge funds have jumped in which tells me that this tower is being built on sand and it will only take a sprinkle to sink it. I see companies like ABK, B of A, ETFC and so on are being pulled up by the momentum.

My fire continues to burn brightly around the Federal Reserve and its continued effort to keep the information as to what banks received what emergency loans a secret. They are now preparing an appeal.

Red Flags

Emotions of the collective are ruling the roost.  The European markets are showing their level of confidence in what congress is doing with the proposed bailout by the Feds.  With a big run to commodities, especially oil at a jump of $25 in one session, that is a sure sign that there is information in the subconscious about to surface that reflects a stark picture of our financial system.  

Democrats and Republicans are working to add more to what the Fed recommended to stabilize the system.  Making the government have access to owning the company's stock who sells the 'toxic mortages' is a form of nationalization like what happened with Frannie, Freddie, and AIG.  This dilutes the value for the stockholders, like you and me.  Even those big mutual funds and institutions holding shares are made up of contributions by the individual.  Now we have an idea of the exposure of number of companies that may have their shares diluted by just looking at the list where short selling is not allowed.  The list grew bigger today.  

One other addition I would like to comment on is a provision to help mortgage holders prevent foreclosure.  What about those who have the financial capability to pay their mortgage, yet walked away because the loan is worth more than the home?  What percentage of the overall defaults are made up of these individuals?  They do not need to be rescued.

Going back to my original post of 9/15 and talking about the 'Big Bang,' the latest is the collider is out of commission for at least two months.  I predict there is a timeline similar for the markets and the turmoil to continue.