Monday, January 20, 2014

Lets look at what is REALLY going on with F&F. lets filter it all from 2008

Lets look at what is REALLY going on with F&F. lets filter it all from 2008

lets forget the political wind bags that talk and lets look at actions from 2008 to now. lets use this as a guide forward. lets also disregard all stock movement in the last 6 months. they are now important either. lets just get right down to the probability of the govt and the fhfa having a strategy to exit this without destroying the realestate market and in turn our country.

in 2008 the govt took control of F&F. share price 7 dollars, after announcement share price .39 cents.
why did they take them over? because if there was a run on the bonds that these two offer they would have to pay out 5 trillion dollars to the bondholders. and all new bonds would dry up. no buyers. how to protect that? they take over the companies and put the full faith and credit of the US on the line as a backstop to the BOND holders. We know the shareholders do not matter in this equation. their loss is expected in a downturn, but bond holders get paid no matter what from the assets of the company. So the US asks for a 10% dividend payment on its investment and they also start buying huge sums of the bonds from the GSE's this buying of bonds adds liquidity to the mortgage market by allowing the money at the Banking level keep moving to the consumers of mortgages, that the average joe. So there is your trickle down. Now we know that other countries are adopting the Gse form of mortgage market because it is the best, the Netherlands. We also know in places without the Gse form the 30 yr fixed rate mortgage does not exist. here in the US we mostly take the 30yr fix as 80% of all loans, since the end of the subprime that is. So we know we need the bond market, We know that in countries that used large banks intstead of the Gse type model, the governments of those countries bailed out the Large Banks, Australia and most of Europe. We also know our govt is asking the bondholders to start taking a 10% loss ahead of the backstop Govt. This will not work on shaky mortgages such as sub prime

they need the guarantee now because the world has never seen a downturn in assets of housing on such a big scale. no bond holder wants to be at a loss, they can always buy US treasury bonds or GOLD. these are universal. but interest is better on MBS but too risky now.

i want to make this point. If i am the govt and I print money. I borrow you money say 188 dollars. now i have diluted all the other money by that amount. all other money is worth that much less. It takes a little while for the economy to figure this out if I circulate the money, if I do not circulate the money there really is no dilution to the liquid flow of money. its is just numbers on a paper held between the govt and the entity that borrows the money, no inflation, no dilution. as you pay me back the 188 dollars i simply erase the numbers or shread the money that i lend to you. this does not mean I the govt have made money, what it does mean is the money i borrowed you is never let into circulation and there is no net effect on the economy as a whole. no inflation and no money made or lost

part 2 , as there will be no takers for such garbage. So how do we make sure we get bond holders to buy mortgages? we have two choices. ONE we let the banks issue the bonds and offer fmic insurance as corker would suggest. will this work? NO chance. there is No way to insure the quality of the loans that the bank is making and wrapping up as a bond that they are good loans. So since no bond holder will be willing to buy the bond from the bank and take a first loss of 10% on it, they will not buy. We know as well as bond buyers that the banks will since they are capitalist try to squeeze every dollar and at some time try to package JUNK into what they would call pristine loans. there will be very little oversight as the market is too vast to insure that each bank on an individual level did its work on these loans to make sure they are good for the bond holders. SO as been seen, the bond holders wont buy these JUNK bonds. also all current bonds from F&F would have to be added to the books of the US govt as debt or transfered to this new LLC that they just made from fannie and freddie. this could be a place for the bonds to be held and the new bonds issued by the banks sold to the new LLC? would this work? NO. because the bonds would still be junk packaged by the banks and now sold off to the govt to hold in the LLC. when the losses come, and they will, the bond holders take first loss again. so this leads to no buyers of the bonds again. 
Option 2, the GSE's continue to hold the standards high and check each loan made by the banks that are sold to them. they keep their new book pristine and traceble and package these to bond holders with first loss to the bondholders at a higher interest. then the us govt backs up these two with catastrophic insurance FMIC. this is controllable unlike the free market Idea that would not have any buyers of the bonds, or the Idea that the FMIC would backup all the individual banks with this type of insurance, only to sue the banks

part 3, JUST as they are doing now for poor standards that were not caught by the govt before the belly up.
SO in conclusion, the only way to get a bondholder to take a 10% loss first is to backup the loan with FDIC and guarantee that those bonds are pristine. and the ONLY way to do that is with the GSE model with the addition of the FMIC backing those loans and the DD of the company that is issuing the bond. IN this case F&F would be the most likely candidates to do this. and they are in the position to insure a smooth transition without a hickup in the market that is VITAL to the US. the GSE model allowed for the US to bounce back much faster than any other model in the world. as is evident in EUROPE and AUSTRALIA. The GSE model wants to No longer take a first loss to taxpayers and the bondholders dont want to lose any money. So if you want to offer a BOND people would be willing to take a chance on it would be the GSE with FMIC backing. this is not about Stockholders, this is and always was about bonds. the GSE is in temporary limbo, and the court or the congress will correct it. the treasury will want to stop the bond buying and hope that someone else will start buying as they taper down. the only way that happens is if the govt redirects the GSE model to stay pristine and not allow for garbage and then backs up the GSE with FMIC insurance, this will bring the bond holders to the table. No other bank will be able to pull this off even with FMIC coverage for them as there will be no guarantee the bond they are offering is not full of fraud and misinformation to the bond buyer, so he will not buy. the GSE's can offer this as the middle man. as for the reason behind my thoughts, during the downturn the Banks lost 25% on their loans while the GSE loss was 4%. those are fact. If the GSE's were not directed by congress to buy subprime loans the loss to them would have been next to nothing. This means that the GSE model is the best in the world and the most safe to buy

part4, a bond from other than the US govt treasury bond. this would allow for people to get more return and feel safe that their investment would not take a loss. In no other way does this scenario play out. and in no other way will this work. with that said it would seem that there is no replacement for the GSE, and that reform would end the problem that they now find themselves in. this is the true answer to this problem IMO.


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