Danny Salas

Archive for September 9th, 2008

Chico, CA Interest Rates Market Report – Economic Influences – Sept 9th, 2008

The Saving Grace Of An Industry, Entirely

HOLY … #&*@!

HOLY…Toledo!  Treasury Secretary Henry Paulson announced that the Federal Government would have to take over control of Guaranteed Service Enterprises (GSE) Fannie Mae and Freddie Mac.  HOLY Mollie!  Holy guacamole!

First of all, what does this mean and why did it happen?  To put it bluntly, Fannie Mae and Freddie Mac just got too big!  They got to do whatever they wanted, pumped tens of millions of dollars into the lobbyists that asked congress and the senate to look the other way when it came to making decisions on determining a consumer’s ability to make mortgage payments.  Things are good, why change a good thing?  And then the mortgage credit crisis hit…and things started to change.

Surprise Takeover?

The takeover is not too much of a surprise.  We’ve already seen some intervention when the Federal Reserve stepped in to bail out Bear Stearns.  But this is the largest expansion of government in the history of the United States.  This is big!  This is HUGE!  Hence the “holy guacamole” quote from the first paragraph.

Last Wednesday, we saw the Dow Jones Industrial Average plummet 300 points.  Also, we heard from portfolio manager Paul McCulley of the single largest purchaser of mortgage backed securities PIMCO come out and say that they were finished buying any more bonds.  Also, Friday, governments from around the globe mimicked McCulley and the stage was set.

Rescuing An Industry

Anyone remember the Savings and Loan Crisis of ‘89 and ‘90?  Again, the government had to step in and create the Resolution Trust Corporation to monitor the assets of failed banks, put $300 – $400 Billion tax payer dollars into a wrecked system, but later re-coupled about $225 Billion of those funds…but it rescued an industry.

That’s what’s happening here, folks.  The government had to step in and rescue an industry that would have collapsed…period!  If the GSE’s could not have sold their bonds (or mortgage backed securities) than they would have continued to lose capital until they had nothing left.  Now, conforming loan amounts (loans with values of $417,000 and lower) will stay liquid, as PIMCO announced on Monday that they’ve been, “buying all weekend.”

All Is Good…But What About Long Term Effects?

So, for the short-term, this is great.  It helps free up funds for banks to operate, but we cannot forget that we’re still dealing with tighter credit standards for loans, a slowing economy, people can’t qualify for loans to buy homes, etc.  So this isn’t a quick fix…it’s just the ability to enable us to continue to operate.  We still exist as opposed to the collapse of an entity.  Fannie/Freddie created the ability for conforming loans to have an open ended line of credit ($200 Billion) that would guarantee to investors a place to be able to place their loans and get a return on their investment.  If we need more; than it will just take an act of Congress to approve more.

Hard Lesson Learned

Frankly, I think this is what government is for.  Some would argue that it gives too much power to the government.  Maybe it does.  But put in the hands of greedy CEO’s and stockholder’s of banks and savings and loans…hard lesson learned.  Hard lesson learned!

Rates have benefited from this and may continue to do so in the short term.  Government will eventually release more management to the GSE’s as time goes on and the Private Sector will benefit from this also.  So…until next week!