Yes technically speaking FNM and FRE pool mortgages and then issue bonds. However, since those orgs were taken into conservatorship the implicit guarantee has become explicit.

What shitstorm. Yes there has been a couple articles but Geithner, Bernanke, etc all have their jobs In fact Bernanke was given Kudos and renominated. Do you think they did not know what happened with AIG a few months earlier? Lets not forget Barney Frank tries to pass mortgage cramdowns every other month, once the Federal Reserve buys all the notes it will mean far fewer orgs will object to it. Back Door principal forgiveness.

FHA is huge. Jim has gone over cases of people getting tax credits and FHA loans. Cash buyers purchase from the bank and then sell to FHA borrowers.

Simply said without FHA and the Federal Reserve mortgage rates would be much higher and far fewer people would be getting mortgages. If far fewer people could get a mortgage there would be more foreclosures and fewer buyers and hence lower prices.

No offense intended, but “the government buying up the mortgages” is NOT correct.

FHA is offering a helping hand for those underwater, but that’s having little impact, if you ask me. Most people who are more than 20% underwater, if faced with the dilemma will simply walk away.

If you’re referring to the FED buying mortgages, that’s not technically correct. Banks (including FNM, FRE) still own the note, and they are only offered as collateral to improve liquidity. As they are marked down based the regulator, they are liquidated from the FEDs balance sheet and marked down as collateral. That’s bank accounting rules, and unless you can offer specific ways that basic bank accounting is being broken, I’d say that you’re getting a line from someone who doesn’t understand the process wholly in the first place. In most cases, I believe banks and FNM FRE are simply recycling the notes for other performing notes. There have been no FED write-offs to date, all GSE write offs have been taken to Congress and that’s why you’re seeing ugly messages that the GSEs lost hundreds of billions and needed money. The FED would never take writeoffs of their member banks… they are, after all, a private consortium, not a public arm of the government. It would be the FDIC’s responsibilty to take the write down after seizing the bank and liquidating it.

I doubt that after the shitstorm that happened with AIGs honoring CDSs at face value after they were siezed, that we will make anyone whole. There may be some minimal debt forgiveness, and only for the really well connected, but not on a massive enough scale to solve any of our serious problems.

Besides, none of this discussion helps the natural price of housing in SoCal. It’s just the music going on around us.

I think the one thing you did not mention is that the government is quickly buying up all the mortgages. In the conforming market almost every loan written this year was written by FNM, FRE, and FHA (GNM). The Federal Reserve is then buying all the bonds those organizations issues (and then some of their previous bonds).

Which means the banks are not the ones making the foreclosure/no-foreclosure decision, the government is.

This is important cause it seems that Obama, Reid, Frank, and Dodd are comfortable backstopping up to $250B in mortgage losses each year. What is next, will the government who now owns many of the mortgage loans soon choose to forgive the debts?

BTW I almost hope they forgive the debts, cause then the homes will likely quickly hit the market at a lower price point.

Th other reason people sell homes in traditional SFH areas are divorce and forced movement because of work. With continued higher unemployment for a year or more in SD ($21B Cal budget deficit) and unhappy married couples no longer able to borrow money to hide (drown) their marital unhappiness, how long until prices start to fall?

A tsunami is not needed, rather the flippers need to see declining rents and a normal flow of must sells coming on the market. This will create falling prices despite all the government actions to Keep It Inflated.

Thanks Chuck, for taking the time to share your insight. The flood metaphor is pretty cool. Someone was talking about the prisoners’ dilemma back in the old thread. Their explanation is way different than what I remembered in my poli sci classes (stability theory to be specific), but both are applicable to the current situation.

The argument is getting to the point of staleness, imo. Tsunami vs. flood only affects the rate of change and at some point we’re left arguing about a derivative.

Actually, I thought my discussion of Nash Equilibrium was more apropos:

OK, for those who don’t know, I studied economics some in my undergrad and grad work. I also did work with Robert Fogel, Nobel Laurate in Economics.

So, I only say that because there are some fundamental flaws in thinking here (that seem to be widely held) that are accounted for in modern game theory. I hope that lends some credence to what I say. Basically, the general thought process is that banks will “slowly trickle out properties” because it is in their best interest. Unfortunately, this is an exact description of the “prisoner’s dilemma”. You can read more about it here:

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

The Nash Equilibrium states that this cannot continue if the participants perceive that they will be better of by taking equilibrium or first-mover advantage. I believe we have yet to establish Nash Equilibrium and, regulatory efforts have been the primary force in tilting the table to that point. However, once the “banking crisis” is behind us (and trust me, the world is tiring of seeing “Recession Over!” and “Housing’s Improving!” along with “Banks still need billions in bailouts!” together) banks will resume their foreclosures as quickly as possible. At the present time, banks internally believe that “there but by the grace of (government) go I” and as long as the bailouts continue, they choose the non-equilibrium choice. Foreclosure is more efficient and offers banks better returns than modifications, despite what the media has led you to believe. As soon as they can resume normal liquidation proceedings without invoking the wrath of the financial services committee, they will.

In the meantime, the ground is quickly getting saturated. It get “saturated” several ways:

1. Lowered prices means substantial numbers of undefaulted are underwater unless we return to 2005 pricing, something I have a hard time believing. General perception among homeowners is that we’ll be back to 2005 in a year or two. Once reality sets in, we’ll see more rational defaults.
2. Many investors have blown their load too early in the game. Only flippers remain nimble enough, but they absorb net 0% inventory. While it is still significantly cheaper to rent than own, no significant conversion of renter to owner will happen.
3. The widely held perceptions in #1 along with the tax credits (up to $18000 in Cali) went a long way to saturate the ground by pulling demand forward.
4. Most people with money are buying now, afraid of missing out. We are having a lot of bidding wars, but they often involve many of the same players. I don’t believe the demand exists in the level that people here believe it does. At least not at the current prices in higher-priced areas.

At this point, I believe the water table is nearer the surface than it was 1 year ago. We had a california flash flood last year that picked up a lot of debris, but quickly receeded. Real floods take a long time to go away.

I may be all wrong, but I’m trying to translate technical evidence into a narrative and there are always factors that I cannot see and do not factor into my model. Some possible unforseen events could prevent the water table from overflowing:

1. If the economy markedly improves. GDP growth of +8% p.a. would permanently forestall this, although the attendant inflation would probably make it untenable (+10% p.a.)

2. Widespread amnesty and open border policy, especially greencard-for-homeowners policies mentioned before, although this would have some negative societal consequences that would probably drive me out of California, so I wouldn’t care either way.

3. Expanding homeowner credit, or “New Flipper Credit”. Doubling it would allow us to pull quite a bit of demand forward, especially in normally non-rational purchasers. Incentives matter!

4. New moratoriums, or nationalization of the banking system (although this could admittedly go both ways, as the length of the asset deflation is marked more by the time required to liquidate non-self-liquidating debt. We still have a substantial debt overhang).

I hope everyone luck in this upcoming year, as it is a real test of where we go for the next 3 years.

Chuck ponzi

Awesome take. So true.

I personally think falling prices though are just one painful experience people in SD will have to suffer. The other is California reinventing itself yet again. I suspect half the buyers and sellers here will not live in CA 20 years from now. No disrespect to jtr, it;s just a little bit of history repeating.

You should consider a career in politics. You’re very good at appealing to many different groups all at once.

JtR, are you seeing a drop in interest for properties yet?