Florida Mortgage Report

Fannie and Freddie to Go Jumbo? Is the Government Going Insane?

"Stop the insanity" is the first phrase that comes to mind after reading this headline.  Why?  Think about what is truly happening in the mortgage market and where all of this is headed.

Basically, the government is trying to overtake the mortgage market through endless regulation.  They feel they must do something or else and are succumbing to pressures to "bail out" a market that was in desperate need of a correction to bring itself back to reality.

But is "over-regulation" what we truly need?  Don't take me wrong here as I am all for added regulation which protects the consumer, but when the government steps in, they tend to overdo it.  Allowing Freddie and Fannie to go into the Jumbo market, even if only temporarily, is one case in many of how the government is throwing Band-Aids on the gaping wound.  Sure it stops the bleeding some, but basically just prolongs death.

Paulson and Bernanke are doing everything in their power to Band-Aid the mortgage market.  Bernanke and crew are cutting the Fed Funds Rate and Discount Rates even with inflation showing signs of growing and the economy slowing.  He is giving stagflation an "open door".  Both are looking for any changes they can make or get other parts of the government to make in order to "save homeowners from foreclosure." 

Who stands to win though?  The homeowner?  Not likely.

The real winners in this game they are playing are the lenders and other financial institutions that are struggling due to their risky lending practices or over leveraged positions on mortgage backed securities.  Citigroup, Wachovia, Bank of America, Washington Mutual, Countrywide, the list goes on and on.  All are shouldering huge losses and will likely continue to do so into 2008.  They "need" the government to do something.

The homeowner's facing foreclosure, for the most part, deserve to be foreclosed upon.  While the media and government play that the typical foreclosure is a subprime borrower facing increased mortgage costs due to their payment adjusting, that represents the minority, yes the minority of foreclosures out there.  Factor in that the government portrays the mortgage professional that sold them the loan as an unscrupulous one and reality shrinks even further from the truth.

Again, don't get me wrong.  There are unscrupulous originators and there are homeowners that truly should be helped somehow, but they are the smallest percentage of the pie. 

So, why is the government willing to screw up the entire industry over the few?  Well, because that is what they do.  They disguise "bail outs" as "homeowner salvation plans".  They usually go out of their way to appease the minority groups on an issue, while sacrificing the desires of the majority groups. (Note:  I am not talking about racial or ethnical issues here, so don't even go that route in any comments please).

More Trouble in The Financial Sector and the Number One Stock to Short is...

Bank of America came out saying it will set aside $3.3B to cover losses in the fourth quarter.  The CEO, Ken Lewis said “While we do not make a practice of forecasting quarterly earnings, I think you certainly can assume results will again be quite disappointing.” That's gotta hurt.

B of A started what other banks decided to follow up with.  A slew of losses being shown across the board with Wachovia setting aside around $1.0B and PNC around $1.5B.  Washington Mutual is around $1.6B.  Others have issued warnings as well.

The most interesting announcement yesterday is that from Morgan Stanley.  They came out and said the #1 stock to SHORT is none other than Citigroup.  Their analysts are saying Citi will try all kinds of methods from spinning off units to selling funky securities, all of which will dilute shareholder value.

I think it goes without saying that any attempt by the Fed to prevent failure is not working, at least not enough.  Throwing money at the problem (yesterday's Fed announcement) moved the markets temporarily, but when reality set in, investors saw through the Fed's attempts.

The reality is that the markets need to work through the issues and move on, but the beatings to the financial companies will continue, at least into the first quarter, if not beyond.

WaMu Finally Faces Reality

Yesterday Washington Mutual (WaMu) announced it was going to cut dividends and lay off thousands as well as announcing a $2.5B capital infusion.  The Seattle-based bank is also expected to report a net loss in the fourth quarter after recording non-cash write-offs related to mortgages.

Washington Mutual is the nation's largest savings and loan and could not escape the mortgage dilemma.  They are laying off more than 3,000 and have set aside $1.6B for loan losses for the fourth quarter.  Additionally, they are getting out of the subprime mortgage business like most other lenders these days. 

In case you have already forgotten, WaMu was also facing appraisal fraud and the ramifications from that have not yet been felt completely.