The Daily 2¢ - Jackson’s Yuppies

The Bush administration has got to get its story straight.

On several occasions now, including as recently as last Thursday’s hearing in front of the House Financial Services Committee, Housing and Urban Development Secretary Alfonso Jackson has explicitly stated that administration policy is not intended to help so called “Yuppies”.

Yet, with their now uniform acceptance of the “temporary” conforming loan limit increase, that’s exactly Senator Schumer, Representative Frank and a reluctant Bernanke, Paulson and Jackson seem bent on doing.

In an interview with Bloomberg last July, Secretary Jackson initially made his anti-yuppie bailout position.

“We have very educated people that decided that they wanted to live above their means, and we call them yuppies… young people who wanted a Mercedes Benz but at the same time wanted a $600,000 home. So, they go in and make a loan that is basically interest only wake up the next morning and they can’t cover the note because the house has not increased [in value]… In those cases, we are not willing to bail those people out. But low and moderate income people, fireman and police who didn’t read the fine print, we will be able to help them stay in their home.”

Again, during the press conference preceding the “bailout” conference with all the national homebuilders that occurred earlier this month, Jackson reiterated his anti-yuppie stance.

“… this is a limited market we are trying to save. We’re not here to save those persons who made those huge exotic loans, which I call yuppies, We’re here to look at middleclass Americans.”

Then again, at last week’s committee hearing, Jackson stated that yuppies were not on the list to be saved.

“Let me say this to you mister chairman, clearly there are some people that we are not going to be able to help. Especially, as I always say, the yuppies who had this extravagant decision to have two or three cars, and a huge house they can’t afford but the people we are looking at are basically middle income people, fireman… police, teachers, nurses.”

So, I would think the point has been made very clearly… No Yuppie Bailout!

Yet, with the proposed conforming loan limit increase to $625,000 for the more expensive “urban” areas, it’s obvious that, by its definition, the yuppie and his or her lender is being bailed out.

Who else lives in the expensive metro markets and borrows $625,000 toward their home purchase anyway… fireman, police and nurses?

It’s important to keep in mind that the main proponents of the conforming loan limit increase are Senator Charles Schumer (D-NY) and Representative Barney Frank (D-MA), both of whom receive the overwhelming majority of their campaign contributions from the real estate and financial service sectors (hat tip Frothy).

It seems obvious that, in the name of helping the common American, and even with numerous public statements to the contrary, the government will plow ahead and bailout Wall Street.

One good turn deserves another as they say!

The Daily 2¢ - The China Solution

Seeing Housing and Urban Development Secretary Alphonso Jackson sitting next to Treasury Secretary Paulson at yesterday’s lender bailout summit jogged my memory of Jackson’s recent trip to China that, although covered in the traditional media, didn’t seem to garner the attention it deserved.

In early July, Jackson appeared in a very candid Bloomberg interview in Hong Kong as he was passing through on his way to meetings with Chinese People's Bank of China governor Zhou Xiaochuan, Construction Minister Wang Guangtao, and other Chinese officials.

In the interview, Jackson showed no hesitation when revealing that the purpose of his visit was to attempt to persuade China to participate in the “very lucrative” market of American mortgage backed securities.

Specifically citing both FHA and Ginnie Mae, Jackson’s intention was to lean heavily on the explicit federal guarantees that both of these programs provide when making his case to Chinese officials who, as he stated, had already showed some interest in the investment.

“The best argument that we can make is that they have the full faith and credit, and backing, of the US government. “

This was the precise message he pressed during the delivery of his speech as well stating “They are a sound, solid investment, a win/win situation for the investors and for the American people. These securities are attractive because they have no credit risk and are backed by the full faith and credit of the U.S. Government. Also, most Agency Mortgage-Backed Securities even have a higher yield than the Treasury Securities.”

The result of the meeting was a lengthy “Memorandum of Cooperation” that was signed on August 30 between the two governments that established many areas “of mutual interest”.

Given that the federal government now seems bent on dramatically expanding its role in the mortgage market, I thought it was important to recount the events surrounding the Jackson visit to China.

Keep in mind that all mortgage related programs and agencies of our government (Fannie Mae, Freddie Mac, Ginnie Mae, various FHA programs etc) require some form of private investment in order to function.

With a reeling and risk averse Wall Street now pulling back from mortgage securities, possibly even including government agency investment, China may inevitably pick up the demand for agency securities and even drive an expansion.

It seems to me that a more sensible approach, considering that compensation for failed government agency securities would be funded by the US taxpayer, would be to let the turmoil in the US housing markets play itself out before looking for additional fuel from foreign investors.

More private investment will likely equate to a broadening of these programs possibly putting them further in jeopardy of overreaching.

This would be especially risky considering the uncertain state of the housing markets at the moment.

The Daily 2¢ - Federal Nonconformists

I can't think of a more preposterous and irrational example of exuberant upside bias on the part of the Federal government then that of the recent toiling over the OFHEO conforming loan limit.

For those of you that are not yet familiar, the Office of Federal Housing Oversight (OFHEO) is the government agency that is responsible for regulating the two primary Government Sponsored Enterprise (GSE) mortgage giants, Fannie Mae and Freddie Mac.

One of the main, if not THE main, role of OFHEO is to set the “conforming loan limit”, a maximum loan value that is used to act as the threshold between a “safe” loan that Freddie Mac and Fannie Mae are allowed to purchase and an “unsafe and unsound” loan “running contrary to statute”.

This is how the “conforming” vs. “Jumbo” loan is defined… below the limit is “conforming” above is non-agency “Jumbo”.

Currently, the limit for a single family home is $417,000, pretty frothy when you consider that, only as far back as 2000, the limit stood at $252,700.

Keep in mind that this means that an average home buyer can go to a mortgage broker, bank or other lender and borrow as much as $417,000 of home loan principle and still remain eligible for GSE underwriting that carries a lower rate of interest since GSE loans are assumed to be backed by the full faith and credit of the federal government (this assumption is really a bit of a myth… but that’s a post for another day when things really start to quake!).

So how is it, you ask, that the limit nearly doubled in roughly 5 years (keep in mind, it was set to $417,000 in November 2005)?

Easy, when the home prices went up, they simply raised the value (for more detailed information on how they change the limit, see my prior post on the subject).

But now comes the sticky part… now that home prices are going down, what are they doing to the limit?

The answer is surprise… OFHEO is coming up with all sorts of oddball ways of keeping from having to lower the limit (see my past two posts on the subject)

In fact, in 2006 when home prices declined which, according to their prior inflating methodology, should have resulted in a reduction of the conforming loan limit, OFHEO revised their guidelines and left the limit unchanged.

Now in 2007, home prices are going to fall again, only this time by a likely far more significant percentage and what has OFHEO done in response?

They have revised the guidelines once again, effectively postponing any decrease until certain conditions are met (again, see my prior post on the subject).

After soliciting public comment in June and July about the proposed changes to the guidelines, OFHEO received a number of respondents, particularly the National Association of Realtors (NAR), the National Association of Home Builders (NAHB) and the Mortgage Bankers Association (MBA) as well as Fannie Mae, Freddie Mac and a whole raft of two-bit mortgage lenders who expressed clear opposition to the changes NOT because they would leave the limit unchanged BUT because they feel OFHEO should NEVER LOWER THE LIMIT!

ONLY UP... NEVER DOWN!

If that weren’t outrageous enough, there has been much talk for the last few days coming from Congressional figures such as Representative Barney Frank (D-MA), the Chairman of the House Financial Services Committee, who actually prefers that the limit be INCREASED, even in the face of two years falling home prices!

The point of this, obviously, would be simply to force Fannie and Freddie to effectively “re-liquefy” the now totally stalled Jumbo market.

Apparently though, both Treasury Secretary Paulson, and Senate Banking Chairman Dodd (D-CT) have expressed that it will take specific legislative action in order to allow OFHEO to raise the conforming limit above the current level.

Now, I’m not very sure why they have concluded this as OFHEO just modified its procedures for lowering the value without any legislative debate whatsoever, but it really makes no difference.

If you listen closely to Dodd, Frank and Paulson, they are all saying the same thing namely it will take legislative action and the legislation is on the way.

This is one of the most egregious examples of a dimwitted Congressional-Federal assault on the “free” markets I have ever seen.

They, in the supposed well meaning attempt to help “average” Americans, are essentially attempting to control the market price of residential real estate.

Don’t underestimate the severity of this fumbling.

To put it in better perspective, it has recently been estimated (in Dean Bakers latest excellent paper... hat-tip HousingPanic) that there is anywhere between $4 to $8 TRILLION of housing equity that will be lost in the process of deflating (re-pricing) the housing bubble, bringing prices back to hundred year historical averages.

That’s nearly 2 – 4 times larger than the entire 2008 Fiscal Year Federal Budget.

This means the by finagling with things like the conforming loan limit, mortgage bailout funds and foreclosure timeouts, the Federal government is attempting to use both taxpayer dollars and the full faith and credit of our government in order to maintain absurdly inflated housing values and the artificial wealth this boom created.

This would clearly create a moral hazard of unparalleled proportions.

Remember, Jumbo loans were most frequently used by upper middle class affluent home buyers, and for the ones that are now in trouble, the ride down will be painful.

But that is the price you pay for taking a risk in a “free” market.
And who better to take this hit than Americans with generally good incomes and employment opportunities.

If the government is smart it will allow this natural correction to take place unfettered, permitting scores of Americans to learn a valuable life lesson.