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ECONOMIC ANALYSIS:

Thinking About Umbrellas

by Fred Cederholm

The system is not only in crisis, it is tottering on the brink of a complete meltdown.

I’ve been thinking about umbrellas. Actually I’ve been thinking about the housing bubble, Fannie Mae, Freddie Mac, The American Housing Rescue & Foreclosure Prevention Act of 2008, agenda, and reality. Umbrellas are definitely useful items to have in a backup arsenal of protective gear when the sun is shining, or there is a threat of rain. They even serve to keep the user somewhat dry and protected when there is a gentle drizzle, or shower. Unfortunately they don’t do much good in a monsoon, a hurricane, a tidal wave, flood, or tsunami. An ark would do you far better.

You see, the debacle of the housing/real estate bubble continues to ratchet up on the scales of severity—growing exponentially in losses, write-offs, impact, and negative spin-offs. The unwinding crisis and ramifications have just progressed up the ladder a few more rungs. We are not yet at the top (or should I say the bottom)—far from it! The banking/financial systems behind real estate financing underwriting are in crisis. Far too many people assumed obligations for housing mortgages they could not service and could never ultimately pay off under the best of times and conditions. It began as the tragedy of Sub-Prime and Alternate-A loans, whereby if the borrowers had a pulse, they got the loan at a teaser rate of interest they could only theoretically afford. Mortgage resets triggered a rash of delinquencies, defaults, and foreclosures. An already existing market glut of “spec” houses was joined by a flood of re-sales and walk-aways. The spiraling glut impacted the sale prices of all properties.

These Sub-Prime and Alternative-A loans were packaged and re-sold to investors as CDO’s (Collateralized Debt Obligations), where investors bought dollar-denominated blocks of “generic” debt that were NOT property specific. The losses, write-downs, and write-offs on these "investment instruments" already tally in the hundreds of BILLIONS, and we are only getting started. The rush to unload properties keeps impacting the reselling and market values of an ever-larger block of homes—originally financed by borrowers who had met the more stringent income and down payment requirements of a Fannie Mae and a Freddie Mac. These two had packaged the paper on what “were” a higher quality of mortgage-backed derivative investment paper. These, too, are now in the tank and sinking fast.

The on-the-market glut of properties for sale has pushed prices down pretty much across the nation—the largest price declines occurring on the two coasts and in the sunbelt. Households who had enjoyed paper equity gains in double digits saw those completely evaporate; now they're saddled with mortgage obligations far in excess of their properties' sales (recoup) value. They, too, are upside down/underwater.

Fannie Mae and Freddie Mac hold about half of the $12 TRILLION outstanding mortgage paper and are now looking at write-offs/write-downs in the TRILLIONS for their investors. They can’t re-sell or redeem the paper they have out there, much less re-market more for new or take-out loans. The system is not only in crisis, it is tottering on the brink of a complete meltdown.

The American Housing Rescue & Foreclosure Prevention Act of 2008 doesn’t “fix” anything and certainly won’t even mitigate much of the pain. It only buys some time.

Last week saw Congress railroad through The American Housing Rescue & Foreclosure Prevention Act of 2008. This has been dubbed the “bailout of Fannie and Freddie.” If you think this 700-page bill actually “reimburses” borrowers/lenders for “any to-date or future losses” with Uncle $ugar picking up the tab, you are dead wrong! For now the Act authorizes the Treasury/FED to buy up upwards to some $25 BILLION of Fannie and Freddie paper to fund new mortgages for home buyers who meet established criteria. Another bureaucratic watchdog agency is established to keep the forward-moving Fannie and Freddie on the up and up. Existing homeowners (and those up-beyond-their-eyeballs in debt) qualify for some new tax credits on the property taxes they pay—even if they don’t itemize deductions. The National Debt ceiling is goosed up $800+ BILLION more!

The caveats of the Fanny and Freddy "rescue" legislation stress that the liability/costs to the taxpayers won’t exceed the $25 BILLION figure, so why is the ceiling on the National Debt being raised 32 times that amount?

The brouhaha behind the bill is pretty much spin, hype, and hot air. It doesn’t “fix” anything and certainly won’t even mitigate much of the pain. It only buys some time. Its caveats stress that the liability/costs to the taxpayers won’t exceed the $25 BILLION figure, so why is the ceiling on the National Debt being raised 32 times that amount?

Oh yeah... it’s an election year—so here is your umbrella! Cheers!

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


Copyright 2008 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.

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This story was published on July 29, 2008.