Category: Economy
A Non-Guarantee Put to the Test (part 2)
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| By Robert Folsom |
Published: Fri, 14 Mar 2008 17:15:00 ET |
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The stock market was down hard on Friday (March 14), and mixed on the week overall.
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Part one of this story left off yesterday in the early 2000s, when Fan and Fred were about to attend history's biggest mortgage market party -- "The Subprime Bash." And make no mistake, it truly was history's biggest, one for the ages in every way. In fact, the size of this party was a product of arrangements that had been tried and tested on a smaller scale.
Homeownership rates in the U.S. had been remarkably constant for 40 years, always in a range between 63% and 66% (Census Bureau data). But a change in that data began to unfold in the late 1990s. Homeownership reached 67% for the first time ever in Q3 of 1999, then 68% in 2001, then 69% in 2004. Yes, Fan and Fred took (and received) lots and lots and lots of credit for these record levels of homeownership. After all, can you imagine anyone being against it?
But credit of a veeerrryyy different kind was the real reason for the unprecedented levels of homeownership. This different kind of credit took those levels where they'd never been before by making "homeowners" of folks who'd never owned homes before. Which is to say, folks who were often unable to qualify for a conventional loan. Fan and Fred wasn't motivated to bother with those types, given how easy their lives were via the benefit of Brother Government's wink & nod -- you know, the non-guarantee guarantee implicitly behind all "government sponsored entities," even when they act like hedge funds.
So, Fan and Fred's competitors found a competitive edge of their own -- and it was called "Subprime." That's when you make loans without worrying about whether the borrower can pay back the money. You simply sell it on the secondary mortgage market.
And then, when interest rates fell to levels not seen since Eisenhower was president... the Subprime Bash was on. "Interest-only," "sub-prime," "no-doc," "hybrid," "negative amortization," "balloon," and "exotic" mortgages were all part of the festivities. At this party the mortgage lenders put up a Limbo Pole, and raised it high enough for borrowers as tall as Shaquille O'Neill to walk beneath.
Fan and Fred couldn't resist -- they got in on the Subprime Bash too.
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We know how the story -- and the party -- ended. Well, we don't really know the FULL ending to the story, only where it stands today. Fan and Fred recently announced a quarterly loss of $3.6 b-b-billion. Investors who hold Fan and Fred's paper were getting lower yields all along anyway, now the situation speaks for itself. As for investors who hold stock shares, this chart of Freddie also speaks for itself.
Bear Stearns, one of Wall Street's "Big Five" investment banks, announced today that it's out of money. It's not too far fetched to imagine Fannie and Freddie's non-guarantee guarantee being put to the test in the foreseeable future.
The government can't help you, and, apparently, government sponsored entities ain't doing so hot either. Think for yourself. We can help -- learn more by clicking here: www.elliottwave.com/single-issues/the/0803THE_Real_Dow_at_New_Low.aspx.
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