Thursday, March 13, 2008

Finally a decent idea from the Government/FHA

Well if you are wondering why the DOW went from 200 down to up 35 it was based on two pieces of news. The S&P announcements that the writedowns are close to being over(HAHAHAH yeah right), and a new government FHA backed mortgage plan for distressed owners.

My take:

Let me preface my opinion on the FHA idea by saying that I think there is very little chance that Wall St. Accepts this deal. If Wall St. does take this deal then we are in much deeper doo doo then any of us know.

"A mortgage bailout plan hatched between Wall Street and Congress is gaining political traction even though it could be on a crash-course with the Bush administration.
The plan would amount to a steroid boost for the Federal Housing Administration, a program conceived to help poor people buy homes that is now being used as a subprime mortgagelifeline.
Both Credit Suisse and Bank of America have mapped out how the FHA could gather up more shaky home loans and Rep. Barney Frank, chairman of the House Financial Services Committee, on Thursday offered legislation to do just that.
Under those plans, the government would take failing mortgages off the hands of investors and write new terms that would prevent foreclosure.
The Frank bill is specifically aimed at borrowers who are distressed because the value of their home has dropped.
His legislation would see lenders write down the mortgage amount in exchange for a government guarantee the new loan would not fail. Lenders who have a choice between seizing a home or taking a hit on the loan amount could find the plan appealing."

My take:

OK so why am I shocked that Wall street is involved in this deal. Here is how this plan would work. The Fed would take on billions in bad debt from the banks and feeds the loans to FHA. The FHA will then analyze what the person in the home can afford and drop the loan value to a point where they can afford it. You need to be living in the house in order to qualify so this takes out the speculators. Sounds like it makes sense right? The problem is why would anyone on Wall St. sell a loan and then take the loan back from the FHA if the loan value is at a HUGE loss because the the FHA has decided this is all they can afford based on their income. Example, Subprimer pays 700,000k in Cali and can only afford 400k. FHA could potentially take the loan down to 400K and sell it to another investor or the same bank.

I love the idea because it will start bringing transparency and trust back to Wall Street. this also is not a bailout and doesn't cost the Fed anything. The fact that Wall Street helped develop this plan tells you what shape the banks are in.

Another thing to think about here is prices are still dropping at the fastest rate in history. Maybe FHA decides to lower the loan amount lower then its worth to protect owners from price drops. Wall St. gets hammered if this goes through but they deserve it. They never should have made the loans in the first place. All things being said if this goes through then expect MAJOR losses on Wall St.

Why would Wall St agree to this? Here is what I think they are saying to themselves: "Well the loan debt we are sitting on may be worthless so I guess a FED gauranteed loan at 50% less is better then ZERO!!! Lets take the deal."

We will see how this develops. Its perfect for the Feds because this costs them nothing. FHA just becomes a holding house until the loan is sold off to investors. It may go down as one more idea that never makes it through congress but this is the first one I like because it squeezes the banks who created this mess. they need to be punished when they get involved with fraudulent behavior.

Investing note:

Because you are hearing FED rumors on a daily basis I wanted reinforce the fact that investing right now is extremely dangerous. You can smell the desperation on both sides of Wall St.and the Government, and new ideas can move the market by 250 points like it did today. This bull move was also helped out by S&P saying that they could see the end of the writedowns for the banks. Yeah right, like they have one ounce of credibility left. Remember these are the same guys that told you your subprime bond was AAA rated. Notice they forgot to include thethe Alt-A and Prime loans that are going down as I have previously described. Forget to include those eh?? This is the why I continue to preach fixed income investment.

You really need to look at fixed income during these times like these. If you go into CD's, treasuries or bonds for one year then maybe your return is 4% with almost zero risk to the downside. If the market goes up the average 10% then you have lost 6% on your investments for one year. Now lets look at the alternative. If you throw your money into equities your return could be 10% at best in this type of market with a downside risk of 30% or more depending on how this mess gets worked out.

I am usually a bull and in stocks. There are times however that you need to take a breather from equities when common sense is telling you things are not right. I learned from the tech bubble that going to fixed income is smart when there are big threats to the economy. If you don't have DANGER WARNING lights ringing in your head right now then you never will. This housing time bomb will go down as one of the biggest debacles in the history of our economy.

One quick story and I will call it a night. Many wonder how the great Kennedy family made their huge fortune. During The Great Depression as stocks peaked one of the Kennedy's listened to his shoe shiner talking about the stocks he bought(just remember the busboy that owned in 1999 before it went to zero) and Kennedy said to himself is he is buying then who is left to buy? He then went to his broker and shorted the stock market as it crashed down 80%. This is how much of their fortune was made. FHA story S&P Joke of a story

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