Mortgage News

If Fannie and Freddie fail the price tag is somewhere between $400 billion and a shade over a trillion of taxpayer money to bail them out. How do you like them apples? A trillion bucks? Big enough to sink the government’s AAA rating. Big enough to make LTCM look like child’s play. This is some scary stuff folks.

Some comparisons shall we?

Clinton’s proposed universal health-care coverage
10-15 years of Obama’s plan @ $50-65 billion per year
Cost of the Iraq war

From CNN’s trillion-dollar mortgage time-bomb:

Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor’s recently placed an estimated price tag on this worst case scenario — $420 billion to $1.1 trillion of taxpayer’s money.

This dwarfs how much it cost to help banks during the savings and loan crisis of the late 1980’s and early 1990’s. That cost taxpayers about $250 billion in today’s dollars.

S&P added that saving Fannie (FNM) and Freddie (FRE, Fortune 500) might cost so much that the federal government’s AAA credit rating, the top possible rating, might even be at risk. If that was lost, then all federal government borrowing would become more expensive.

But other experts expect that declining home values will force more borrowers who have a Fannie- or Freddie-backed loan to stop making payments in the coming months, rather than continuing to make payments on a home now worth less than their loan balance.

Rising job losses may also make it difficult for other borrowers who formerly had good credit to stay current on their mortgage payments.

“The real fundamental problem is real estate prices have been falling and they might fall substantially more,” said Robert Shiller, a Yale University economist who argued for years that a bubble was forming in real estate prices. “OFHEO and Fannie and Freddie never considered the possibility of a massive real estate correction.”

Some economists suggest that if investors start to see problems in the performance of loans backed by Fannie and Freddie, they’ll dumping them. And that would force the federal government to step in.

“I would say there’s at least a 50-50 chance of some sort of bailout. I’m not saying it will necessarily cost $1 trillion, but they’ll need some kind of help, and it very well could happen this year,” said Dean Baker, co-director of the Center for Economic and Policy Research

Investors are signaling growing concern as well. The yield premium for securities backed by Freddie and Fannie compared to the yield on Treasury bills has grown to about 2.25 percentage points from 1.7 percentage points at the beginning of the year. That’s a sign that the investors see a greater risk of Fannie and Freddie running into bigger problems.

I’m guessing there’s a school, a child, a homeless person, a neighborhood, a teacher, a firefighter, a veteran that could all use more help - I hope we don’t end up costing them that help by recklessly throwing Fannie and Freddie in front of this train.

And Fannie and Freddie’s role in the mortgage and real estate markets is likely to grow, as Congress recently allowed them to back larger mortgages, up to $729,750, up from the previous limit of $417,000.

The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both firms, also recently lowered the capital requirements for Fannie and Freddie in an effort to pump $200 billion more into the credit markets.

The new loan limits will increase the risks and losses for Fannie and Freddie, said Wagner and other experts.

We’ve all read the stories of how the great American subprime unwinding is reeking havoc overseas; but now it’s time for a little turnabout. The LIBOR index has surged recently as economists have called for scrutiny of the posted borrowing rates by institutions measured by the index. This is big news to anyone with an adjusting adjustable rate mortgage. Most of the loans made during the boom were tied to the LIBOR as a measure of the adjusting rate that would be carried when the brief fixed period of the loan ended.

What this means for people with ARM loans is that even with the Fed aggressively cutting rates at home, expecting relief from rising mortgage payments is a pipe dream, as the bankers in London horde cash to protect from a liquidity crisis. Amazing how interconnected we all are. The fates of a subprime homeowner trying to hold on to their home at the mercy of the British banking system.

From the Telegraph in Britain about the recent LIBOR jump:

A key inter-bank borrowing rate surged yesterday in the wake of comments by economists questioning its credibility.

The three-month dollar London Interbank Offered Rate climbed more than eight basis points - its biggest jump since last August - following criticism that the pivotal measurement was being understated.

The British Bankers’ Association (BBA) also stepped up its defence of the benchmark reference rate system, which underpins real borrowing rates across the world.

BBA Libor director John Ewan acknowledged that banks were likely to have reconsidered the information they supplied for use in setting Libor.

But the association’s move to accelerate a review into the Libor calculation process owed more to concerns about difficult market place conditions than questions about credibility, Mr Ewan said.

Libor changes daily based on offered rates - rates at which banks say they could borrow from their counterparts - posted every morning by a panel.

Economists have voiced concerns in recent days that banks are understating the rates they supply for Libor to downplay the extent of their funding problems.

Of course, your mileage will vary based on the type of LIBOR loan you hold - 1-month, 6-month or 1-year; but across the board this week LIBOR rates are up, which means monthly mortgage payments in the US for subprime ARM holders are going to be as well.

Some relief in sight?

There may be some relief from the rising LIBOR index as the British government is set to announce a securities-for-cash swap fashioned on the Federal Reserves recently expanded lending plan.

From Market Watch on the British government’s attempt to forestall the credit crisis:

The plan to be unveiled by the central bank is expected to see the Bank of England offer to swap as much as 50 billion pounds worth of government bonds, or gilts, for certain types of mortgage-backed securities for a period of up to a year or more, according to analysts and news reports. Banks would then be able to use the government bonds as collateral for loans from other banks.

Darling said the plan would help open up the U.K. mortgage market.

“We are doing our bit and I would like to see the banks pass on the benefit of the three interest rate cuts” by the Bank of England since December, Darling said.

Rising mortgage rates threaten to exacerbate a downturn in the British housing market, which could also accelerate a slump in consumer spending and worsen an expected economic slowdown, economists say.

Darling denied that the plan, which bears similarities to the expanded lending facility announced by the U.S. Federal Reserve last month, is a bailout. Banks will borrow the gilts, pledging the mortgage-backed securities as collateral.