re: FNM's/FRE's Assets to Be Unwound at 10%/Yr from 2010 On

They have been tightened. Quite a bit. and what Fannie has not tightened the MI companies have.

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They have been tightened. Quite a bit. and what Fannie has not tightened the MI companies have.

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What downpayment amounts are required? If its less than 20%, then they have tightened as far as they will. Next spring its going to take solid credit and lots of cash to buy a house.

Short term bounce on the equity or on the debt? Why would the equity rally now?

Its already taking solid credit to buy a house. Underwriters are being told to ignore DU and LP findings and actually underwrite the file. Credit score no longer being looked at as much as it used to be. I disagree with the 20% requirement. I've seen the default charts over the years and it is at 95% where they REALLY jump up. At 90% they are pretty much in line with 85 and 80.

I'm also curious to see how foreigners react to this, particularly in Asia.

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ETA: I'm saying what the Col. is saying.

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Never a good sign.

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Why not?

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1. This will raise borrowing costs across the board. The treasury market will NOT like the assumption of a new $5T on the books of the U.S.
2. Any institution that owns GSE preferred just got skullfricked.
3. This happened after Merrill came in and essentially forced them to mark their shite paper to market. How long until everyone else is forced to do the same? Want to guess what the outcome of that will be?

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Okay, and here are the counter-points:

1. This will not raise borrowing costs across the board. U.S. 10-year Treasuries are trading at absurdly low yields in part because all of the foreign traders who started fleeing from GSE bonds. Now that flow will start going right back in the other direction, lowering borrowing costs for Fannie and Freddie. Hell, that's the whole damn point.

2. I seriously doubt GSE preferred owners are getting "skullfricked," as I've explained above.

3. With the government making the takeover of Fannie and Freddie official, more stability will obviously be brought to the housing market. Taxpayer money running in the tens of billions of dollars will be used so that mortgage financing availability might be expanded, while at the very same time lending restrictions are tightened. Government subsidies will continue into 2009 so that investors can be assured that housing prices in most markets (outside of CA, NV, & FL) won't nosedive. This will give financial institutions time to continue business and work their way to greater solvency as economic conditions improve next year.

Thus, with intervention assured to prevent any kind of deflationary crash that you've been so worried about, equity markets will rebound slightly from their recent drops.

Long-term economic conditions will not be significantly affected, as this is not a plan for greater government socialization of the larger economy. Quite the opposite.

Once the next Congress meets next January, only then can investors become more certain about the prospective path for future legislation on tax policy, energy policy, health care and pharmaceutical policy, foreign policy, etc.

Repeat after me: the preferreds are NOT getting hosed.

Debtor-in-possession financing always comes first, and is actually value-creating to the GSEs (at taxpayer expense of course).

And preferred dividends are always indefinitely suspended. A corporation can arbitrarily choose to pay out or not pay out these dividends whenever it likes. The only rule is that if dividends are being paid to regular equity holders, they must first be paid on preferred stock. They can't get passed up, that's all. Corporations temporarily suspend dividend payments all the time. It's generally not a good sign, obviously, but it hardly means that a majority of the value of the asset is necessarily destroyed.

Yeah I should probably have worded it differently. Coupled with legitimate/safe lending standards, it should definitely stabilize the housing market. As far as current/immediate effects on price declines, they are still way overvalued and there is still a 10-month national supply to burn through. I guess I think it will help as far as shorterning the bottoming-out phase, whenever we reach that point (imo not anytime soon).