Friday, February 26, 2010

Freddie to stop buying Option ARMs

Freddie Mac announced that it would stop buying interest-only mortgages because of their poor performance overall[1]. That's one GSE down, one more to go. Given the fiscal insanity our government has been engaged in, even the slightest steps toward rationality—compelled by obvious and overwhelming evidence—I suppose we can welcome as progress.

In broader news, there has been widespread reporting lately on the generally poor performance of housing and its tepid recovery[2,3]. What hasn't been reported on is the upcoming wave of Option ARM resets scheduled from the end of 2009 through 2012. This will be the second of a one-two punch to the housing market that began with the subprime resets back in 2006-2008. Option ARM resets will be at least as big, in terms of dollar value, but are spread out over a broader period so they might not have quite the obvious impact of subprime. This will particularly hit the mid-range market in the bubble states. Bottom line, we've had minimal housing recovery since 2008 and house prices are likely to fall further now.

So, Freddie is getting out right before the real disaster hits. They should have gotten out a lot sooner and in fact never existed at all subsequent to their conservatorship by the federal government or enactment by Congress. Still, I find myself pleased by the news.

1. Freddie ends buying of all interest-only mortgages.
2. Sales of previously-owned houses unexpectedly fall.
3. Midwest home sales figures reveal mixed picture.

UPDATE [2/28/10]: Fannie Mae's loses were nearly $75B in 2009, following $60B in 2008. That's about $1000 T*Bux shifted to every tax payer in America... for just one GSE. Similiarly, AIG is reporting loses of $11B in 2009, down from $100B in 2010. AIG was the conduit through which TARP bailout money was directly handed to banks, foreign and domestic, free and clear, no strings attached and no need to pay it back. The GSEs allow the shifting of toxic securities from banks balance sheets on to the tax base.

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