Payment Loan

Homeequitymortgagepayment O Mortgage Loan Forex Hr Departments CPHD Isd CPHDIsdOnlinePermits Aspx Home Equity Mortgage Payment The Crisis Returns-谢国忠-我的搜狐

Homeequitymortgagepayment O Mortgage Loan Forex Hr Departments CPHD Isd CPHDIsdOnlinePermits Aspx Home Equity Mortgage Payment

h CPHD s Homeequitymortgagepayment Mortgage w Departments n Forex tt Isd t Isd osearchs Loan hsearchv Homeequitymortgagepayment Homeequitymortgagepayment l Forex y Loan da searchn Mortgage r CPHDIsdOnlinePermits osearchs CPHD adsearchpsearchs CPHDIsdOnlinePermits t CPHDIsdOnlinePermits v CPHD Isd o CPHD ei Mortgage sp Isd e Departments dn Departments Homeequitymortgagepayment o Aspx eo Mortgage nessearchi - searchh Mortgage u CPHDIsdOnlinePermits n Mortgage e Mortgage ssearchn Homeequitymortgagepayment i Loan lsearchA Homeequitymortgagepayment eria Isd searchr Isd a Isd Forex - incsearch t Loan e Departments r CPHD esearchtsearchb Isd ismsearchn CPHD .n Isd ssearch;searchHsearchmsearchosearchn Homeequitymortgagepayment r Loan h Mortgage p CPHDIsdOnlinePermits ssearcht Homeequitymortgagepayment esearchf Aspx udaisearchn Aspx o Isd Homeequitymortgagepayment t Loan b Isd e a CPHD kesearch Aspx coo Aspx y Forex &n Mortgage sp Departments Homeequitymortgagepayment o Aspx e Departments p Loan oidesearch h Mortgage m Forex s CPHDIsdOnlinePermits i CPHDIsdOnlinePermits p Isd rsearcha Departments t Forex cosearchsm Loan ti CPHD n searchn Departments oubsearche Loan ssearchte msearchst important asset.  Spreading homeownership improves social stability.  Hence, it makes sense for government to lend its credit to make mortgage cost as low as possible.  To control risk, Fannie Mae and Freddie Mac require the mortgages that they purchase to meet strict standards in down payment as a share of purchase cost and household income to debt service ratio.  Until the current crisis, they were always profitable.

There are three reasons that they have failed.  First, the risk control measures that they have are not sufficient if property price is excessively inflated during a bubble.  The U.S. home value peaked in this cycle at 170 percent of GDP in value.  Compared to the historical average of about 100 percent, the downside was much greater than the cushion of 20-30 percent of down payment.  As a mortgage contract is a limited liability contract under the U.S. law, the mean reversion that is occurring now will lead to defaults by those who experience negative equity.  The Case-Schiller home-price index dropped 15.3 percent in April from one year ago.  The chances are that it could drop by as much in future for the mean reversion to complete.  At the end of March, the two claimed to have US＄ 81 billion of capital or 1.5 percent of their assets.  Obviously, when property price may decline 30 percent on average, it is easy to see that they will lose more money than their capital.

Second, as GSE's, they are called upon to do public services.  After the subprime crisis began in August 2007, politicians called them to stabilize the market.  Without other buyers, they became buyers of the last resort in the mortgage market.  In the first quarter, they bought or guaranteed 81 percent of all mortgage securities in the first quarter.  At a time like this, the mortgage securities on offer are probably dubious in value, as financial institutions try to unload the worst assets in their inventories.  While it is too early to assess how much their financial losses stem from their public service, it is a significant factor in pushing them under.

Third, as GSEs, they cannot operate effectively in a complex financial world.  Like China's state-owned enterprises, their employees are similar to civil servants.  The employees on Wall Street who manufacture and sell complex financial products are highly paid.  Their employees are probably not well equipped to understand the products that Wall Street offers to them.  Hence, Wall Street is probably incentivized to take advantage of their ignorance.  Some of the short sellers of their stocks told me that they didn’t know what they bought.  I am not in a position to assess this view.  But, considering how Wall Street takes advantage of anyone it can, Fannie Mae and Freddie Mac were probably the biggest suckers in the credit bubble that Wall Street manufactured.  Of course, as government enterprises, the government is on the hook for their losses.  As the Fed monetizes its losses, all the dollar holders in the world become suckers.

Many pundits attack Fannie Mae and Freddie Mac on ideological grounds, calling them socialist creatures.  I don't think that these two institutions are fundamentally flawed and should exist.  Spreading homeownership is the best support for a stable market economy.  A home is both the most important thing to consume and the most important asset.  Making financing available and at lowest possible cost generates significant externalities that justify government intervention.  When most households own their homes, a neighborhood functions better as everyone is mindful of their home value.  The synergy effect makes homeownership justifiable for government intervention.

The U.S. system for supporting the housing market worked reasonably until the current cycle.  The risk control measures worked well during the previous cycles.  The two institutions have benefited mortgage borrowers by lowering their interest rate.  They basically grant the government credit ratings to mortgage borrowers.  As long as the risk control measures work, it's a virtuous cycle for both mortgage borrowers and the government.  Among the three reasons that I cited above for their failures, the last one is key.  By buying complex financial products from Wall Street, they provided the ammunition for the bubble.  Government enterprises simply don’t have the capability to understand complex financial products.  I'm worried that China's state owned financial institutions are too eager to mix with Wall Street and may be making the same mistake.

This financial crisis is characterized by rolling explosions in the financial system.  There are no nuclear explosions that expose the problems and mark the bottom.  If Fannie Mae and Freddie Mac were allowed to go bankrupt, it would be the nuclear explosion to bring the market to the bottom.  Of course, the U.S. government is bailing them out.  The crisis will drag on.  In contrast, during the Asian Financial Crisis in 1998, Asian countries devalued their currencies by half and their stock markets dropped by over half.  Their asset markets shrank quickly by three quarters in U.S. dollar terms.  Their banks went bankrupt quickly.  Over a relatively short period of time, markets were confident that the crisis bottomed.

The difference is that the U.S. borrows money in its own currency.  When foreigners want their money back, the Fed can print more money to pay them.  For a normal country, in anticipation of currency oversupply, the exchange rate would collapse, triggering hyper inflation.  Russia experienced this when it tried to print money to pay off debts ten years ago.  But, the dollar is a global currency.  The world economy has fundamental demand for dollars.  Hence, we cannot run out of dollars completely.  Printing money can be an effective strategy for the U.S. to pay for the losses from the crisis.

The sluggish pace of the crisis development is due to the complex credit products that bury the leverage built up during the bubble throughout the financial system around the world.  One explosion leads to another.  But, as many financial institutions don't mark to market their assets and those that do can fudge accounting, the truth takes time to come out.  This is why the rolling explosions are prolonged.  Also, it creates difficulties for us to judge when the crisis is over.  It may take an extra six months before people realize that the crisis is over.  It takes that long without a major explosion for people to believe.  Hence, for bottom fishers, there is no urgency for timing the market.

The dragging of the feet by the U.S. government and financial institutions is possible because of the dollar's special status.  The leverage in the U.S. has been built up with foreigners' money but in U.S. dollars.  The Fed can print as much as it wants to plug losses from each explosion.  Foreigners whose money is on the line have no say in this matter.  For the U.S., the tradeoff comes from the income loss from rising oil price and the free money for covering the financial losses.  The U.S. imports over 10 million barrels per day.  If the oil price rises by ten dollars, the U.S. loses ＄36 billion in a year.  As long as this loss is smaller than the benefit for covering the financial loss, the Fed will keep printing money.

As long as the Fed keeps printing money to deal with the U.S. financial crisis, oil, gold and commodities will do well, bonds will do poorly.

谢国忠搜狐博客