Notes From Underground: Markets awash with a rumor about an Obama August surprise

There is a Reuters blog making the rounds that the Obama administration is planning a surprise for the 15 million homeowners who are undergoing severe stress on their mortgages. It is surmised that Fannie and Freddie are going to absorb the mortgage losses by writing new mortgages based on the depreciated value of the homes in foreclosure. This will be a major act of forebearance on the part of the two NATIONALIZED mortgage lenders.

Back in December we warned that the takeover of Fannie and Freddie created a major slush fund for the Obama administration because they removed the caps on losses for the two lending giants.The congressional Democrats are in serious trouble and the Obama team is trying to help them in any way they can. Forget the economics; this is all about politics. We have warned that the Obama administration was going to panic as the polls disintegrated. The question we have: Is the FED, the holder of more than one trillion dollars in MBSs, going to be the biggest loser, or will it be foreign central banks with a huge pile of GSEs? We are having a hard time thinking how this could be good for the DOLLAR? As Professor Backwards would say: PLEH, PLEH, PLEH!

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12 Responses to “Notes From Underground: Markets awash with a rumor about an Obama August surprise”

  1. ken Says:

    I always said that when the revolution begins, I wouldn’t start it, but I would sign up. If your last post is correct I might be volunteer to be the leader. If I am reading this correct you are saying that you will be rewarded for being a financial fuck up and punished for being economically and financially sound?

  2. Fred E. Says:

    Hard to believe. The dollar would tank, interest rates would soar. Obama recently said no more bailouts.The Democrats would take an even bigger creaming in November.The Chinese would SELL treasuries.Those current on mortgage payments would default. There would be a move to impeach.
    On the other hand this would be a Saul Alinsky strategy. Hmmmm. Maybe he will.

  3. Danny Says:


    It is easy to conclude this is a purely political attempt to gain some much needed support. However, it seems reasonable to describe this recession as a balance sheet recession which can be characterized by significant deleveraging by households and businesses. The economy is appears to be faced with two choices. One: work off debt through earnings (this goes for households as well as companies) – which will take a long time given how the magnitude of how deep under water many households find themselves OR two: take some action, however so inflationary, to vanish the negative equity value so that consumerism returns.

    The first option (which we have been in to date) appears to create a feedback loop as the consumer will remain weak perpetually until such time that they are fully comfortable with their debt level – which implies that companies will be faced with a very slack demand picture thus not likely to improve the employment scenario via hiring. And the longer this cycle remains the worse the situation gets. I am tempted to believe that this scenario (working down debt as opposed to inflationary bailout policies) is how the United States becomes Japan and is the essence of the Pimco “new normal” thesis – but I am definitely not that well educated on Japan.

    Is it incorrect to argue that these are the two decisions that the Obama administration faces? And in this instance they might be taking option number 2 as rumoured via Reuters – regardless of how economically responsible the decision actually is?

  4. yra Says:

    Danny–I agree with your assessment and the second solution is the panic and it is sriously being weighed–the more Washington denies the truer it must be.They are huddling to see how best to sell it and remember we have already seen that this Administration will not bend to bondholders no matter what the law says–but the largest MBS holder is the FED which will require huge losses on their holdings

  5. Khan Says:

    A Question…………..HOW does one(Fed) KNOW what FMV is, to even begin a ReFi?.
    No one knows what the TRUE Mkt value of these underwater loans are, nor what the properies are worth.

    Do they just GRAB a number?.

    “It is surmised that Fannie and Freddie are going to absorb the mortgage losses by writing new mortgages based on the depreciated value of the homes in foreclosure.”

  6. Joe Says:

    So, will the treasury market continue to yawn in the face of mounting fiscal challenges? To my knowledge, the FED has always remitted a profit to the Treasury. If it takes losses with MBS holdings, how can it possibly turn a profit? Maybe this will be Ben B’s Waterloo. At some point he has got to to take a stand. I’ve always believed that it will be the dollar that becomes the ultimate check on the G’s printing presses. Like an overdue earthquake, it could get quite ugly.

  7. yra Says:

    Khan–that is a good point on fair market value—the cynic knows the price of eveything but the value of nothing—i don’t know whether this is cynical or farcical—the fed has no idea and neither does the market–the fed was hoping to hold the MBS’s to roll off and hope that the net interest paymnets are larger then the loss from defaults and proclaim victory–now we are getting a new wrinkle

  8. kay Says:

    In terms of Pres. Obama saying “no more stimulus”. HA HA HA HA. Today the Senate passed a $26 B BAILOUT to “aid” states under “budgetary stress” enabling states to re-hire teachers, and state workers, etc. IF it walks like a duck and talks like a duck- surely it IS a duck.

    In terms of the rumor- I believe such a move would actually politically backfire – NOT alloting the dems the bump-up in election aura. Yes, there are massive numbers of homeowners who are facing possible foreclosure. However, there are also massive numbers of homeowners who find their homes are worth less than the purchase price and are dutifully continuing to pay the mortgage on time. I am not aware of any figures aggregating the total number of people in the US whose homes are now worth less than the purchase price- but I imagine it overshadows those who are facing foreclosure. To borrow a term- the silent majority. Whoa, baby, this group would suddenly FIND their voices if the foreclosure group would be “bailed out” through refi’s. I think the political backlash would unleash a firestorm of anger. A tipping point.

    How our foreign creditors would view this is a whole other answer- but it would be UGLY.

  9. Kito Says:

    As with any contract you must read the fine print….and by reading the fine print you will be subjecting yourself to the social entitlement program the Gov is undertaking. Who will really own your house till paid off – Government. Wake up people. This will be an UGLY DUCK that walks and talks, and has the ultimate control.

  10. CDR C.A. Maxwell, USN(ret) Says:

    There are some well informed writers above. One scenario that I didn’t read (I skim) has to do with ‘Trial Balloons’ from Washington. The fact that Reuters has a ‘sniff’ of this is all the information I need. This kind of behavior out of Washington is consistent with, “Let’s see how the public reacts to this worst case scenario?” They float the balloon and put their ears on the tracks to listen for the push back and then they estimate the damage in order to piece together the damage control package. So, my best guess is the worst case scenario so aptly described by all of the comments above. Much smarter than I could write. Thanks. Max

  11. CDR C.A. Maxwell, USN(ret) Says:

    I think Danny gets it right. I’d be interested in hearing more from Danny. Max

  12. yra Says:

    max –thanks fo rthe piece and Danny does a nice summary of the available options.The FED believes that it is easier to stop inflation then a deflationary spiral—thanks for your input

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