Government Sponsored Enterprises such as Fannie Mae and Freddie Mac are proven losers.

The federal government is spending hundreds of billions of dollars to bail them out.

The politicians pushed Fannie Mae and Freddie Mac to buy all sorts of risky mortgages and this government intervention was a key reason for our housing crash.

There seems to be no end in sight for the federal government's pumping of billions in to Fannie Mae and Freddie Mac.

I wonder how long it would take the free market to sort out this housing crash. I suspect it would make short work of it. Housing prices would plunge to levels the free market would support.

From The Washington Post:

THERE IS NO END in sight to the federal bailout of Fannie Mae and Freddie Mac. President Obama's fiscal 2011 budget proposal said as much in a few phrases that promised nothing more definitive than continued "monitoring" of the two mortgage giants, which have been operating since mid-2008 in the legal and organizational limbo known as government "conservatorship." The administration had said its plans for definitive reform could be expected "at the time of the budget," not in the budget itself, so technically this doesn't count as a broken promise or a blown deadline. Still, as the two agencies' chief regulator, Edward J. DeMarco, gently reminded congressional leaders on Tuesday, conservatorship was intended as a "timeout" during which policymakers could reinvent the entities. With an election year upon us, that timeout is looking more and more like a cop-out.

This is alarming. The Fannie-Freddie business model — "government-sponsored enterprises" (GSEs) with private shareholders but a public purpose, promoting homeownership — is a proven loser. In fact, Fannie and Freddie were in large part responsible for inflating the housing bubble that burst so disastrously in 2007. The market's perception (correct, as it turned out) that the GSEs enjoyed federal backing enabled them to take on far more risk than their capital bases could support.

Read more here.

On Friday, Feb. 5, 2010, I spoke with construction guru Mike Foreman of ConstructionGuru.com about tainted drywall that's causing thousands of people (mainly in Florida) serious health problems:

Lev: “What is Chinese drywall?”
Mike: “It’s a gypsum-based product commonly known as drywall. It’s manufactured under a process that allows it to meet an ASTM 1396 standard.
“Chinese drywall is a product manufactured in China with some contaminants in it that are out-gassing different gases such as hydrogen sulfide, carbonal sulfide, etc. It’s eating up copper components and affecting galvanized components. There are also products sold in the United States as though it were made in the United States under a different label. You can’t always say that this contaminated drywall is Chinese drywall. That term has been abused. I’m not fond of all the problems we’re having from products sent to us from China but in this case the bulk is coming from China, but not all of it. I prefer the terms ‘tainted’ or ‘corrosive’ drywall rather than ‘Chinese drywall.’”
Lev: “When did this tainted drywall become a big deal?”
Mike: “It became apparent to me in August of 2008 when I started getting phone calls from lawyers and clients. I’m a forensic consultant. We specialize in construction issues.
“It piqued my interest after I went to about 25 houses. I was opening up the air conditioning units and scratching my head and thinking, ‘I can’t believe this developer is using used units.’ That’s how bad they looked. They looked 16-18 years old. According to the owner, they were 12-24 months old. I checked the equipment and sure enough, it was 18-24 months old.
“By the end of 2008, I had analyzed about 100 homes and tried to figure out what the common element was. I finally realized that the drywall was the only thing that was common in the houses. That’s when I started doing a lot of research.”

Read more here.

To prop up the housing market, the Federal Reserve has bought $1.25 trillion worth of mortgage-backed securities over the past year.

The housing market has stabilized. Now there's a call for the Fed to start selling off these securities and get back to more normal sized holdings.

Will the housing market be able to stand on its own two feet without government intervention?

Reuters says: The Federal Reserve could begin to sell off assets later this year and should try to get its balance sheet down to a normal size before the next recession strikes, a senior Federal Reserve official said on Monday.

"Maybe you get in the second half of 2010 or something like that, if things are going pretty well, maybe then you'd sell a little bit at that point and you'd try to see how the market reacts," St. Louis Federal Reserve Bank President James Bullard told Reuters in an interview.

This is booming in popularity.

Leading up to the housing crash, people tended to use their homes as ATM. They'd take out massive HELOC (Home Equity Line Of Credit). They'd borrow against the equity they had built up in their home to pay off credit card debt or the like. Then they often built up that credit card debt again and when the value of their home plunged in the crash, they were in a very tough position.

From 2005 to 2007, American home owners lost about $7 trillion in equity. This is unprecedented in American history.

Now we have a phenomenon that is the opposite of taking equity out of your home.

Kenneth R. Harney reports:

"It almost sounds un-American," quipped Frank Nothaft, chief economist for mortgage giant Freddie Mac. After all, Americans have grown accustomed over much of the last two decades to tapping into their equity — pulling out a chunk of cash and adding to their debt load — when they refinanced their mortgages. "Almost nobody thought of putting money back in."

Cash-outs hit their highest level of popularity during the wild appreciation streaks in the early and middle years of the last decade. In mid-2006, just before home values began deflating across the country, the rate of cash-outs hit 88%, according to Freddie Mac, which monitors refinancings quarterly.

This meant that nearly 9 out of 10 refinancers whose loan files were sampled by Freddie Mac increased the size of their mortgage balance by at least 5% in the process. It was the heyday of the pile-on-more-debt mind-set — cash me out, I can't lose on my real estate — that came crumbling down in 2007 and 2008, when home equity holdings shrank drastically and painfully.

This forward-looking index is still down 11% from a year ago.

Home sales plunged in November and December.

The supply of homes for sale keeps falling. Interest rates remain low. There are tax benefits for buying a home. Home prices are down.

These are the reasons for a stable home market.

The LAT says:

"The pending sales index stabilized at the end of 2009," Weiss Research analyst Michael D. Larson wrote in a note to clients. "That potentially sets the stage for a more positive spring selling season. Indeed, with mortgage rates low, house prices down, and the supply of homes for sale steadily falling, it's easy to see why the market should stabilize."

"There are easily understood swings in contract activity as buyers respond to a tax credit that was expiring and was then extended and expanded," said Lawrence Yun, chief economist of the Realtors group. "These swings are masking the underlying trend, which is a broad improvement over year-ago levels. December activity was the fifth-highest monthly tally in two years."

This rise does not surprise me. What surprises me is that interest rates remain so low with the U.S. dollar so weak, and U.S. deficits so high.

The LAT says:

The Primary Mortgage Market Survey from the government-controlled mortgage company assumed that borrowers owned a 20% stake in the house, had good credit and paid 0.7% of the loan amount in upfront points and fees to the lender. Many people pay additional points to lower their rates.

The 15-year fixed mortgage, which is a popular option for homeowners refinancing to pay off their loans faster, averaged 4.40%, also with 0.7% in points and fees. That was up slightly from 4.39% for the week ending Jan. 28.

The five-year Treasury-indexed hybrid adjustable-rate mortgage averaged 4.27%, with an average 0.6 point.

This is the fourth year in a row that such sales have dropped.

Sales were down about 24% in 2009 compared to 2008.

Many people who want to sell their expensive homes are holding back because the market is so weak right now. Mortgage financing is difficult to come by. Home values are down, dropping many homes below $1 million.

The Golden State is no longer so golden. This is another sign of California's economic woes. No turnaround is in sight.

The Los Angeles Times says:

"Prestige home sales are a unique sub-category of the real estate market. The buyers and sellers respond to a different set of motivations," DataQuick President John Walsh said. "In the multimillion-dollar price ranges, decisions are largely discretionary and aren't as dependent upon jobs, prices and interest rates the way they are for most buyers and sellers."

The trend underscores the nature of the state's housing recovery. Sales of California homes at all price levels increased 16.9% last year, to 460,166 from 393,703 in 2008. One in 25 homes sold for $1 million or more last year. The year before it was 1 in 16.

Lower-end homes largely fueled last year's buying spree as investors and first-time purchasers sensed opportunity in steeply discounted foreclosure properties across the state.

The Federal Housing Administration, which insures mortgages often used by first-time buyers with small down payments, has played a big role in supporting the market for lower-end properties in California and some move-up markets.

According to an AP report in The New York Times:

ANCHORAGE, Alaska (AP) — Records show that Sarah Palin has not paid any property taxes on cabins that have been built on two backcountry plots partially owned by the former Alaska governor.

It's unclear how long ago the structures were built, but records show that there are no tax assessments for the buildings. Property taxes were only paid on the land — and not the structures themselves.

The issue has attracted the attention of local tax officials who conducted a scheduled aerial survey of the property on Thursday.

Palin's attorney, Thomas Van Flein, says it is not the responsibility of property owners to report structures that go up on their land. But local assessor Dave Dunivan says owners are required by state law to report any omissions or errors in their tax assessments.

It seems the former Republican vice presidential candidate is a follower of my hero, the American economist and social philosopher Henry George, author of Progress and Poverty and advocate of the single tax on land values irrespective of the value of improvements such as buildings or other structures.

Los Angeles Times financial columnist Michael Hiltzik was disgraced three years ago when he was caught making positive comments on his work through an alias.

While half of his peers have been laid off since then, Hiltzik still has a job.

Hiltzik is predictably left-of-center. He's rather fond of tax increases and increased government regulation of business.

He writes:

To hear the bankers squeal, you'd think they were being sent to Guantanamo for failing to get the taillights fixed on their limos; they're even thinking about challenging the tax on constitutional grounds.

To hear the president brag, you'd think he's making the taxpayers whole after an elemental breakdown of the financial system.

He says that the tax would generate about $9 billion a year for at least 10 years, which might still be shy of the projected $117-billion hit the taxpayers will take from the $700-billion Troubled Asset Relief Program, or TARP (i.e., the bank bailout). It will apply only to financial institutions with more than $50 billion in assets, or about 50 big financial companies.

Both sides are deceiving the public. Here's the reality: The proposed tax is both fully justified and not remotely as big as it should be.

A year ago, it appeared that many Wall Street firms would have trouble meeting their debt payments. This has not happened. Wall Street has been going up for the past few months (until the past two weeks).

Now bond investors are examining Europe closely. Countries such as Greece are having trouble meeting their debt payments.

The Los Angeles Times says:

With Greece's budget deficit ballooning, major credit rating firms downgraded the country's debt last month, turning it into a market pariah. Now investors are demanding a yield of almost 4.9% to buy a two-year Greek government note — 3.5 percentage points more than in November.

If some poor Athenian pensioner plunked his savings into a government note at 1.4%, he's now feeling like a chump. Not to mention that his investment is worth less than he paid, because rising market interest rates automatically devalue older bonds issued at lower fixed rates.

The debt woes of the Middle Eastern emirate of Dubai gave markets a brief jolt in late November. But Greece's struggles are more worrisome. For one thing, European Union fiscal rules are supposed to ensure that member nations can't borrow themselves into oblivion. Yet Greece's budget deficit, at nearly 13% of gross domestic product, is four times the EU limit.