Property Grunt

Thursday, August 11, 2005

The fuse has been lit: From Housing Bubble to Housing Bomb

At the risk of sounding like a drama queen the Grunt feels that this isn’t a bubble anymore. It’s a bomb.

The chaotic nature of the real estate market and factors associated with it gravely concern the Grunt. I could give you a laundry list of factors ranging from suicidal mortgages being taken by buyers infected with irrational exuberance to a housing market that has been carpet-bombed senseless with overpriced homes and a lack of inventory. However there are two factors that I would like to address that I feel that are transforming this bubble into a bomb.

Obviously interest rates are first on the list. Greenspan raised interest rates once again and according to the New York Times Greenspan is spreading the word that there is more to come. The Grunt feels that Greenspan was holding back with gritted teeth and fists clenched last year due to the election but since its conclusion all bets are off.

The Grunt sees two scenarios. One is that Greenspan unleashes a barrage of interest rate body blows before leaving office or the Chairman maintains a low profile while executing a series of strategic yet limited set of increases and leaves the brunt of what needs to be done for the next guy. Greenspan is not an idiot. He will take whatever actions are necessary to stabilize the economy and could care less what people think of him. So whether it is now or later, Greenspan will be giving us our bitter medicine regardless of who is holding the spoon.

The number two factor that has inflamed the ulcers of investors is Fannie Mae which has been undergoing a tremendous amount of upheaval in the last couple of months. First, Daniel Mudd took over Fannie Mae and began reorganization efforts to get the biggest lending company in America stabilized. One of the first orders of business was an order for all employees barring them from selling or buying Fannie Mae stock.

Fannie Mae has barred its 5,000 employees from buying or selling company stock for the foreseeable future, as the mortgage finance giant moves ahead with a multibillion-dollar restatement and deals with federal investigations into its accounting practices.
Company officials announced the trading blackout in an e-mail sent to employees Friday evening. Spokesman Charles V. Greener confirmed the authenticity of the message and said Fannie took the step because it "felt it was the prudent course of action." He declined to comment further.

There was obviously something that spooked Mudd for that order to be issued and the last thing he wanted was a company wide panic. Mudd also probably wanted to prevent any perceptions of insider trading therefore eliminating further turbulence for the company.

But what has really shook up investor confidence is that Fannie Mae once again missed their regulatory deadline and will not release their second quarter earnings report. Fannie Mae stated that it was due in part that they needed a year to fix accounting errors resulting in Fannie Mae shares taking a nose dive.

Shares of Washington-based Fannie Mae declined $2.19 to $52.64 in New York Stock Exchange trading after the company said Wednesday that it won't finish fixing the errors until the second half of next year

The Grunt can only speculate that when Mudd saw the books he dropped a load in his pants. He probably realized that if word got out how f**ked up everything was it would cause a chain reaction in the economic landscape that would make Enron, Worldcom and all the other stock scandals look like a day at the beach.

Besides limiting the exposure of Fannie Mae’s inner workings to the public as much as humanly possible Mudd is also taking action by putting his bean counters and executives into the trenches to get the company back on track which he publicly declared.

"Fannie Mae is committed to devoting all resources necessary to complete the restatement as expeditiously as possible," the company said in a regulatory filing with the SEC reporting the delay in second-quarter results. That will include hiring about 1,500 consultants to work on the massive project this year and spending more than $420 million on auditing and legal costs, it said.

Daniel Mudd, the chief executive installed by Fannie Mae's board to replace ousted CEO Franklin Raines, said in a statement that completing the project is the "number-one corporate priority, and we are moving forward."

"We are leaving no stone unturned," Mudd said.

From what the Grunt can see, Mudd is taking the appropriate actions needed to remedy this situation. Although no further details are being released, Mudd is upfront with what is going on and is making no attempts to sugar coat that he has a potential FUBAR on his hands. However, are his efforts a day late and a dollar short?

In his column, Paul Krugman speaks of the hissing sound of the air being let out of the bubble. The Grunt's instincts tell him that hissing sound isn’t air but the fuse that has been lit to this housing market. Whether you are buying, selling or sitting this one out please watch your backs and do not ignore the red flags that have popped up. This is not the time to gamble with your finances with risky mortgages or overpriced property. Whatever deals you make, do the math and make sure it makes sense. And when in doubt, dont.

What will be the result of this housing bomb? It could just be an M80 sized pop or it could be on the scale of the Mighty Thor slamming Mjolnir into the earth. We'll find out soon enough. But don’t call this a bubble anymore.