Ginnie and friends to the rescueBased on Bush's announcement last week of a new Federal Housing Administration program to help around 80,000 at-risk homeowners obtain debt relief -- an effort modest in scope but stunning in its reversal of prior policy -- it's clear he will go for the latter in the interest of helping his party avoid a wipeout next November.
Bove notes that a precedent for a widespread mortgage-assistance program lies in the Emergency Home Finance Act of 1970, which established these mechanisms to help challenged households:
- Banks would originate mortgage loans with 1% interest rates.
- The Federal Housing Administration and Department of Veterans Affairs would insure the loans against loss.
- The Government National Mortgage Association, aka Ginnie Mae, would buy the mortgages at par from the banks, allowing the banks to make a small profit.
- Ginnie Mae, taking a sizable loss, would then sell these loans to and at a discount so that the buyers would earn reasonable yields.
- Fannie and Freddie would fund these purchases with low-cost, government-guaranteed debt.
As a result, Bove speculates, tens of thousands of at-risk homeowners would get to keep their homes. Ginnie Mae would lose tens of billions of dollars that would be repaid by banks and taxpayers at a pace and in a manner similar to the Iraq reconstruction effort. Fannie Mae and Freddie Mac would end up with huge increases in the sizes of their portfolios. And, most importantly, the nationwide housing collapse would disappear as an election theme for Democrats.
Although this may seem a bit far-fetched, insiders in the financial services and home-building industries are buying their own companies' shares these days at a record pace -- essentially betting that something like this scenario will transpire. Home-building companies' executives bought $15.9 million worth of their firms' annihilated shares in August, the largest monthly purchase in the sector since Thomson Financial started keeping track in 1990.
The last time that insiders even came close to this level of buying, in September 2001, the sector rose 55% in value over the next six months while the S&P 500 Index ($INX) advanced 10%. Thomson analysts suggest raw valuation is a factor in insiders' zeal for their stocks -- as the price-to-book value of the sector hit 0.75 last month, the lowest since October 1990 -- but clearly a larger motivating force is at work.
- Video: The housing market's outlook
The bottom line is that Bush has ample tools at his disposal to make the foreclosure crisis vanish if he is willing to make a financial and political commitment on a par with his pledge to stabilize Iraq. With almost one in every 7.5 housing units in the United States empty due to overbuilding during the easy-money years, it would take years for enough demand to emerge under normal conditions to soak up supply. But don't underestimate the president's capacity and motivation to speed up the process with a surge of looser credit and check writing.
Fine PrintWells Fargo, now trading at $36.50 a share, could easily go to $50 in a year in this scenario, as its competition from the likes of and lesser mortgage bankers and brokers have been thrashed and it has its pick of the best talent fleeing those firms. SunTrust, now trading at $78, could go to $95. . . .
The three home builders with the most insider buying are, where one insider bought $12.9 million in shares in August; , where three insiders bought $1.4 million; and , where one insider spent $845,100. Shares of these three builders are down 63%, 49% and 46%, respectively.
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At the time of publication, Jon Markman did not own or control shares of companies mentioned in this column.