Matrix Blog

Federal Reserve, New York

[Almost Zero] It’s Now Or Never: Fed Needs To Use The Toolbox

December 17, 2008 | 1:26 pm | |

It’s nice to see the Fed deal with the recession aggressively in their rate cut. Here’s a good summary from Bloomberg:

The Federal Reserve cut the main U.S. interest rate to as low as zero and said it will buy debt as the next step in combating the longest recession in a quarter-century and reviving credit. The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

Here’s a good summary of economist commentary from WSJ/Real Time Economics blog in their post: Economists React: ‘Who Could Ask for Anything More?’

I pondered this action last week…..

We are now 0 to .25, the lowest federal funds rate ever and hopefully the beginning of noticeable stimulus to the economy. Of course, this fact is still to be determined by whether banks opt to start lending full scale soon rather than simply recapitalizing.

I am thinking we will see some thawing (on a small scale) in the first half of 2009, because lenders have to actually lend at some point (I know they are currently lending, but not enough to sustain their existence). If they don’t move forward, many will need to reinvent themselves (that is what the investment banks already did) fairly soon.

Aside: speaking of gambling, here’s the worst last name ever.

[Community Reinvestment Act Reconsidered] Quantity Before Quality

December 12, 2008 | 2:16 am | |

There was an interesting Op-Ed piece in the New York Times this week written by Howard Husock of the Manhattan Institute called Housing Goals We Can’t Afford.

The article points out that with all the housing and mortgage woes across the country, it’s pretty easy to point fingers. However, it gets more difficult when you point them at groups that tried to do the right thing.

The Community Reinvestment Act was passed in 1977 when bank competition was sharply limited by law and lenders had little incentive to seek out business in lower-income neighborhoods. But in 1995 the Clinton administration added tough new regulations. The federal government required banks that wanted “outstanding” ratings under the act to demonstrate, numerically, that they were lending both in poor neighborhoods and to lower-income households.

Banks were now being judged not on how their loans performed but on how many such loans they made. This undermined the regulatory emphasis on safety and soundness. A compliance officer for a New Jersey bank wrote in a letter last month to American Banker that “loans were originated simply for the purpose of earning C.R.A. recognition and the supporting C.R.A. scoring credit.” The officer added, “In effect, a lender placed C.R.A. scoring credit, and irresponsible mortgage lending, ahead of safe and sound underwriting.”

I remember at one point, quite a while ago, before digitally delivered appraisals, lenders were calling us to get the census tract number the property was located in. We soon discovered that the standardized binder that held the appraisal and other mortgage documents, required two holes punched at the top of the form. One of the holes covered the census tract number. This number was used to credit the bank with originations in lower-income neighborhoods. It struck home (no pun intended) how important it was for them to cover all the markets.

CRA is a noble endeavor. The solution to uneven lending missed a basic economic fact: banks were pressed to lend in areas with lower home ownership and therefore had to lower their underwriting standards to get enough volume to make the regulators happy.

The result? Higher default rates are experienced in these markets. Mandating quantity creates an environment of weaker quality.

If the Community Reinvestment Act must stay in force, then regulators should take loan performance, not just the number of loans made, into account. We have seen the dangers of too much money chasing risky borrowers.

An argument can be made here for encouraging renting when ownership is not affordable or simply creates too high of an investment risk. You can look around and see what happened when lending practices were not reflective of market forces. Bedlam – good intentions or not.

UPDATE: I got an generic but informative email from the Center for Responsible Lending, likely as a result of this post that contained the header: “Bashing CRA Doesn’t Help.” It provides tangible talking points that are informative. The sensitivity is very elevated over this topic and I wasn’t bashing – I just have a concern over the transfer of risk to lenders – it’s a brave new world out there and interpretation of risk has changed overnight.

Here’s their email text:

According to John Dugan, Comptroller of the Currency, “It is not the culprit.”

Federal Reserve Governor Randall Kroszner says, “It’s hard to imagine.”

They are talking about the wrong but persistent rumors that the Community Reinvestment Act, a longstanding rule to encourage banks to lend to all parts of the communities they serve, is the reason behind for the surge in reckless subprime lending.

First, CRA was passed into law in 1977, well before the development of the subprime market. The majority of lenders who originated subprime loans were finance companies, not banks, and thus not even subject to CRA requirements.

A recent study by the Federal Reserve points out that 94% of high-cost loans made during the subprime frenzy had nothing to do with Community Reinvestment Act goals.

A lump of coal to the media who perpetuate this myth. The sooner we stop finger-pointing and focus on real solutions, the better.

Tags: , , ,

[FedSpeak] Beige Colored Glasses

December 3, 2008 | 4:31 pm | |

The Federal Reserve just released the Beige Book, at 2pm today which provides anecdotal commentary on the economy nationally and across the regions of its member banks.

Here’s real estate and mortgage excerpts from the overall report.

Nearly all Districts reported weak housing markets characterized by reduced selling prices and low, but stable, sales activity.

Real Estate and Construction

Residential real estate continued at a slow pace nationwide. Sales were down in most Districts, but mixed activity was noted in the Boston, Atlanta and Minneapolis Districts. Boston, New York, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Kansas City and Dallas noted decreases in housing prices. Inventories of unsold homes remained high in the New York, Atlanta, Kansas City and San Francisco Districts, but declined in Chicago and Minneapolis. Philadelphia, Richmond, Chicago and Kansas City reported relatively stronger demand for lower- and middle-priced “starter homes.”

Commercial real estate markets weakened broadly. Vacancy rates rose in Boston, New York, Richmond, Chicago, Kansas City and San Francisco, but were mixed across markets in the St. Louis District. Leasing activity was down in almost all Districts. Rents fell in the Boston, New York and Kansas City Districts. Despite reductions in construction materials costs, commercial building activity declined in many Districts with tighter credit conditions as a factor.

Banking and Finance

Business and consumer lending activity continued to slow in most Districts. New York reported weakening loan demand in all categories, while Kansas City and San Francisco also witnessed substantial lending declines. Lending activity in other Districts was mixed among loan categories. In contrast, Philadelphia indicated that its banks saw loan volume rise in November, and some regional banks reported picking up new business borrowers. Cleveland reported that business loan volume has been steady to higher, and some bankers reported actively marketing their loan business.

Credit standards rose across the nation, with several Districts noting increases in loan delinquencies and defaults, especially in the real estate sector. Credit conditions remained tight. Chicago reported that FDIC actions and Federal Reserve lending had improved liquidity and slowed deposit outflows. Dallas indicated that government capital investments have led larger institutions to feel less constrained in their lending, while some smaller banks reported that scrutiny from regulators was making new deals more difficult to forge.

Here’s the NY District perspective from you know who.

A major residential appraisal firm reports substantial deterioration in New York City’s housing market over the past two months: prices of Manhattan co-ops and condos are reported to have fallen by 15 to 20 percent since mid-summer, though it is hard to get a clear handle on prices due to thin volume–much of the recent activity is reportedly from desperate sellers. Transaction activity has dropped off noticeably, and there has been a large increase in the number of listings. Some buyers that had signed contracts for units under construction earlier this year are having trouble getting financing at the contract price now that market values have dropped.

(I actually said 15%, ranging from 10%-20%)

Here’s the map (shades of beige, of course) in WSJ

Tags: ,

[Getting Graphic] National Economic Indicators: Pictures Tell $700B Words

November 26, 2008 | 12:24 am | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Here’s a slew of easy to understand charts from the Federal Reserve Bank of New York on the key national economic indicators that relate to housing such as consumption, housing starts and sales, employment, oil, consumer confidence, GDP and others. They tell a consistent story.

My favorites are below (here are all of them/expanded in size):


[Cultural Regulation Noodling] Be Careful What You Wish For

October 15, 2008 | 12:10 am | |

Click here for full sized graphic.

Regulation grew faster in the current administration as measured by annual increases, than in any since administration since the 1960s. That seems to be counter to the mantra:

Less government enables the free market to do its thing – self-regulation via market forces weeds out the weak?

One of the key issues of election campaign and the credit crunch was the lack of relevant regulatory oversight during the mortgage boom. Certain members of the public (ahem) complained, blogged, cajoled, and even…gasp…resorted to rolling their eyes and sighing.

But no one was listening. The administration told us everything was fundamentally sound. This commentary has been occurring since at least 2004 when all the lending snafus began to gain momentum. Frank, Dodd, Bush, Greenspan, Bernanke, Syron, Mudd, Paulson et al have told us things were fine until as recently as a few months ago.

I suspect most of them actually believed “the fundamentals were sound” and the real problem was that they were not fully informed or had an understanding of systemic nature of the crisis.

Be careful what you wish for. The sleeping giant in Washington has been awakened and it’s ready to eat. This weekend I took my family to DC for my high school reunion and a few days of rampant tourism whose highlight (for me) was going through an airport-like security screening process to eat mac & cheese at the Department of Agriculture’s employee cafeteria (ok, so offbeat cafeterias are my thing). I was struck by the enormity of the facility and the wildly inefficient service and presentation.

I shudder to think that this energy will now be channeled into regulatory oversight (hopefully not at the expense of good mac ‘n cheese for USDA employees).

We are now going to see a cultural shift toward more regulation, no matter who is elected in November. You can see it in the press releases and “on top of it” like responses from all the agencies – FDIC, OTS, FRB, FHFA et al. Once that stops, it’ll take years to reign in.

Why can’t there be a middle ground rather than extremes? Do we only feel comfortable at the margins, on the edge?

We don’t need more regulation – we need smarter and ultimately less regulation. A reasonably level playing field where regulations set the boundaries, rather than direct specific actions is what allows free markets to work.

Case in point: The tennis courts at our town’s new high school have a 6 inch slope from end to end to promote drainage. The slope is so exaggerated you can clearly see it. Good for drainage, sucks for tennis.

Next thing you know, mac ‘n cheese won’t be as yellow as it used to be at the USDA cafeteria but at least their cups will be biodegradeable.

Tags: , , ,

[Taking Stock] The Mother Of All Advice

September 9, 2008 | 1:25 am | |

The agencies who watched the US Treasury bail out the GSEs issued a joint statement including:

  • Board of Governors of the Federal Reserve System
  • Federal Deposit Insurance Corporation
  • Office of the Comptroller of the Currency
  • Office of Thrift Supervision

Now everybody (the regulators) is starting to act together like a family. The statement sounded like motherly advice to the children at dinner time after a long day…

All institutions are reminded that investments in preferred stock and common stock with readily determinable fair value should be reported as available-for-sale equity security holdings, and that any net unrealized losses on these securities are deducted from regulatory capital.

In other words, I am saying this nicely, but if you make the same mistake Frannie made, you’re going to be spending a lot of time in your room.

Tags: ,

When A Cloud Is Over Your Neighbor’s House, Go Skiing

September 3, 2008 | 12:39 pm | |

There is a lot of controversy, inconvenient truths and discussion about going “Green” (no, not Favre signing with the Jets). One of the key elements of discussion is the economic impact of climate change.

The Federal Reserve Bank of San Francisco’s economic letter, discusses a paper on Regional Variation in the Potential Economic Effects of Climate Change by Butsic, Hanak, and Valletta.

Here’s an interesting chart in the Fed posting covering the increase in temperature:

The continental US has a 100 degree F range of temperatures on some days. The impact will be greater in areas already on the edge of tolerance.

One of the key bases for variation in the potential impact of climate change across geographic areas is the starting point from which climate change occurs: climate warming may have little or no impact within a range of temperatures, but the impacts may grow rapidly as temperatures rise above that range. This nonlinear or “threshold” pattern implies that climate change effects will be most pronounced for areas that are already near critical temperature boundaries. This principle is best illustrated by some examples from recent research on the potential economic effects of climate change.

Shifts in agriculture production are most pronounced, not much impact on mortality rates. The article zeroes in on winter sports and it’s impact on resort housing.

Some markets are hurt more significantly than others. My take away is that the issue can’t be looked at as a matter of degrees (no pun intended) of impact. There appears to be some sort of tipping point to which the study suggests market prices are hurt significantly in different regions depending how stressed they are by temperature ranges already.

ergo, coastal flooding

[Shakespeare On Subprime] “First Let’s Kill All The Lawyers”

August 27, 2008 | 11:58 pm | |

Perhaps one of the most misused phrases in the history of literature is the reference to a quote in Shakespeare’s play “Henry VI”, “First lets kill all the lawyers.”

The line is from The Second Part of Henry VI, act IV, scene ii, line 86; spoken by Dick the butcher, a follower of Jack Cade of Ashford, a common bully who tries to start a rebellion on which the Yorks can later capitalize to seize the throne from Henry.

The plan would be to take away the rights of common citizens but that would only work if they “killed all the lawyers.”

In the wake of the subprime crisis, there will be plenty of opportunities in litigation, foreclosure and bankruptcy actions over the next several years. We are all (or at least I am) screaming for action on going after those that overstepped rule of law.

But what about those who were hurt who can’t afford legal advice? With so many law firms working with financial institutions in the wake of the crisis, there is a potential conflict of interest.

That hurdle is “issue conflict”—the potential conflict of interest for any law firm that has lawyers representing banks, savings and loans, and other financial institutions.

But the need—arising from the subprime mortgage debacle and exacerbated by skyrocketing food and fuel costs as well as rising layoffs—is great. Mark Schickman, a partner at Freeland Cooper & Foreman in San Francisco who chairs the ABA’s Standing Committee on Pro Bono and Public Service, says one in every 160 homes is subject to foreclosure.

“It’s almost a losing battle trying to provide legal services to the poor,” he says. “Every time we think we’re making headway, something like the foreclosure crisis comes in and pushes us from the goal. Pro bono attorneys are coming out in droves for this. It’s really heartening.”

In the ABA Journal article Prime Aid, Subprime Crisis there is already a surge in such activity.

In April, the Association of the Bar of the City of New York’s standing Committee on Professional and Judicial Ethics issued an informal opinion (PDF) regarding homeowner representation by firms that represent financial institutions.

The Federal Reserve Bank of New York and the City Bar Justice Center are sponsoring a pro bono legal services effort called the Lawyers’ Foreclosure Intervention Network that pairs homeowners at risk of foreclosure with attorneys and certified law students.

It’s an encouraging development as well as good public relations effort for the legal profession.

I’ll have to crack open that dusty copy of Hamlet.


[GSE Reminder] Hey, There Are No Guarantees

July 21, 2008 | 1:58 pm | |

Fannie Mae and Freddie Mac are government sponsored enterprises (GSE). Yet they have shareholders and are profit driven. They play a critical role in the stability of the US mortgage market (and housing) by promoting liquidity, helping mortgage rates and availability consistent throughout the country.

One of the things that made them have a competitive advantage over others was their inferred backing by the federal government.

In the New Yorker this week, James Surowiecki writes in his column Sponsoring Recklessness

The two companies have long been required to tell investors that their securities are not guaranteed by the federal government. But in the financial markets everyone has always assumed that this demurral was just window-dressing, and everyone, it turns out, was right. Last week, when fears of a possible collapse of the two companies threatened to spark a major financial crisis, the Treasury Department and the Federal Reserve quickly came up with a rescue package. What had been an implicit guarantee became an explicit one

Fannie was privatized in 1968 so president Johnson could move the debt off the federal books to help sell the Vietnam War budget, not to help the mortgage market.

Help to the consumer in terms of their impact on keeping low mortgage rates may be exagerated.

A paper by the economist Wayne Passmore, of the Federal Reserve, suggests that in fact Fannie and Freddie have only a small effect on the interest rates that homeowners pay, saving them less than one-tenth of a percentage point.

The GSE self-preservation mechanism has been aggressive lobbying using former high placed government officials, very effective in enabling them to grow to $5 trillion in mortgage debt. A blip on the radar could cause more damage than Congress is able to burden the taxpayers with.

More than $10 billion in losses in the past two quarters, the GSEs (and FHA) are looking for more money to capitalize to help bailout the housing market at Congress’ urging.

Holden Lewis over at Bankrate wrote a great post on this last week called The GSEs and moral hazard.

Daniel Gross, my friend over at Slate and Newsweek, makes a better argument for the help GSEs provide to the taxpayer/homeowner suggesting that a bailout of the GSEs would actually be a bargain.

I guess I have a hard time accepting that anything the federal government would do would be a bargain and the long term concept of nationalization of the GSEs would be cost effective, but hey, I don’t have to refinance my mortgage.

Tags: , , , , , , ,

[Subprime Truth In Lending] From A To Regulation Z

July 16, 2008 | 12:01 am | |

The Federal Reserve finished crafting their subprime mortgage rules regarding Truth in Lending called Regulation Z. I am doubtful that this rule would have been updated if we weren’t experiencing the current mortgage market turmoil.

Because this is such an important issue, it will take effect on October 1, 2009 (more than a year from now.)

“The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership,” said Federal Reserve Chairman Ben S. Bernanke. “Importantly, the new rules will apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve. Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers,” the Chairman said.

Ask anyone whether they thought these types of rules would already be on the books (for high priced mortgages – 1.5% above the “average prime offer rate”) – here are some excerpts:

  • Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.
  • Require creditors to verify the income and assets they rely upon to determine repayment ability.
  • Ban any prepayment penalty if the payment can change in the initial four years.
  • Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.

And here are rules for all loans, not just high priced:

  • Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home’s value.
  • Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees.
  • Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan.

Is it just me or do these rules seem crazy obvious? Why aren’t they on the books already? Why on earth do these rules only apply to subprime mortgages? Not Alt-A or Prime?

Speaking of scapegoating subprime, and something about the squeaky wheel getting the grease, lets talk oil and the evils of the dreaded speculation.

And the tale of two economies…

Highlights of Regulation Z [Federal Reserve]

Tags: , ,

[GSE Flat] Reality Sets In For Those Wide Knobby Tires

July 8, 2008 | 12:43 am | |

Real estate -> territorial -> turf -> self-preservation -> wide knobby bike tires

Ok, so the timeline doesn’t work, but hear me out. I used to fix my own flat tires, now I rely on the bike shop so I don’t have to get dirty.

As I have mentioned on more than one occasion, government on a federal level seems unable to ease the credit/housing market pain. Congress can’t seem to move forward with housing relief in any meaningful way. The Federal Reserve missed the signs of growing housing stress and took action too little too late. The GSEs seemed to be part of the problem as enablers of poor lending practices (made painfully apparent with its agreement with NY AG Cuomo).

GSEs Fannie Mae, Freddie Mac, plus FHA were designated as the housing saviors for Congress to rely on in the stimulous package. They’ve lost more than $15B in the past 6 months by my calculations and everyone is rooting for them.

On a monday, a comment by a Federal Reserve official and a Lehman analyst sent GSE stocks plummeting, an illustrating just how nervous investors are about the effectiveness of the GSEs role in all of this is.

Aside from letting time pass, I am fresh out of ideas, and I have resorted to incessant whining so watch out.

The problem is more complex than Congress can wrangle an effective compromise out of, and the OTS is still angry about the Cuomo deal with the GSEs.

It seems like a government solution’s time has passed.

On the bright side, the Tour de France, my all time favorite sporting event after March Madness, might have a prayer of being drug free this year or close to it. Of course, like housing, there is a turf war between the Tour de France and the International Cycling Union over their more stringent testing policy. Coincidentally, none of the usual cycling stars are in the race.

Perhaps an unknown, generic solution to housing may appear at some point. The current situation is over the heads (and handlebars (sorry)) of the usual government participants until they can get together.

UPDATE: Fed to Clamp Down on Exotic and Subprime Loans [NYT]

UPDATE2: Mortgage Fears Send Global Shares Down [NYT]

Tags: , , ,

[Deflating Expectations] FOMC Shifts To Neutrally Unsure

June 29, 2008 | 10:46 pm | |

The Federal Open Market Committee was widely expected to raise rates a few weeks ago amid growing concerns over inflation. However, that concern eased in recent weeks as it became apparent that the overall economy was still weak and the rate was left unchanged.

Repeat of last month’s hint: Housing AND inflation

I would doubt there will be a change in the federal funds rate until after the election – a coincidence I am sure [wink].

Here’s a great discussion on Fedspeak and the Feds’s political connections by Holden Lewis over at Bankrate.

But assuming not much fixing happens until after the election, can the next President actually do anything about the state of the economy?

Here are the minutes from the last meeting:

Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

Of course, as Congress struggles to pass legislation to ease some of the homeowner pain (which, as a body of government, I feel the issue is far too complex for them to arrive at an effective solution because excessive compromise is the result), mortgage debt is snowballing.

Hurry up.

Although 71% of Americans describe the federal government’s economic policies as bad, a recent Harris Poll found that More Now Believe Their Household’s Financial Condition Will Improve in Next Six Months.


I think it’s not just the Fed that’s unsure about the economy at the moment.


Get Weekly Insights and Research

Housing Notes by Jonathan Miller

Receive Jonathan Miller's 'Housing Notes' and get regular market insights, the market report series for Douglas Elliman Real Estate as well as interviews, columns, blog posts and other content.

Follow Jonathan on Twitter

#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
NYC CT Hamptons DC Miami LA Aspen
Joined October 2007