I joined Dan Gross for my monthly visit on his “The Number” segment talking about the general improvement in the US housing market, FHA’s possible pending implosion and what’s in store for the market in 2013.
I joined Dan Gross for my monthly visit on his “The Number” segment talking about the general improvement in the US housing market, FHA’s possible pending implosion and what’s in store for the market in 2013.
Here is a front and back view of a gut renovation on the Upper East Side of Manhattan observed by one of our appraisers. Offhand I don’t know what the building was or will be but other than the street facade, nothing else remains. It’s like new construction only completely different (the facade keeps it authentic as perceived by the local market).
Not much left inside.
I came across this amazing table (hat tip: Robert Paterson’s Weblog) that lays out the percentage of each European country’s national debt to GDP compared to the US. The author applies a 5% debt repayment rate to estimate how long it would take to pay it off (assuming no more additional debt).
While the US is far better than the 19 other countries listed, I am more concerned about the continued growth US debt – it appears to be growing unabated.
Irish eyes are NOT smiling. It’s hard to imagine an influx of foreign investors providing meaningful real estate demand from Europe anytime soon, in addition to the restraint caused by the rising dollar relative to the euro.
Reality check – At 97% financing for 19 years, the US is beginning to feel like an FHA mortgage. Hey, isn’t FHA losing money?
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.
In a lapse of judgement, poor writing or an irrational need to be contrarian, the normally solid publication Barrons (I subscribe) drops the ball on their cover story:
If IndyMac, Fannie and Freddie didn’t steal the headlines over the weekend, I wonder if this article would ever made it to print.
The article suggests housing is moving toward recovery based on a review of recent data:
NAR exisitng homes have a 10.8 month supply in May versus a 11.2 month supply in April (ahem: Seasonality occurs in rising and falling market. Home sales rise in the spring.)
Case Shiller showed prices rose in 8 of 20 housing markets in April, and the pace of decline is slowing in many of the cities surveyed. (see no. 1)
Treasury Secretary Paulson recently said: “”we are well into the adjustment process.” (This is a political move to allay investors – other than that, what does this statement actually mean?)
David Blitzer, chairman of the S&P Index Committee indicated the media was only interested in the “…bad year-over-year number.” (blame the media observation – see no. 1.)
Pending Congressional bailout. FHA will reposition $300M in subprime mortgages. (For perspective, Fannie and Freddie have 5 trillion in outstanding mortgages, how does this save the market? It’s a drop in the bucket).
Fannie and Freddie may be taken over by the government is a good thing. (no it’s not)
A million unit drop in housing starts has signified the end of the last 3 housing corrections. (none of those period saw anything close to the speculation and poor lending practices seen the recent boom – no lessons learned by history here).
Affordability (via price/income) has improved with price declines. (The rationalization for increased affordability is pretty silly since underwriting standards are much tighter. In other words, if your credit score and salary didn’t change from last year, and your home dropped in value, your buying power is probably much lower. In other words, affordability did not increase despite the mechanical calculations to the contrary).
NAR reports 2% increase in co-op. condo and townhouses from April to May. (See no. 1)
NAR economist Lawrence Yun is actually relied on in this article. (He called the credit crunch temporary last August and the housing market would return to normal in the fall.)
Mortgage market weakness is front end loaded with foreclosures and defaults. (In theory the bad is behind us – for the life of me, I can’t understand the rationale. How does this mean housing is poised for a turn if the scope of the credit crunch is unprecedented?)
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.
In the recent issue of Businessweek, which has been spot on in its coverage of the housing market, interviews the inventor of mortgage-backed securities, Lew Ranieri.
The first pool of home loans was sold in 1977 and the technique is probably unfairly the source of the blame of the credit crunch we have now.
To accommodate the demographic demand, banks had to keep raising equity, which wasn’t realistic. Securitization allowed them to fund the loans off the balance sheet.
Basically create a pool of mortgages to investors who took this concept a step further and cut them into a smaller pieces and sold them off, effectively offloading the risk onto someone else, who usually didn’t understand the risk they were taking.
In my short time working with Wall Streeters last year I was told several times about the “nexus between fear and greed.” In real estate speak, a fair comparison would be the pendulum that swings between a buyer’s market and a seller’s market.
If you diminish fear, you get more greed. People got braver issuing this stuff. All the participants felt they could act merely as agents and collect fees. Nobody was prepared to say “I have liability.”
Ranieri sumarizes the situation with the following points:
The problem likely isn’t securitization, its overlaying appropriate regulation to create a rational and fair playing field. Of course, this reduces the rapid profit potential (or loss) and I suspect there will be another product developed in the next several years while securitization reverts to a more mundone financial technique and Wall Street seeks to reinvent the next “great thing.”
Back in September 2007, US Senator Dodd from my home state of Connecticut submitted what appears to be hastily conceived legislation to solve the mortgage crisis in response to the prior month’s credit market meltdown. I believe it was created to address subprime lending, but because it was so loosely presented, it casts a wide blanket over the lending process to little effect and likely causes more problems because it embraces conventional wisdom rather than actual practices. As far as appraisals go, it clearly doesn’t recognize the fundamental problems that New York AG Cuomo has already recognized.
The appraisal related language in the bill is sloppy and contains slang, suggesting that someone with little experience drafted it or the the bill was not understood by the Senator. I am very disappointed. It found co-sponsors because it contains buzzwords like “appraiser”, “mortgage” and “meltdown”.
In fact, the language of the bill was so vague and misdirected (the appraisal part) that most appraisers never took it seriously, instead focusing on efforts by Senator Frank and NY AG Cuomo. However, it still has life and is being taken seriously.
I think Senator Dodd’s introduction of the concept of bonding was to incentivize the appraiser to do good by having “skin in the game” but it does nothing to solve the current lending problem. Is this the best that can be done by Congress? It’s damaging to the lending industry and poorly written and thought out, and in my opinion, it allows Congress to say this takes care of the problem, when in fact, it makes it worse.
Here is the appraisal-related content summary provided by Senator Dodd’s web site.
V. Require good faith and fair dealing in appraisals.
– Prohibit pressure from being brought to bear on appraisers.
– Hold lenders liable for appraisals to avoid the appraisal problems created in the current climate.
Here’s the actual language of the appraisal related portion of the bill:
Title IV Good Faith and Fair Dealing In Appraisals
Requirements for Appraisers
My comment: Generic boilerplate that probably needs to be said. On that note I propose legislation that government officials never abuse their power, the public shouldn’t commit crimes and all school kids show do their homework. In other words, its an ideal, but it has nothing to do with addressing the core systemic problem – remove the possibility of collusion from the process.
My comment: They actually use the word “hit” in the legislation. Who wrote this? How is a lender prevented from attempting to “seek to influence an appraisers work.” These are just words.
Comment: “A crucial cause” implies appraisers initiated the problem. Wrong. They were the enabler of the lenders and the bad ones were rewarded for unethical practice. They actually use the word “meltdown” in this bill? This paragraph also infers that good appraisals are always low. You can say stuff like this all day long but that doesn’t stop it from happening.
Comment: “How do the costs of the bonding enter into this? I am not familiar with getting bonded I assume that means appraisers would file for a bond with a predetermined amount so we get enough coverage. That violates federal licensing law (USPAP). This does nothing to fix systemic fraud and burdens the appraisers that do the right thing with additional costs. How does it keep a bad appraiser from doing bad work? They charge the bond costs to their unwitting (or not) clients and it’s no skin off their back. Good grief.
— Lenders must adjust outstanding mortgages where appraisals exceeded true market value by 10 percent or more.
Comment: Can you imagine the litigation costs that would result if this passes? Who determines whether the value is off by more than 10%? Another appraiser who is hired by the homeowner? An AMC? A real estate broker? Zillow? A lender using an Automated Valuation Model? What is “True” market value? Is this a new definition of market value and all other forms like “Fair” used by GAAP are “False”? I find it hard not to say the word “true” in this application without sounding sarcastic.
— When an appraisal exceeds market value by 10 percent (plus or minus 2 percent) or more, a borrower has a cause of action against the lender. A consumer who is awarded remedies under this section shall collect from the appraiser’s bond.
Comment: Can you imagine the the costs that will be endured by the consumer? I understand that bonding costs for the typical appraiser would be $10,000 to $40,000 per year (per appraiser). For what? Appraising is already a razor thin margin business. Two things are going to happen: appraisal services are going to probably double, and many good appraisers will be forced out of business.
— Actual and statutory damages up to $5,000.
Comment:The further destabilization of the lending industry is worth $5k?
Here are the Senators who think this is a good idea:
Sponsored by Christopher Dodd(D-Ct), with co-sponsors:
Sen. Daniel Akaka [D-HI]
Sen. Barbara Boxer [D-CA]
Sen. Sherrod Brown [D-OH]
Sen. Robert Casey [D-PA]
Sen. Hillary Clinton [D-NY]
Sen. Richard Durbin [D-IL]
Sen. Dianne Feinstein [D-CA]
Sen. Thomas Harkin [D-IA]
Sen. Edward Kennedy [D-MA]
Sen. John Kerry [D-MA]
Sen. Amy Klobuchar [D-MN]
Sen. Frank Lautenberg [D-NJ]
Sen. Claire McCaskill [D-MO]
Sen. Robert MenÃ©ndez [D-NJ]
Sen. Barbara Mikulski [D-MD]
Sen. Barack Obama [D-IL]
Sen. John Reed [D-RI]
Sen. Charles Schumer [D-NY]
Sen. Sheldon Whitehouse [D-RI]
I’ll bet if the situation was explained to the Senators with clarity, they would have issues with the bill as written. Time is of the essence, but the solution needs to solve the problem. The problem is about self-dealing and allaying investor’s concerns with the products they are purchasing.
Ok, let me get this straight. Fannie Mae:
Actually Fannie Mae’s stock dropped 5.7% yesterday so maybe it’s not love afterall.
Ok, what am I missing here? It seems to me that the GSEs can not be the housing market’s sole saviours and we risk serious damage to our financial system if housing drops sharply this year and Fannie & Freddie get taken over by the government and assume the liabilities…
But some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion — the capital that their regulator requires them to hold — underpins a colossal $5 trillion in debt and other financial commitments.
The companies, which were created by Congress but are owned by investors, suffered more than $9 billion in mortgage-related losses last year, and analysts expect those losses to grow this year.
More regulation is need to protect the GSEs from faltering. OFHEO lowered their capital requirements in exchange for making Fannie Mae go out and borrower $6B to help protect against further housing market declines.
“Regulators need all the tools they can get to make sure these companies don’t fail, especially since we’re talking about entities that have over $5 trillion in financial commitments and debt,” said Senator Richard C. Shelby of Alabama, the senior Republican on the Senate Banking Committee. “Six billion dollars looks like a pretty paltry sum, and if we get into a further housing downturn, that capital can go pretty fast.”
The dilemma (although its not really a dilemma because there few other options) is whether to entrust the GSE to get the nation out of the mortgage problem that is keeping housing from stabilizing.
Increased roles for Fannie and Freddie could be just what the doctor ordered to maintain confidence and liquidity in the mortgage markets at a crucial time and stave off a far greater crisis. However, if the crisis continues to deepen, these companies could go under and possibly push the worldwide financial system into turmoil.
William Poole, a former Federal Reserve Bank president, said that Fannie and Freddie are “at the top of my list of sources of potentially serious trouble.” And according to Senator Mel Martinez, a former secretary of housing and urban development, the companies “could cause an economywide meltdown if they got into real trouble and leave the public on the hook for billions.”
It seems to me like this is one small solution of many others that are needed. It’s going to be a long time to ride out this downturn and common sense says that the GSEs can’t weather it alone. FHA lost money last year too. I am starting to think we are making things worse by trying to fix the problem.
Here’s a great piece by Randall Forsyth of Barrons called Show Me the Monet where he says more than half of all homeowners who bought in ’06 are underwater and that’s the tipping point for foreclosures. He wonders how the worst of the credit crisis can be behind us.
Periodically, I like to round-up some of my favorite recent blog posts that are housing market/credit/economy related. There’s a lot of passion and great commentary out there, you just have to light a fire to find it (sorry). Of course, I throw in random stuff as well.
There’s an old joke that goes like this:
Man1 Seems like I’ve been married for five minutes.
Man2 Really? only 5 minutes?
Man1 Yeah, 5 minutes…underwater
Judging by the booing the president got at opening day for the Nationals yesterday while throwing out the first pitch, the administration is starting to think it needs to do something about the stability of the financial markets, specifically credit/mortgages. We are starting to see some stirring (about a year too late , I suspect).
HUD has plans to specifically help borrowers whose home values are less than their outstanding mortgages.
The Department of Housing and Urban Development plan would enable homeowners who are “underwater” on their mortgages to qualify for a partial backstop through HUD’s Federal Housing Administration, these people said. HUD Secretary Alphonso Jackson “is examining the potential for FHA to be a solution for these borrowers,” Treasury Secretary Henry Paulson said Wednesday.
The FHA is central to multiple plans to revitalize the housing market and prevent foreclosures.
Meanwhile, Democrats are trying to pass legislation that would allow the FHA to insure up to an additional $400 billion in mortgages by requiring lenders to take partial losses on loans and refinance borrowers into more affordable products. HUD’s proposal is likely to be much smaller in scale and is expected to offer partial insurance for certain borrowers, leaving lenders on the hook for some losses.
The way of Washington (40 square miles surrounded by reality): HUD Secretary Alphonso Jackson announced program on a Friday, expected resignation on Monday…
Housing and Urban Development Secretary Alphonso Jackson is expected to announce his resignation Monday, according to people familiar with the matter, a decision that will deal a blow to the Bush administration’s efforts to tackle the housing and mortgage mess.
The exact reasons for Mr. Jackson’s decision couldn’t be learned. The secretary has been beset recently by allegations of cronyism and favoritism.
That’s more like 10 minutes underwater.