The Great Debate

Everyone’s housing market profits were fictitious

By Maureen Tkacik
The opinions expressed are her own.

Also read part one of this series, How Ed DeMarco finally cried fraud.

A big clue something had become dysfunctional at Fannie Mae and Freddie Mac came in the first week of 2011, when the government mortgage market makers announced the terms of a settlement agreement they’d reached with Bank of America, and were immediately pilloried for extending the bank another “backdoor bailout” by the likes of Maxine Waters and the American Enterprise Institute.

By the end of January an internal investigation had convened, all other settlement negotiations had been suspended, and Edward J. DeMarco, the acting Fannie/Freddie overseer pending the confirmation of his replacement, found himself suddenly faced with the challenge of replacing himself as congressional Republicans vowed to stonewall Obama’s pick. Part one of this series traced DeMarco’s unlikely conversion in 2011 from coddler of banks to unyielding litigator of bank fraud. It’s a rare shift in Washington, where “corruption” is a process that’s practically synonymous with “aging.” What’s often forgotten when bureaucrats fail as spectacularly as they have at Fannie and Freddie is the critical roles played by cluelessness, incuriosity, faulty reasoning and fraudulent economic logic as well.

Consider what the inspector general learned about the corporate procedures for pursuing “putback” claims in place at Freddie Mac. While purchase contracts entitle the GSEs to force banks to buy back any delinquent loan in which it finds evidence of fraud, Freddie restricted examiners to screening only mortgages which had defaulted within two years of origination, a tiny sliver of total foreclosures comprising less than one-tenth of defaults from the years 2004 to 2007—the vintage of the Countrywide loans. When one of DeMarco’s deputies noticed this apparent oversight and began warning executives that “Freddie could passively be absorbing billions of dollars of losses” merely by refusing to glance at 90% of their files, the enterprise … chose to absorb the losses, repeatedly resorting to a boilerplate argument justifying the two-year policy holding that:

loans that had demonstrated a consistent payment history over the first two years following origination and then defaulted in later years…likely did so for a reason such as loss of employment, which is unrelated to [fraud].

Oh really.

The deputy spent six or so months attempting to politely introduce his colleagues to the concept of the “teaser rate.” Perhaps, he writes in one email, Freddie was failing to take into account that “from 2005 through 2007 there was a substantial increase in non-traditional mortgage products [which] frequently featured ‘teaser’ rates initially resulting in low payments” which would “increase dramatically two, three, or five years after origination” when “rates reset and/or the repayment of principal began”—thus rendering virtually any deliberate fraud essentially “invisible” for the first few years of the life of the loan.

Housing double-dip threatens banks

Another dip in U.S. housing looks likely, bringing with it difficulties for banks and for their government guarantors.

What is perhaps worse: having chucked money at supporting asset markets in order to support banks the past two years, the policy options for handling another housing downturn and banking crisis would be greatly circumscribed.

If you think the debate about more fiscal stimulus is heated, wait until you see the venom which the prospect of another housing and banking bailout brings.

Cheap credit cannot restore broken illusions

Hans Christian Andersen’s fairy tale about the “The Emperor’s New Clothes” is a good explanation for the spectacular expansion and implosion of the bubble economy in the 2000s.

For a time, a collective suspension of disbelief allowed markets and investors to ignore risks produced by cheap credit, subprime mortgages, securitisation and the shadow banking system.

The system worked until someone impolitely shouted out the risk had not gone away, it was just hidden in plain sight, and many institutions were insolvent.

Regs, tax breaks expiry to hit lending

By Jim Saft

With tax credits for house buyers gone and tough new banking regulations on the way, expect lending in the United States to come under significant pressure.

Demand for mortgages, kept artificially high through the end of April by juicy credits for first-time and other buyers, has now crashed and, at least to judge by the fundamentals in the housing market, should stay low. Loans to consumers too will be getting, appropriately, more expensive, at least in part due to costs imposed by new financial regulations, which while if anything not tough enough from a prudential point of view will without doubt make banking less profitable.

Supply of loans to businesses will also be hit, and demand should remain slack.

Deflation pressure not just from housing

It will take more than a recovery in housing to reignite inflation in the U.S. economy, a state of play that argues for the continued threat of deflation and a Federal Reserve that is pinned to the mat, unable, even if willing, to raise interest rates.

The strong disinflationary forces in the United States are deeper and wider than a simple, if bloody, aftermath of a housing bubble.

Many took encouragement from a report by Reis Inc that apartment rents in the United States rose in the first quarter for the first time in a year and a half even as the apartment vacancy rate stayed at an all-time high of 8 percent. Besides indicating a possible recovery in jobs and household formation, which tracks jobs, there is a hope that stabilization in housing values and rents would remove a powerful disinflationary force.

Housing’s Humpty Dumpty moment

(James Saft is a Reuters columnist. The opinions expressed are his own)

All the King’s horses and all the King’s men have been busy propping up the housing market but sometime this year, perhaps soon, it will face a Humpty Dumpty moment.

While it gets a lot less attention than the banking bailout, the official forces targeted at supporting house prices are truly vast; a generous tax break for buyers and a mortgage market that has essentially been nationalized.

That’s bought a recovery of sorts — Standard & Poor’s/Case-Shiller home-price index released on Tuesday showed that in 20 major cities home prices rose 0.2 percent on a seasonally adjusted basis between October and November, despite a national unemployment rate of 10 percent and a slow-motion cascade of foreclosures.

A brief, but welcome recovery in housing

jamessaft1.jpg(James Saft is a Reuters columnist. The opinions expressed are his own)

Activity in the U.S. housing market has bottomed – a huge plus for the economy – but a recovery in prices will not be sustained and the threat from real estate to bank capital remains acute.

We are over the worst, but only because of massive official support, support that will soon ebb. That could lead to a relapse, especially among more expensive houses, but nothing along the lines of what we have suffered so far.

The news has been good.

Newly built homes sold in July at the fastest pace in ten months, up 9.6 percent, in U.S. Commerce Department data on Wednesday. This echoes a fairly good showing in last week’s data on sales of existing homes which are selling at the fastest pace in almost two years.

Learning to love falling house prices

Christopher Swann– Christopher Swann is a Reuters columnist. The views expressed are his own –

Optimism has been all but extinguished from the U.S. housing market.

The number of Americans lining up for new home loans is shrinking again, according to Wednesday’s release from the Mortgage Bankers Association, and the best that can be said of homebuilding is that it has stabilized at almost 80 percent below its peak.

With no end in sight to falling prices, perhaps we should look on the bright side. Indeed, there are three good reasons why sliding prices are not such a bad thing.

An emerging opportunity in U.S. housing

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

Deep breath. Ok, here goes: For the first time in a very long time U.S. housing might actually be a reasonable buy on a five-year view.

As a long-time housing bear and someone who believes there is still considerable pain to come in the U.S. economy and banking system that is quite a hard thing to say.

Fishing for the housing bottom in San Diego

– James Saft is a Reuters columnist. The opinions expressed are his own –
When prophetic long time bears turn a bit cuddly, it is usually best to take notice.  A real estate maven who rejoices in the “nom-de-blog” of Professor Piggington has now, after five years of correctly shouting bubble, labelled San Diego housing prices “reasonable” based on the latest available housing data.

Remember, San Diego has been, along with Phoenix, Las Vegas and parts of Florida, among the most bubbleicious markets in the U.S., and the massive busts there still represent a huge problem for bank balance sheets, for employment and for the U.S. economy generally.

So a bottoming, if that is what we are seeing, would be very significant. Housing is usually among the first sectors to recover in the aftermath of a recession and many economists argue that it actually drives the economic cycle.