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.
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.
Despite absolutely massive official support, via the FHA, Fannie Mae, Freddie Mac, a now expired housing credit and other initiatives, air now appears to be leaking out of the housing market faster than it is being pumped in.
The recent run of data in the aftermath of the expiration of the housing credit has been terrible. Existing home sales fell 27 percent in July to an annual rate of 3.83 million, the lowest figure in the 11-year history of the data, leaving inventories above a year’s worth of sales even before you account for the shadow inventory of foreclosures and would-be short sales. Nearly 15 percent of all loans are past-due or in foreclosure and 23 percent of properties encumbered by a loan are in negative equity, meaning they have very good reason to default if they haven’t already. Another 5 percent of mortgaged homes have 5 percent equity or less.
Combine all this with a clearly weakening U.S. employment scene and you have the potential for further substantial falls in the value of housing, which, last time I checked, is bad news for the loans that are the backbone of the financial system.
Meanwhile household formation, a key determinant of house prices over the medium term, is going in the wrong direction. When jobs are tough to find and house prices aren’t rising many people decide it is better to move back home with mom and dad.
It’s actually worse…those that were enticed into the housing market by gov’t programs will feel just the latest ponz of the banking industry.
They’ll say you made rates low, you subsidized downpayments, you said “buy” I bought. Now foreclosures on my street are up and my downpayment is gone. I’m underwater and you say you can no longer help.
What’s the equivalent of the 1930′s farmer’s pitchfork? Anyone?
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.
But how many people remember how the fairy tale ends?
“‘But he has nothing on at all,’ said a little child at last. ‘Good heavens! Listen to the voice of an innocent child,’ said the father, and one whispered to the other what the child had said. ‘But he has nothing on at all,’ cried at last the whole people.
“That made a deep impression upon the emperor, for it seemed to him that they were right; but he thought to himself ‘Now I must bear up to the end.’ And the chamberlains walked with still greater dignity, as if they carried the train which did not exist.”
The emperor decided it was too embarrassing to admit he had been fooled. But that is where monetary policy and the fairy tale part company.
Good article, except Wall Street investors do seem to believe we’re going back to the pre 2007 ‘emperor’s clothes’ system, if you judge by still elevated stock prices.
I wonder who invented the new myth that US corporations are sitting on trillions of cash? -
FYI, US corporations normally sit on trillions of debt, because that’s what keeping them going.
In real life, for every company that has some excess cash there’s a dozen struggling to keep their heads above the water.
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.
The upshot is sluggish movement of money through the economy and, believe it or not, a Federal Reserve that keeps interest rates ultra low because of domestic concerns rather than simply because of fragility in Europe.
This is what happens in a balance sheet recession. People and enterprises repay loans rather than borrow and hold cash rather than invest. Money sits idle on deposit with the Federal Reserve rather than multiplying into loans and activity in the economy.
First, take a look at the housing market. Data from the Mortgage Bankers Association last week showed that demand for loans to buy houses fell to a 13-year low, falling by 27 percent, after federal tax credits worth as much as $8,000 per borrower expired. Consumption of housing was brought forward but now the pool of natural first-time and move-up buyers is very shallow.
Last spring, the IRS released a report (1st authorized by Clinton EO, then surpressed by GWB EO following 2002 tax “changes”) that analyzed taxes paid by S&P 500 corps in the last completed yr (2006, I think). Two-thirds of the corps paid… NO Taxes whatsoever! Since the financial sector had grown to 40% of the index by then (pretty absurd, when ya think about it), may it be assumed that a good number of the tax-free were financial firms? Perhaps we should focus less on taxin’ those bonuses and more on taxin’ the firms’ revenue streams. The latter might just solve the problem of the former. [though I have yet to see that annual IRS report this Spring--- wonder where o where it is? [:) ]
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.
However, the downward trend in core inflation, while influenced by weakness from housing, is far broader.
“A close examination of recent inflation data shows that the weakness in housing costs is representative of a broad pattern of subdued price increases across most consumption goods and services and is not distorting the broad downward trend in core inflation measures,” Federal Reserve staffers Bart Hobijn, Stefano Eusepi and Andrea Tambalotti wrote in the Federal Reserve Bank of San Francisco Economic Letter.
“Weakness in the housing market has reduced the inflation rate of the housing components of core inflation. Yet, this very substantial decline in the rate of housing inflation has not been isolated. Rather, it is indicative of a much wider decrease in inflationary pressures observed since the peak of the financial crisis,” they wrote.
Could it be that the same forces constraining housing are also constraining inflation in the rest of the economy? In other words, our problems lie not just in our houses, but in ourselves, our overstretched balance sheets, our poor job prospects and our constrained incomes.
Can one type of stimulus or another change anything for real, and save the economy?
So far, have things really improved in the real-world US, or is it just investors who are more upbeat?
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.
But like the egg in the nursery rhyme, which once broken cannot be reassembled, housing still faces some pretty horrendous fundamentals. It needs a strong recovery in employment to arrive before political consensus for housing support cools. (Full disclosure: I just bought a house, but hey, everybody’s got to live somewhere).
Already there are signs that housing may be faltering. Existing home sales declined sharply in December, though this was partly because many rushed to close purchases before a now extended deadline for tax rebates expired on Dec. 1.
Housing starts too fell in the month and, significantly, the Federal Reserve removed language pointing to improvement in housing from its statement accompanying its decision to keep interest rates at record lows.
Fact is, people who REALLY run America are great con artists and globaliztion is their tool for transfering wealth from the rest of the world to the USA. Surely you’ve heard of the old scam of inflating house values, getting a big fat mortgage based on the inflated value, using the money on yourself and then letting the lender get stuck with the loss. Who do you think is buying up the bonds issued by fannie mae and freddie mac and FHA??? It’s European pension plans, the governments of Japan and China as well as many individuals who invest in Bond mutual funds; all of that foreign money pours into the USA into the hands of the americans who take out the mortgages. They then spend the money within the USA on crap and pay taxes spent on weapons all of which funnel money to the guys who are facilitating the inflated house values. It’s really quite obvious once you think about it a little bit.
A brief, but welcome recovery in housing
(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.
Miraculous to say, prices now look to be rising, at least as recorded by the Case-Shiller home price index which rose 2.9 percent between the first and second quarters, the biggest jump in close to four years.
This all comes as a huge relief. You can construct an argument that we are now most of the way through the most painful adjustment in house values and sales activity since around the time great clouds of dust blanketed the mid-west in the 1930s.
It´s very likely that prices of low-end homes are set to fall further. Primarily due to the fact that a vast number of the ´regular´ foreclosures are being held by the banks purely because of fear the impact would generate. Flooding the market with unwanted properties and writing off the losses will have to happen sooner rather later. This will just prolong the agony. So the euforia you paint is just a wishful thinking.
Learning to love falling house prices
– 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.
Falling house prices are usually seen as wealth destruction. But they can also be seen as wealth transfer. The next generation of homebuyers will benefit from our loss. Those young homebuyers who have been able to cling onto their jobs are already reaping the advantage. The American dream of home ownership can now be achieved at bargain basement prices.
Take San Francisco. If you earned the median wage in San Francisco at the peak of the housing market in 2006, you would have needed to devote 75 percent of your income to meet mortgage payments on the average home. Now people will pay just 35 percent of their income, according to Ian Morris, chief U.S. economist at HSBC.
It would no longer be any surprise if prices remained stagnant for a decade – spreading the benefit of cheap housing for at least 13 million new households.
Why does everyone seem to think home prices are such a great deal now? Housing costs are only returning to normal values after a speculative bubble.
When they reach 2002 prices, plus some normal appreciation, they will be at the levels they would have been, if the bubble did not happen.
An emerging opportunity in U.S. housing
– 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.
Well James, you’re right about not calling a bottom. Even those adverse to market-timing knows one cannot time the bottom this year. Therefore why buy now? Knowing full well the money will be locked up for 5 years without income, subject to further downside risks. It cannot even be used to store value. Surely there are other asset class that will perform better than buying US housing now. Unless, of course, one buys on emotion – that most beautiful dream house now on the market for a killer price. 
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.
Piggington, whose mother knows him as Rich Toscano, is making more modest claims; that prices are reasonable historically, but his arguments have some merit and fair value is a necessary but not sufficient precondition for a bottom and a turn.
He argues that, based on the historical relationship between San Diego county house prices and both incomes and rents, prices are now not so bad. The ratio of home prices to per capita income in December was below eight (remember San Diego housing has always been expensive!) as opposed to a bubble peak above 14. And buying the average single family home now costs the equivalent of just about 200 months of the average rent, as against well over 350 at the peak.
I think it’s fair to say that we are getting ever closer to a bottom in some of the bombed out markets, not just San Diego, but I don’t think we are there yet. On the plus side, in many of these markets transactions are now well above last year’s extremely low levels, driven by banks selling foreclosed properties at aggressive prices. And many of the buyers in places like Florida appear to be investors who are happy to take the quite positive cash flow from renting, a real sign of health, as opposed to 2006′s flippers.
But be cautious: we are in the midst of an awful recession and the employment effects will last long into 2010. Prices also are liable to overshoot on the way down, as they have in the past, including in California.
Well analyzed