Surprise — we might actually begin meaningful housing reform this year
Last week, I spotlighted three ominous trends in consumer banking. The last one spotlighted a brewing war “between the private bank sector and the government over who exactly controls the allocation of consumer credit in this country.”
By far, the most important front in this battle is over the future of housing finance. Today, the government is underwriting or assuming 100 percent of the credit risk on practically every new mortgage that’s originated. With regard to outstanding mortgages, the government is responsible for 100 percent of the default risk on about $6 trillion of the roughly $10 trillion market.
Thankfully, there is some real hope that a somewhat clandestine reform effort is about to commence that would start to shift a portion of this credit risk back to the private sector. The leader of this effort is the much-maligned regulator of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. After Fannie and Freddie were bailed out and then taken over by the government in 2008, Edward DeMarco was named acting head of the Federal Housing Finance Agency (FHFA) and conservator of the GSEs. He was tasked with a nearly impossible balancing act or mission:
mitigating Enterprise losses, which ultimately accrue to taxpayers; ensuring families have access to mortgages to buy a home or refinance an existing mortgage; and offering borrowers in trouble on their mortgage an opportunity to modify their loan or otherwise avoid foreclosure.
Most of the criticism that DeMarco has received to date has come from those who wish he would prioritize making mortgage refinancing or modifications easier, even if there are questions about whether some of these actions may lead to more taxpayer losses. Taxpayers have already bailed out the GSEs with more than $150 billion.
Democrats and Republicans practically all acknowledge that the government’s role in housing finance must be reduced. Likewise, nearly everyone is concerned about maintaining the availability of credit and making sure the speed of any transition back to the private sector is well thought out, so as not to jeopardize the nascent recovery.
This tension has paralyzed the Obama administration and Congress, which have let more than four years pass without providing DeMarco any clear instructions on how to proceed. In fact, President Obama has not even nominated someone to serve as his permanent conservator of the GSEs, a shocking fact given that there is perhaps no other federal regulatory position that’s more important to taxpayers and the economy, save maybe the top post at the Federal Reserve.
Foreclosures, capital and sickening cures
-James Saft is a Reuters columnist. The opinions expressed are his own-
A dilemma at the heart of the response to the financial crisis is that the antidote to so many ills actually causes the symptoms to worsen.
Take for examples bank capital levels and the chaos surrounding home mortgage foreclosures.
Both issues are the fruit of the same tree: the desire to do things quickly, cheaply and with minimal safeguards. And both, if you want to fix them, are probably going to slow the economy and lower asset prices in the short term.
So over the long term, paradoxically, the economy will slow and asset values fall anyway.
Being in possession of a hammer and sighting a nail, Governor of the Bank of England Mervyn King put it bluntly on Monday: “Of all the many ways of organizing banking, the worst is the one we have today.”
He’s not kidding and he’s probably not far wrong – the current system has enshrined too big to fail and the upcoming new banking regulations, Basel III, calculates the need for capital based on losses during the last crisis.
How the mortgage mess could spread beyond sub-prime
By Julian Fisher
Bank of America shares have been rocked by news that a consortium of mortgage bond investors is demanding it repurchase billions in soured mortgages, amplifying the effects of the recent “robo-signing” debacle.
Industry proponents are downplaying the risk that these so-called “putbacks” will impact more than a small number of financial institutions, but the evidence increasingly points to substantial and widespread breakdowns in controls along the mortgage origination and securitization chain.
What’s more, the impetus for putbacks appears to be shifting from lapses in documentation to ones involving possible fraud and misrepresentation.
The potentially fraudulent activity has come to light through data gleaned from reports and FDIIC hearings involving third party re-underwiter Clayton Holdings, as reported by Reuters.com blogger Felix Salmon.
Unlike the documentary issues at the heart of the “robo-signing” debacle, these findings point to a banking-industry wide epidemic of bundling loans which failed the originators’ underwriting standards into pools sold to investors.
Great article! The saddest part of this has to be that currently we are returning to the same atoms that went rogue and caused the just past atomic collapse. Let’s list a few.
The Government will once again take back end risk
The loan programs are amazingly similar and will become even worse as competition once again increases.
There has been no recognition that Servicing/Master Servicing has not created capabilities that contain the universe of information necessary from origination through Securitization, Derivative formation(Tranching), Credit Default Swap(CDS)coverage and and public Exchange created tracking of CDS. (Exchange is necessary)
Finally for now, there is no cost efficiency that would allow only good loans instead of quantities necessary to cover the too large inefficient overheads.
Welcome to the Teenies, sorry about those returns
-James Saft is a Reuters columnist. The opinions expressed are his own-
As we say goodbye to a decade so abysmal it never even earned a nickname, it is time to take bets on how the coming 10 years will shape up in economics and financial markets.
Welcome, then, to the Teenies, a word that will describe the decade as well as the small returns in financial markets and the shrinking financial sector it will bring.
So, let’s run through some themes for the 2010s:
Banking – The decade will end with meaningful reform of banking in place, but what is not clear is if this happens soon or only after a new banking crisis brought on by an unwillingness to take tough steps now. The likelihood is that regulation limits leverage and causes the share of the economy captured by financial services to shrink. It will be a lousy decade to be a shareholder, but given the government backing, perhaps not a bad one to be a bondholder.
It will be a great decade in which to have credit skills; even if the ratings agencies escape meaningful reform, everyone is going to want to do their own homework and a shrinking banking sector will open up highly profitable opportunities for alternative avenues of credit.
Investment - Just as the last decade started with dot-comfever and ended with unease, the next one will be all about reconciling oneself to moderate returns and figuring out who is hurt worst by a world of slower growth, less volatility and less debt. My theory is that a balance sheet recession means growth in the developed world for the next few years will be restrained at best. The past few months have been heady, but don’t be fooled, it will be very hard work to make an overall portfolio return even 8 percent. As those expectations slowly deflate, pension fund risk will become much more important in investing. General Motors will not be the last icon partially brought down by its obligation to retirees.
Great article Nostradamus.
Because of all the money that has been printed, we are facing stag-/hyperinflation, so there goes our returns as per the Fisher-effect. Rolfe Winkler pointed that out in 2009.
If we are serious about the environment, growth will have to decrease even further, I wrote something about that under Agnus Crane’s column on Mortgage Giants, for the lack of a relevant article coming up.
I doubt whether middle to top bracket tax payers/voters will bail us out, so the Teenies will come with serious hormonal fluctuations and acne.
Bankers will never let go. It was and is a fatal error to view certain markets as ‘emerging’ as they emerged long ago and then went into hiding to now overdevelop ? Those guys are too bright and informed to allow bubbles. What goes for the US housing/residential market goes for the rest of the World, the Tower of Babel in Dubai a good example. Who cares about a reserve currency anymore ? I think the next decade will also see an exponential growth in conflict between two of the main religions, both geographically and politically, not leaving superpowers many reconciliatory options…
I nominate you for the 2009 ‘Advocacy’ prize under the following link:
http://blogs.reuters.com/fulldisclosure/ 2009/12/29/honoring-free-expression-onli ne/
ps: voomies, because it costs to exit and re-enter the market while paying off somebody else’s mortgage’s capital and interest component while losing out on the US tax breaks.
from Commentaries:
Where the job seekers aren’t
Even in weak employment markets, the United States has typically had a trump card to play. The nation's workers are legendary for their willingness to travel across the country for new opportunities.
The result has been a speedier recovery of job growth than in Europe and possibly a higher productivity rate, since skilled workers are better matched to openings.
With the August employment report on Friday expected to show little improvement in the job market, America has never needed this flexibility more. Yet, at the risk of adding to the gloom, this advantage appears to be fading fast. The good news is that the United States still boasts one of the most dynamic labor markets of any rich nation. OECD rankings of its 30 wealthy member nations put the U.S. far ahead of other large countries. (It comes second only to Denmark, which has unmatched programs to help the unemployed back to work.)
On average, around a quarter of American workers change jobs each year, compared with 15 percent in Italy and 13 percent in Greece, says Stefano Scarpetta, head of employment research at the OECD.
Yet there has been a striking decline in U.S. mobility in recent years. Since 2000, the movement of Americans across state lines has halved to just 1.6 percent of the population this year -- the lowest rate since records began in 1948. Even movement between counties is at historic lows.
(Click chart to enlarge in new window)
Americans may be becoming less adventurous because they are getting older. During the recession of the early 1980s the median age in the labor force was 35, according to the Bureau of Labor Statistics. Now it is 41.
We would move, no problem! To where? No one is hiring in South Carolina, where we moved a year ago not knowing the bottom would fall out. We have a small mortgage, so we could relocate, but jobs at my age of 53 years are not there. I applied for TSA job, and never got an appointment to take the test. I managed in communications for 30 years, yet no one seems to respect my experience. What is America coming to? I continue to apply for jobs over a year now with no prospect ahead.
An abnormal recovery
(James Saft is a Reuters columnist. The opinions expressed are his own)
Things in the U.S. economy are moving in the right direction, but the pace will be slow, frustrating and very likely to disappoint investors betting on a rip roaring old-fashioned recovery.
News that the Standard & Poor’s Case-Shiller 20 City house price index rose for the first time in almost three years in the three months to May was greeted with much rejoicing. The Case-Shiller data is important and encouraging but not nearly as positive as it looks at first glance.
For one thing, house prices are supposed to rise in the spring; when looked at on a more meaningful seasonally adjusted basis prices are still falling, though at a slower rate than before.
For another, the relative improvement coincides with foreclosure moratoriums which are delaying but not eliminating the flood of repossessed houses. One way or another these houses will need to clear the market and be a continued source of downward price pressure.
Rather than a recovery we are probably facing an extended slow descent in house prices. Compared to how things looked in February this is good news.
Inventories of unsold houses are declining, though they are still unusually high, and housing starts actually rose in June, though again from historically very low levels. All in, it looks like a tentative recovery in housing activity, which will feel very good indeed after the past two years.
How can there be a recovery? These houses that are being “moved” are most likely people buying foreclosures with the hope of making money on them somehow eventually.
But with no jobs, how can people afford to pay their rent, especially if on a 30 year loan?
Who has money to play on the market? That 4.7 trillion that the Financial Industry got, that disappeared, think that would be enough for Goldman Sachs, J.P. Morgan, and all their clients, friendly nations (who have Ex-Goldmanites) and their shell companies using high frequency computerized trading techniques to keep the market moving? Who needs the common investor when the computerized market makes money for the “Big Banks” plugged into the market using computerized trading?
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. 
First 100 days: A fix for the housing crisis
– Elena Panaritis is an institutional economist. She spearheaded property rights reform while working at the World Bank, and lectures at Insead, The Wharton School and Johns Hopkins University-SAIS. A social entrepreneur, she now heads the investment advisory firm Panel Group. Her recent book is “Prosperity Unbound: Building Property Markets with Trust”. The views expressed are her own. —
In his speech to Congress, President Obama spoke of how the proper response to the economic crisis is not just a matter of immediate fixes, but also an opportunity to make investments that will serve the nation’s long-term interests. The same idea should govern the housing recovery plan. Otherwise, we get nothing more than a crutch when we need a cure.
As much as short-term help is needed to keep more people from foreclosure, there is a big opportunity to get to the end of the crisis by starting at the beginning of the problem. The conventional wisdom is that subprime mortgages represent the beginning. In fact, the beginning goes back much further. The current crisis stems from the absence of a system that provides stability to the value of properties in the United States.
Instead, real estate “value” in the United States continues to be set through speculation, and that undermines the security – that is, the underlying asset – when mortgages are traded as part of complex financial instruments. We cannot ignore a simple truth of economics: if we are going to treat mortgages as securities, then they must be secured by the tangible asset: namely, land and buildings. To do otherwise has proven to be a recipe for disaster.
The opportunity before the U.S. government with a housing recovery plan is to set up a new system that will keep us from ever getting to this crisis point again. How? The devil is in the details.
It’s no accident that other countries, even those that trade mortgages as financial instruments (such as Australia and Canada) have avoided the levels of off-the-cuff valuation of property we’ve seen in the United States. The reason is that other countries have standardized the information needed to determine the genuine value of real estate and hence mortgage valuation.
This information – actual boundaries, property transfers, claims, liens, and so on – is made available to everyone. The system is sound and transparent. And where do they keep this information? In national property registries, which maintain all the data, in a standardized format, that buyers and sellers need to undertake transactions related to real property.
interesting article, perhaps i don’t fully understand “Title Insurance” but Title has to register everything with their local county anyways so what’s missing? what is getting recorded at one and not another?
In regards to your value comment i’d have to agree. However real estate, while tangible and physical, is so tough to put a value on. I think we are about to hit dire times come May 1st when Fannie & Freddi require all appraisers be in house. Now the banks who are lending the money get to decide what your house is worth and based on that give you an interest rate. The current system allows the bank to REVIEW an appraisal and make a judgment not force a value upon a borrower for their own interest. Dire times lay ahead.
Let housing find its clearing price
– James Saft is a Reuters columnist. The opinions expressed are his own –
The U.S. government should just get out of the way and allow the crash in U.S. housing; the market is too big, has too far to fall and Americans’ finances are too strained.
President Barack Obama’s measures, unveiled on Wednesday, are part of a $275 billion plan to try and stabilize the housing market and prevent foreclosures. It aims to encourage lenders and their agents to cut repayments for homeowners in difficulties to lower, more affordable levels as well as other steps.
The reasoning is that there is a largish group of borrowers within the U.S. real estate market who may slide into default because their loans are too big and expensive or because they have run into temporary cash flow issues.
Give them a cheaper loan and you break the circuit of foreclosures, more stock coming on to the housing market driving prices down further and giving other mortgage borrowers more incentive to simply walk away from their debts.
There may be some who are successfully modified out of their troubles, but they will be outnumbered by those who will only default again, or even worse in some ways, by those who keep paying on an asset that isn’t worth the underlying loan.
“You probably have about two to three million homes that we overbuilt, a lot of those have to be converted to rental units. We overbuilt on the high end of the market. We just don’t have enough people in this world who can afford these high-end homes,” said Paul Miller, a banking analyst at FBR Research. “Government should just get out of the way.”
Disorderly resolution will lead to a depression that will result in economic and social change where fear embraces what is currently unthinkable. The suggestion of letting the markets unravel this mess is as irresponsible as allowing the markets to assess fair value during this bubble.
from Reuters Editors:
And the band played on: covering the economic crisis
I recently visited one of the most frightening sites on the Web—the place where I look at my shrinking retirement account.
As I calculated the investment loss since the steep decline in the markets began, and particularly since the collapse of Lehman Brothers in mid-September, some questions arose (in addition to: Will I ever be able to retire?).
--Did we in the media do our job in reporting on the run-up to the crisis?
--Now that an “official” recession has been declared in the U.S. and the depth of the crisis is becoming clearer around the world, are we in the media keeping things in perspective? Should we even be using words like “crisis” or “meltdown?”
On the first question, I can’t help thinking of Claude Rains’ “Casablanca” character Captain Renault, who was “shocked, shocked to find that gambling is going on” in Rick’s club. In hindsight, given the current state of the financial markets, wasn’t it obvious a problem was brewing?
Not necessarily. And it probably wouldn’t have been obvious to anyone reading online or print coverage or watching television news in the United States.
A look at a study by the Pew Center’s Project for Excellence in Journalism indicates that, in the United States, coverage of the economy was pretty much drowned out by coverage of the presidential election—at least until the two stories converged in mid-September. Indeed, as the Pew material shows, in the month preceding the week of Sept. 15, which saw the Lehman bankruptcy, the Merrill Lynch sale, the AIG bailout and large drops in share prices, the proportion of the news hole devoted to the economy reached a low for the year, filling only 4.8 percent of the time on television and radio and space in the print and online media. Since then, that focus has shifted, as the presidential campaign narrative became, again, “it’s the economy, stupid,” and as the presidential transition has focused on U.S. economic problems.
Is journalism about reporting or investigating? We can all blog and report and describe what’s happening, the media is no longer needed for that. We can all report numbers and say what other people told us they mean. What we need is investigative journalism that tests the assumptions that are being made, that shines the spotlight on those who gave bad predictions and that helps us understand where and why did we get it so wrong.
I would hardly say DeMarco is leading Washington..he has a good grasp of his obligations and a measured approach to recovery and transition, but his role as conservator of the GSE(s) and acting head of FHFA was suppose to be temporary and wields far too much power for someone at the helm this long with semi-limited experience. The Federal Home Loan Banks have been living on a prayer and walking a tight rope -some say unnecessarily because of this FHFA Board and their naive gumption that the only way to navigate through these rough and blind waters was to force write-downs based on ‘unrealized’ loses and set capital requirements that far exceeding any norm, especially during a crisis, for the FHLBank system (a system that was created and designed to actually absorb and endure the shocks and ripple effects in the event a “Great Depression’ ever occurred again) That said, he has done a decent job with Fannie and Freddie (I mean could he have done anything that would have made it worse?) and keep in mind the ‘modifications’ many are seeking are for mortgages underwater, not foreclosed. It would be a great burden $$ for the taxpayer, and in reality today majority of these underwater mortgages are being paid on time. Yes, these assets were purchased during a bubble but we are all suffering thorough it now and the best thing we can do is continue to batter down and have home owners meet their financial obligations. Predatory lending aside, no forced you to take on that second mortgage or home you couldn’t afford in the first place. We’re all guilty. Adjusting loans on a curve isn’t out of the question, it just needs to be thoroughly examined and questioned on how it would play it out. We cannot afford to make the same mistakes by just adjusting rates to get what we want…(does Russia and their issues of inflation ring any bells?) DeMarco has real character to stand his ground but how much longer will he be able to when Mr. Obama’s health care is deemed unconstitutional? They will come after DeMarco when his current polices continue to not fit in their great re-election puzzle; it is simply the nature of the beast.