Spanish banks 1, Spanish mortgages 0
The trillion euros lent out by the European Central Bank for three years at a rock bottom interest rates were supposed to do two things – throw a comfort blanket around Europe’s wobbly banks and pump money into moribund economies. Some new data from struggling Spain confirms that while there may be a bit of a case for the former, the latter is still falling short.
Mortgage lending by Spanish banks had their largest annual drop in more than six years in February – coming in at essentially half of what they were a year earlier. There are all kinds of reasons for this, not the least being that large numbers of Spaniards are out of work and house prices are still tumbling with at least one estimate being that they remain as much as 30 percent overvalued.
But given that Spanish lenders were among the biggest taker of the ECB’s largesse (officially known as LTROs, a name only a central banker’s mother could love) the lack of trickle down is less than bracing. The suspicion is that Spain’s banks are holding back on lending because of their wonky balance sheets, which is of course a good thing in itself it it keeps the financial system on its feet.
This would fit with data from the ECB itself showing banks in general are so flush with money they don’t know what to do with it. Tuesday’s ECB’s overnight deposit facility showed banks parking 768 billion euros there. In normal times the amounts are minimal.
So while the money may be helping bank’s rebuild their balance sheets (Goal 1), it is not yet getting into the general economy (Goal 0).
Just ask a Spanish home buyer.
U.S. housing slump: Six years and counting
Just as Americans begin to regain some hope that the housing sector might be on the mend, we get another batch of data showing the sector’s not quite there yet.
Groundbreaking on homes fell unexpectedly in March to an annual rate of just 654,000, down from 694,000 in February and well short of the 705,000 Reuters consensus forecast. Some context: permits peaked above 2.2 million in early 2006, at the apex of the housing bubble. On the bright side, permits for future construction rose to their highest level in 3-1/2 years.
In other housing data this week, homebuilder sentiment deteriorated again after posting a pretty decent rebound from the very depressed levels seen in 2011.
Regardless of the fact that the housing market is at pathetic levels historically, the builder data showed the rebound off the lows to be on track. http://bit.ly/IYSxuj
The headline number indicated an annualized decline of 44,000 for total starts, or a monthly rate of decline of 3,666. Most of that was due to multifamily starts, which are wildly volatile. Drilling down into the data, single family starts actually rose by 7,300 units in March, which is a far cry from the headline number implication that the housing market is falling apart. Single family starts normally increase in March and this March was weaker than usual, but is that a bad thing?
It seems that Wall Street analysts forget the law of supply and demand. Fewer starts mean reduced supply, especially considering the incipient rebound in housing demand, however small. Reduced supply versus increasing demand eventually leads to equilibrium, and ultimately to rising prices if those trends continue.
Lenders still overvaluing properties, Fed study finds
The Fed calls it an “apparent misunderstanding.” Whatever term you prefer, a new Cleveland Fed study makes one thing clear: lenders are still overstating home values. The study focuses on real-estate-owned or REO inventory, which covers properties that are now owned by lenders.
We analyzed sales data from Cuyahoga County, Ohio, and found signs that appraisers, lenders, and investors could be routinely overestimating the property values of foreclosed homes there. We suggest some simple identifiers that can help lenders better estimate home values in weak housing markets. And though we have focused on one county, we believe the situation could be the same in other places. The factors we identify as possible causes of overestimation in Cuyahoga County are likely to be found in many other weak housing markets around the country.
The two Fed economists who wrote the report identify an array of reasons for such overvaluations, ranging from the perfectly innocent to the potentially dodgy:
Lenders may be overvaluing properties because their valuation methods—which they use because they work well in most markets—don’t happen to work well in weak ones. The evidence supports this explanation, since it is not only lenders that overestimate the value of properties acquired in the sheriff’s sale, but all parties, including federal agencies and investors. Proper valuation methods would substantially discount the appraised value of homes in weak markets, bringing the estimates of value more in line with what the property will sell for on the open market. It is important to remember that lenders usually cannot legally enter the home and inspect the interior prior to foreclosure, which would prevent them from detecting hidden defects. But even when they are allowed to inspect the interior, it may not be feasible to inspect each property prior to foreclosure, given the number of foreclosures initiated every year.
Finally, there may be incentives that encourage lenders to overvalue foreclosed properties. Doing so would allow them to shift accounting losses from their loan portfolio to their REO portfolio. Solvency tests and supervisors of financial institutions place less emphasis on REO portfolios than on loan portfolios. This is a function of banks having relatively small REO portfolios in normal times, but always having an active loan portfolio that can be analyzed.
Distress signals from U.S. housing
There was something for everyone in the January existing home sales report. Bulls could point to the level of sales, which reached a 1-1/2 year high, and the decline in housing supply, long an impediment to the sector’s recovery. Bears might focus on the sharp downward revisions to prior months that suggested conditions were improving but from considerably more depressed levels.
But one nugget in the report was unequivocally bad: the proportion of distressed sales surged to 35 percent from 32 percent, a considerable one-month rise. For Michael Meyer, economist at Bank of America-Merrill Lynch, this means existing home sales numbers have become less reliable:
We think that simply looking at existing home sales is an insufficient way to gauge underlying housing demand since the data are heavily affected by investors and distressed sales. The best measure for demand from primary homebuyers is to look at mortgage purchase applications, which have remained sluggish. In addition, we think it is prudent to wait for the spring selling season before making conclusions about underlying housing demand. The winter is typically the slow season for home sales, making the data less reliable. We expect the spring selling season to show some improvement, but we believe it risks disappointing relative to market expectations.
There is also reason for caution about the apparent progress in bringing down high inventories, the glut of supply resulting from the overbuilding of the boom years. Zach Pandl, economist at Goldman Sachs writes:
The ‘months supply’ of homes on the market has declined to the lowest level since April 2006. Although we consider the drop in this measure of inventories a modest positive, we also think it exaggerates the improvement in excess housing supply.
Active listings — which are what the existing home sales report measures — decline if a house is sold, but also if a current homeowner pulls their home off the market. They can also be held down by prospective home sellers who decide not to sell due to weak demand conditions. Available data suggest that the latter two factors may have been an important reason behind the improvement in existing home inventory and months supply.
We continue to think that the appropriate way to measure the overhang in the housing market is through excess vacancies: the number of homes currently sitting empty above and beyond the normal frictional or seasonal level of vacancies. Here we see some improvement, but progress looks much more gradual.
from Breakingviews:
Citi, BofA prove too big to punish harshly
By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
Sticking it to Uncle Sam should attract harsh punishment. But the fines Citigroup and Bank of America will pay - $158 million and $1 billion respectively - to settle claims they defrauded the U.S. government look easily handled. Citi has even admitted fraud in its dealings over home loan insurance. A ban from participating in the government’s mortgage insurance programs would be a better deterrent. But unfortunately, Washington needs big banks too much.
BofA’s alleged misdeeds are still murky since its settlement was conveniently wrapped up in the broader $25 billion deal between federal and state enforcers and big mortgage servicing banks over so-called robo-signing transgressions. But the complaint against Citi offers a brutal account of the drive for profit squashing quality control. The Federal Housing Administration ended up insuring shoddy Citi mortgages that, in some cases, were in default within six months.
Federal insurance programs rely to a large extent on banks’ good faith in delivering mortgages that genuinely meet the required standards. Citi’s admission that it failed to do this came only after someone blew the whistle last year. It was a breach of the government’s trust and it has cost taxpayers money.
The penalties for ripping off the government usually go beyond dollars and cents. Yet Citi’s fine, in particular, is hardly crippling. And BofA has already set aside enough money to cover a good chunk of its settlement. A temporary ban on doing business with the FHA, on the other hand, would deliver more punch and show others in the industry that Washington won’t tolerate abuses of its largess.
Yet that’s unlikely to happen. The FHA, once a niche player focused on low-income housing, now backs about a third of new mortgages including super-sized ones for wealthy home buyers. The market for FHA-qualified mortgages runs $25 billion a month. While Citi has only a 2 percent share, BofA is the largest player with more than 26 percent, according to FTN Financial, using mortgage servicing as a proxy for origination activity. Booting offending banks out of the government’s program could make mortgages even harder to come by.
In good company: Bernanke backs Tarullo on housing-targeted QE3
The Federal Reserve, which on Wednesday sharply downgraded its outlook for U.S. economic growth and employment, appears to be seriously considering another round of monetary easing. In what would represent a policy U-turn, any third round of quantitative easing or QE3 appears increasingly likely to be heavily tilted toward purchases of mortgage-backed securities.
The idea was recently floated rather surprisingly by Fed Governor Daniel Tarullo, who normally focuses on regulatory issues. Some analysts had speculated Tarullo might not have broad support, but Fed Chairman Ben Bernanke’s comments on the matter during his post-meeting press conference on Wednesday suggested otherwise:
The housing sector is a very important sector. Problems in that sector are a big reason why our economy’s not recovering more quickly. I do think that purchases of mortgage-backed securities is a viable option. Certainly, something we would consider if the condition were appropriate. So the answer is yes, we will certainly look into that.
Whether any such program would have the intended effect remains to be seen. The Fed already bought some $1.25 trillion of MBS as part of its first round of quantitative easing, to only modest effect. The central bank seems to be hoping that if its actions coincide with the government’s push for broader foreclosure relief, they may raise the chances of success. The U.S. housing slump has been ongoing now for over five years, with home values having fallen by about a third nationwide.
Fed dips back into housing finance
While financial markets are primarily focused on “Operation Twist,” the Fed’s return to buying mortgage-backed securities has helped that market. MBS have outperformed Treasuries and interest rate swaps since the FOMC announcement.
This has yet to translate into much of a drop in mortgage rates for consumers, however. And even if it does, many economists doubt lower mortgage rates can do much to boost home sales and refinancing, helping to put more cash in consumers’ pockets. Banks are reluctant to lend for a variety of reasons, while consumers are reluctant to borrow due to worries about their jobs and the poor outlook for the economy. Homeowners with underwater mortgages remain unable to refinance their loans — barring a sudden improvement in the market or some type of relief from Washington.
As of early Thursday, the current coupon 30-year MBS were 10 basis points tighter in spread versus Treasuries after a 15 basis points tightening on Wednesday, but the average 30-year mortgage rate is down only 3 basis points overnight to 4.10 percent (albeit a record low) according to Bankrate.com.
For now, the housing backdrop remains grim, as evidenced by a renewed drop in home sales in recent months.
