Lunchtime Links 2-2

Feb 2, 2010 19:13 UTC

Homeownership rate falls to 2000 level (CR) At 67.2% it’s still way overstated. Home “ownership” is a misnomer in cases when the owner has withdrawn mortgage equity or when the price of the home has fallen below the principal value of the mortgage. A better measure of homeownership, I think, is just to look at total owner’s equity as a % of household real estate. The most recent Fed Flow of Funds report (page 104, line 50) puts the figure at just 37.6%

U.S. could extend bank fee beyond 10 years, Geithner says (Di Leo/Crittenden, WSJ) The proposed tax on non-deposit liabilities should be permanent, and should target ALL liabilities, including repos. Deposits are guaranteed via FDIC. While that insurance is dramatically underpriced (witness the cash-strapped state of the DIF) at least banks pay something for it. Non-deposit liabilities are also effectively guaranteed, for the biggest banks anyway, via the promise that none which is too big will be allowed to fail. To counter moral hazard, this implicit guarantee must be taxed in order to offset any benefit derived from lower funding costs.

Must-Read: What’s a college degree really worth? (Pilon, WSJ) A lot less than you think, as argued here before. This piece is well-written with lots of good data!

AIG derivatives staff said to forgo $20 million in retention bonuses (Katz/Son, Bloomberg) They’re still well-paid, but this is better than nothing I suppose.

Deficits as a national security issueSanger NYT & Seib WSJ — Good to see prominent columnists picking up the thread. A refresher on the Suez Crisis of 1956 offers helpful background.

Rising FHA default rate foreshadows foreclosure crush (ElBoghdady/Keating, WaPo) Key line: “the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 — the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008.”

Goldman spokesman’s most withering rebuttals (Daily Intel) Methinks he doth protest too much…

North Korea propaganda, with translations (nikopop)

VIDEO — Reporter filing report on the blindfold half court shot, makes own impossible shot (fox4)

Trader caught taking a break…

COMMENT

A better way to state the point you are trying to make would be to exclude from the “homeownership rate”, the percentage of homeowners who have mortgages that exclude the value of their homes. That is not the same as total owners equity as a percentage of household real estate that you cite from the Flow of Funds Data (e.g., some real estate has no mortgage against it).

However, not every homeowner that is underwater will necessarily ‘walk away’ so even that statistic must be haircut in order to arrive at the appropriate figure for the percentage of american households who have a desire to “own” versus “rent” their dwelling.

Posted by Hookahboy | Report as abusive

Lunchtime Links 1-19

Jan 19, 2010 19:18 UTC

MUST READSouring mortgages, weak market put FHA on tightrope (Timiraos, WSJ) Good article, though Timiraos doesn’t address the absurd circularity perpetuated by FHA Chief David Stevens when Stevens says, on the one hand, that more gov’t lending protects the housing market from further declines, while simultaneously arguing that such lending isn’t sustainable. That said, Timiraos has worked lots of interesting stuff into this piece, especially towards the end. For instance, in late ’07 investors were refinancing at-risk borrowers into FHA loans in order to shift risk to taxpayers. Barney Frank defends permanently raising FHA maximum loans for certain geographies to $729k. Also lots of data about how badly FHA loans are performing.

Citi’s Q4 earnings: Not terrible but not great (Wilchins, Reuters) Trading revenues in the investment bank were much weaker compared to last quarter. Citi also benefited from a tax break, without which they wouldn’t have met consensus estimates for the quarter. Here’s a helpful chart.

(Click here to enlarge in new window)

tyt44h

How the French outplayed AIG and the Fed (Berman, WSJ…subscription req’d) Great column. Goldman gets all the bad press, but it was far from the only bank that got 100¢ on the dollar for derivative contracts with AIG…

Too big to fail is here to stay (Salmon, Reuters) Felix does a great takedown of Andrew Ross Sorkin’s latest column.

Record cash means S&P 500 at half 2007 valuation (Xydias/Nazareth, Bloomberg) A very interesting idea, though lots of bones to pick with the way this piece was written. In nearly 1,300 words the writers never manage to provide a solid definition of how they’re computing valuation. What is price to cash flow? Do they mean price to free cash flow? Do they mean price to EBITDA? There’s a line about cash flow being earnings plus depreciation and asset writedowns. That may be a very relevant metric. But it’s not one that investors know or understand and the authors fail to explain it.

The bidding war for failed banks (Mathews/Fisher, SNL) Interesting data on competitive bids for failed banks. (Until FDIC stopped releasing it)

In defense of a 4-day workweek (Hari, Independent)

Google at war in China, now postpones handset launches (BBC)

Another Swiss bank whistleblower (Browning, NYT)

AT&T/Verizon cut prices (Furchgott, Gadgetwise) The price cuts are just for some voice plans, not data plans. You can call the carriers and get the new lower prices without having to extend your contract…

COMMENT

No, Ron, they didn’t. It happens for balance sheet periods beginning on 1/1/10. So the Q1 release will be the first to include it.

Posted by Rolfe Winkler | Report as abusive

FHA bailout watch

Oct 8, 2009 16:12 UTC

From Bloomberg, ht AK:

The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because of $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae, the mortgage-finance company that is now government-run.

Adding to the cost of the government’s price floor under housing.

COMMENT

No wonder the price of gold goes up everyday. Who wants to hold Dollars anymore? Have you seen the price of oil?

How mad is it to create a sub-prime housing crises with easy money, low down payments, government subsidized mortgage guarantees, AND THEN try to fix the problem with low-down payments, government price subsidies (homebuyer tax credit), awkwardly low interest rates (quantitative easing), and government mortgage guarantees? Sowing the seeds of our own destruction…

Posted by John Thomson | Report as abusive

WSJ: Loan losses spark concern over FHA

Sep 4, 2009 01:47 UTC

A must-read in tomorrow’s WSJ talks about the solvency crisis facing FHA:

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.

The required reserve level is a paltry 2%. Readers may recall that was the capital level Fannie and Freddie were operating with just before they were taken into conservatorship:

Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.

No doubt the reserve ratio has fallen substantially since last year. The revised figure won’t be made available until FHA’s fiscal year ends Sept. 30th.

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

Rising defaults have eaten through the FHA’s cash cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That’s up from 5.4% a year ago.

FHA’s exploding volumes are just another indicator of the substantial government support propping up house prices.

With all that volume, one would hope FHA had a robust risk management apparatus. Nope:

Critics have said the FHA, which has never had a chief risk officer, isn’t able to manage such a large portfolio and has weak underwriting standards.

Policymakers have used the FHA to stabilize the housing market by pushing it to offer credit with far easier terms than that offered by most private lenders. For example, it will back loans with down payments as low as 3.5%.

Over $600 billion of loans backed by the end of this year — many very risky due to very low downpayments — but no chief risk officer….

A canary in the coal mine was the raid on Taylor Bean & Whitaker, a multi-billion dollar lender that had seen its FHA lending business expand very quickly over the past year. But TBW’s underwriting was terrible so FHA suspended them from issuing its loans. By the end, TBW’s business had grown to $100m-$150m worth of loans per day. The suspension put TBW out of business overnight.

It’s likely FHA will need a bailout. It’s equally likely the agency will continue to be a conduit through which the Obama administration funnels cash to the housing market.

COMMENT

Good article! I wish, however, that there had been more discussion of the Federal Reserve.

Bubbles come into existence when the money supply is expanded, since the new money does not flow into all markets equally. Those markets which get the new money have bubbles, others don’t. The failure to recognize this is at the root of the intellectual bankruptcy of Helicopter Ben’s philosophy.

Posted by Rich | Report as abusive

WSJ: The Next Fannie

Aug 12, 2009 15:31 UTC

A must-read opinion from yesterday’s WSJ about the expansion of federal backing for home mortgages:

Only last week, Ginnie [Mae] announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.” Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007….

Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006.  Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.

The private mortgage lending business has collapsed, especially considering that most large private lenders now operate with a government guarantee.  This is bad news for existing homeowners and banks, who are very much invested in real estate, either directly or as collateral.  Home prices are a function of the credit that’s available to finance transactions.  No credit would mean much lower house prices, even from today’s “depressed” levels.  This, we’re told, is untenable.  If house prices are allowed to fall too far, the financial sector would quickly collapse and the economy would follow.

So the government is propping up prices by providing MORE financing than it did previously, as you can see in the explosion of FHA lending.  Unfortunately, these loans are of poor quality…

The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud.

The piece mentions a report from HUD’s Inspector General which noted the FHA doesn’t have the resources to handle the explosion in lending, that it’s putting the integrity of Ginnie Mae paper at risk.

On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a “Congressional appropriation intervention to make up the shortfall.”

Sound familiar?  Bad home loans are being made with taxpayer money, but because they are packaged in securities that themselves are explicitly guaranteed by the government, the lenders at the other end couldn’t care less.  So they keep lending money with no regard for risk.  How well did this work out with Fannie and Freddie?

In the wake of the mortgage meltdown, most private lenders have reverted to the traditional down payment rule of 10% or 20%. Housing experts agree that a high down payment is the best protection against default and foreclosure because it means the owner has something to lose by walking away. Meanwhile, at the FHA, the down payment requirement remains a mere 3.5%. Other policies—such as allowing the buyer to finance closing costs and use the homebuyer tax credit to cover costs—can drive the down payment to below 2%.

A tax planner e-mailed me a few weeks back, noting how many folks were re-filing last year’s tax returns to take advantage of the first-time home buyer tax credit.  With the help of an FHA loan, this allows them to put almost no money down to buy a house.

So expect high default rates to continue.  And expect taxpayers to write more very large checks to finance the losses.

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