Housing Doom

Well I think at some point we’re going to have a government in power that’s going to make a choice between the American people and our creditors, who are predominantly foreign. And I think that choice will involve letting the dollar depreciate. I don’t think we’ll ever actually repudiate our debts, as long as we can print more dollars. But I think that’s the fundamental political issue that faces our entire society … - Chris Whalen

Doom Transcripts: Index & Guide

Housing Doom is pleased to present a eighth and final selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

The lively Question and Answer session that closed the conference featured everything from Roubini’s lurid medium term scenarios to Zimmernan’s surprising advice that Re-remics, along with just about any other recent real estate securitizations, are perfectly safe to buy.

Alex Pollock: [1:31:26] Let me come to our questions. We’re going to, we have microphones, a microphone in the back. Please remember how this works. Wait for the microphone, please tell us your name and your affiliation, and then ask your question. For those of you who may feel the urge to make an assertion in addition to your question, may I ask you to keep your assertion short and to the point, otherwise I’ll feel compelled to ask you to come to your question. … I have a hand way in the back, here. … Oh, it’s Bert [laughs] …

Bert Ely: I was hiding on you, Alex. Bert Ely, banking consultant. A suggestion and a question. In terms of describing the kind of recovery you have, let me offer another suggestion to you that I’ve been using. I call it a washboard recovery. Slow and very bumpy over the next few years.

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To that end, FHFA has informed Fannie Mae that a possible transfer of a portion of its LIHTC investments to unrelated third-party investors is consistent with FHFA’s ongoing efforts to conserve Enterprise assets and with the Enterprise’s multifamily housing mission. … FHFA Acting Director Edward J. DeMarco, November 5, 2009¹

Many thanks to twist for data-mining that gem from the dark recesses of the DC bureaucracy. So in all the turbulence going around, the most urgent crisis facing America is …

• Swine Flu? not even in the top 10
• Recession? OVER! OVER! OVER!
• CMBS Tsunami? way out in the offing, won’t hit for weeks
• Looming Shortage of "Dow 10K" Party Hats? not even that …

America’s most urgent crisis is the fallout from October 23, 2008, when DeMarco’s predecessor Jim Lockhart testified in Congress and mentioned the word explicit.²

Once a week³ ever since, the OMB’s most consistently optimistic analyst (let’s just call him "Phineas Q. Pangloss") has come back from a long lunch, taken a deep breath, and circulated a research note to the effect that …

… Yeah sure guys, no problem. Treasury can cut off their support⁴ to the GSEs any time they want to. And holders of Agency Debt would be, like, totally cool with the resulting haircut. After all, every piece of senior debt ever issued by Freddie, Fannie and the gang came stamped with a nice big notice that "This Ain’t No Sovereign Obligation of No USA!"

And the reason this happens every week without fail is that should the OMB ever come to the same conclusion as Mr. Market (that there’s no way in Hell that Geithner’s ever going to throw the agencies holders under the bus) they would have no choice but to immediately double the nominal value of the US National Debt.

But there’s one small problem. Fannie & Freddie are being used as a couple of cudgels to beat back the housing recession, and so their balance sheets are swelling by the day with more and more toxic MBS. Profitable? Probably never as they’re situated, but if the farce of conservatorship ends and they revert to the pre-1968 world where Fannie was an actual Federal Government department like Ginnie, you trigger the above disaster.

Enter LIHTC. If Fannie requests another $15 billion (like they did yesterday) too often, even Pangloss will have to recognize the evident truth that

1. Fannie’s a basket case; and,
2. Treasury is their explicitly dependable sugar daddy.

So the GSEs and their regulator, the FHFA, are going to use every trick they can think of to keep up the pretense that the Enterprises are going concerns.

Now LIHTC is tax-reduction credits, many $billions worth, but Fannie isn’t going to have a bit of taxable income for many, many years. So to achieve a benefit for its own balance sheet, they have to find someone else with $billions of fresh profit who will buy the credits at a discount so they can reduce their taxes. Hello, Goldman⁵ and Mr. Buffett.⁶

But in real life, Fannie and the US Treasury are two pockets on the same pair of pants. The net effect of this exploit would be to give a direct government gift of billions of dollars to some of America’s most flush companies so that Fannie can put off for a couple of months formally going back to Geithner for their next infusion of cash. What’s Wrong with This Picture?

So at any rate, Doomers will I’m sure be ecstatic at the heart-warming news that response-times to aid the needy have reduced considerably since Katrina. Guy Fawkes’ fireworks have barely cooled down and already WSJ⁷ is reporting FHFA approval for selling $2.6 billion-worth of the credits to unnamed, but surely deserving counterparties. Would that FEMA could start dropping relief packages as expeditiously.

UPDATE: The plot thickens.¹¹

If you were curious about the recent news regarding Goldman Sachs’ (GS) and Warren Buffett’s (BRK.A) interest in acquiring the tax losses of Fannie Mae (FNM), the details are in Fannie’s 10-Q.

This deal was agreed to and inked a month ago. It is still pending approval. So the information that was first reported by Bloomberg was a deliberate plant. A possible objective would have been to get a decision on the transaction before yesterday’s release. Note that the Q provides an update of the deal’s status as of November 5. Someone was waiting to edit this section right up to the last minute. A tad unusual.

……………………..

Further (Friday PM late): This¹² just in from the WSJ.

The U.S. Treasury blocked Fannie Mae’s proposed sale of nearly $3 billion in low-income housing tax credits to Goldman Sachs Group Inc. and Berkshire Hathaway Inc. on Friday after concluding that the deal was too costly for taxpayers.
…

But Treasury Department officials blocked the deal after concluding that it would have resulted in a loss of tax revenues greater than the savings to the federal government had it allowed the sale. "In short, withholding approval of the proposed sale affords more protection of the taxpayers than does providing approval," an administration official said in a statement.
…

Approving the deal could have also furthered a perception that policy makers have taken steps that have favored Goldman ahead of other banks at a time when populist sentiment against Wall Street has surged.

But since the debt that finances things like that is still regarded as the world’s safest investment, foreign central banks are eager to buy the stuff. While The Fed’s own MBS holdings rose a trivial $0.328 billion, and the cenbanks’ agencies not much more than that, their Treasury Debt buy was more than healthy, according to this week’s Reuters report⁸. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.⁹ Here is Doom’s updated CSV version¹⁰ of the agencies and treasuries foreign central bank holdings data set.

The treasuries buy was a lusty $18.159 billion, more than doubling last week’s figure.

Agencies were back in positive territory, but only added $0.758 billion.

The net change of US obligations was an excellent $18.917 billion, well over $2 billion a day.

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I’m not sure what to make of Fannie’s new "Deed for Lease" program: [Thanks Coffee!]

WASHINGTON, Nov. 5 /PRNewswire-FirstCall/ — Fannie Mae (NYSE: FNM) is implementing the Deed for Lease(TM) Program under which qualifying homeowners facing foreclosure will be able to remain in their homes by signing a lease in connection with the voluntary transfer of the property deed back to the lender.

 

"The Deed for Lease Program provides an additional option for qualifying homeowners who are facing foreclosure and are not eligible for modifications," said Jay Ryan, Vice President of Fannie Mae. "This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities."

 

The new program is designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under Deed for Lease, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at a market rate.

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In the ongoing debate about whether one should walk away from an underwater mortgage or not, one University of Arizona professor speaks out strongly in favor of taking a hike. According to Brent T. White, an associate professor of law at the University of Arizona:

A failure to grasp the true economics of the situation is holding back many Americans whose home values have dropped far below the amount they owe and who would be better off renting, Mr. White says. Fear, shame and guilt also are preventing rational decisions, he believes. And, he says, those “emotional constraints” are encouraged by politicians and bankers, who ruthlessly and amorally follow their own economic interests while telling Joe Soggy Homeowner he has a moral duty to pay his debt so long as he possibly can.

I was sent the above article by Doom friend M.R., and highly recommend reading the comments section.  There are a number of intelligent comments taking up both sides of the walking debate.  The article discusses White’s paper Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.

White says that he is not amazed by the number of folks walking away from their mortgage- he’s amazed by the number that don’t.  He repeatedly refers to walkers as "rational homeowners".  We often hear how you might as well hang on and sit tight- markets are cyclical and values will come back in a few years.  Besides, you don’t want a black mark on your credit rating.  Here’s why White refers to walkers as "rational" though:

White gives the hypothetical situation of "Sam and Chris".  Sam and Chris purchased a typical home in Salinas, CA for $585K in January 2006.  They have a monthly payment of $4,300/mo., slightly less than 31% of their income.  The couple just break even every month.

Unfortunately for Sam and Chris, the housing market began to collapse in 2007. Though they still owe about $560,000 on their home, it is now only worth $187,000. A similar house around the corner from Sam and Chris recently listed for $179,000, which, with a modest 5% down, would translate to a total monthly payment of less than $1200 per month – as compared to the $4300 that they currently pay. They could rent a similar house in the neighborhood for about $1000.

Assuming they intend to stay in their home ten years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1700 on rent verses mortgage payments, even after factoring in the mortgage interest tax reduction. The financial gain for Sam and Chris from walking away would be even more substantial if they took their monthly savings and put it into an investment account. If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity – assuming, of course, that they live that long, the market in Salinas has indeed hit bottom, and their home appreciates at the historical appreciation rate of 3.5%.

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“The injunction of Jesus to love others as ourselves is an endorsement of self-interest,” Goldman’s Griffiths said Oct. 20, his voice echoing around the gold-mosaic walls of St. Paul’s Cathedral, whose 365-feet-high dome towers over the City, London’s financial district. “We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all.”  Bloomberg¹

Thank goodness for Tatjana’s 17th Century English Lit course.  The last few months would have made no sense at all if I hadn’t decided to make a close study of Donne’s sermons and Laud’s adventures in Xtreme Interior Decoration.

As it stands, I can just sort of work my way through the section on  "The Growth of Individualism" in Tawney’s 1922 Religion and the Rise of Capitalism and treat the whole affair as a kind of cosmic joke.

When the banking lobbyists marched up the Hill on September 18, 2008 and seized control of the economy it was the perfectly symmetrical event to the fall of Soviet Communism.  We’re now enjoying (on a compressed time frame) the same post-collapse rise of oligarchs that Russia experienced in the late ’90s.  Perhaps if Putin’s not too busy pulling the strings back home, Larry could sign him on as a consultant.  Obama’s got a serious problem if he lets these guys strut around unhindered.

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Fraud might be rampant in the program, but that didn’t stop the Senate from voting 85-2 in favor of extending the home buyer tax credit.  Why is it that the Senate is so willing to extend this expensive program?  Here’s an example from Savannah, GA as to how the credit is affecting the market:

The housing credit’s impact is particularly pronounced in the Savannah area.

The number of first-time buyers locally is unavailable, but pricing and loan trends indicate they could make up more than 40 percent of the market.

Homes priced under $200,000 have outsold those priced above that number by almost a 2-to-1 margin this year, with homes sold for $100,000 to $149,999 - "starter homes" - outpacing all others.

And almost half of the houses financed locally this year were done with loans backed by the Federal Housing Administration or the Veterans Administration, which cater to first-time buyers.

And how would allowing the credit to expire affect the market?

A drop in local building permit applications in September offered a glimpse of what a creditless future could look like. Permits tripled in Chatham County during the summer months as builders began construction on homes that could be completed in time to be bought and occupied ahead of the Nov. 30 tax credit deadline.

Permit numbers dropped drastically in August and September, a trend the head of the local homebuilders association, Matthew Young, said reflected the industry’s wait-and-see approach to the post-tax credit market.

"If they don’t extend" the credit, Young said, "they will wait and see what sales are like after that."

Here’s a great chart from Business Insider that shows how this credit has skewed the market in favor of first time homebuyers:

 So how critical is the home buyer tax credit?

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It’s election day, and I’ve decided to try being a poll worker this year.  I’ll be at the polls until closing, so if anything looks interesting, please leave a comment and let us know.  Consider this an open thread.

So, you know, there’s nothing for safety and soundness like a comfortable oligopoly. We might think about that and … we’re planning, for those of you who are interested, a conference, coming up in a few months, contrasting the Canadian house finance and financial system with the American system. So there’s a little advert — little preview.

Doom Transcripts: Index & Guide

Well, that certainly got my attention

Housing Doom is pleased to present a seventh selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

Most of AEI’s "team bear" participated in a brief but lively discussion after the presentations.

Alex Pollock: [1:21:56] Thank-you, Desmond.  Having heard five really interesting presentations, let me give the panelists, if they want, a chance to add something, or react to the others.  Nouriel?

Nouriel Roubini: Just a comment on the last point that Desmond made. In this crisis, regulated banks got in trouble, but also a lot of non-regulated financial institutions — were broker/dealers like Bear and when bust. And so in some sense, suppose we go back to Glass-Steagall and not against it? What does it rule out? And then you’re going to have a bunch of broker/dealers or non-bank Shadow Banks that are going to become too big to fail. They’re going to do crazy things and eventually we’ll have to bail them out.

So do we need to really go back to Glass-Steagall? Or we need to break up every financial institution and make it so small that it can fail and who cares? And we don’t have to bail them out. What’s the appropriate policy choice on that? And I think that’s an open question for everybody else on the panel.

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Clorox Co.’s earnings rose 23% for its fiscal first quarter on improved profit margins and increased sales of disinfecting products caused in part by concerns over the H1N1 flu virus. - WSJ¹

Talk about creative destruction, looks like these guys are gonna lead us on to permanent prosperity

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This tongue-in-cheek solution for reviving housing sounds as likely as any of the other schemes out there:

Now that we have a new (and improved) tax credit of $6500 rolling through Congress to the "move up" buyers we’ll see if government can incentivize that class to start daytrading homes as well.  The only issue is so many of them are underwater on their homes, it is sort of difficult to buy a new house (even with government handing free money out) when you still have to deal with that unfortunate investment you made in your old one.  

Unless, a new national fraud is institutionalized - that is (1) buy the new house with the taxpayer’s money & "super cool FHA mortgages", and (2) then walk away from the old house / mortgage, once the new one is secured.  You take a hit on your credit report but oh well - you have a new house, at a much cheaper price, and the taxpayer can deal with the mess.  In about 5 years you are good to go as the default moves to the bottom of your credit report, and within 7 years…. all gone.  Let’s see if we start hearing of rampant examples of this "strategy" by next spring.

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