There may be a time for irony on housing bubble blogs, but this isn’t it. The news is filtering in [1] from Buncombe County in western North Carolina, and it’s pretty grim. David Kanis is a mortgage broker and branch manager of the local Ashford Mortgage Advisors brokerage. He writes a regular column for the Citizen-Times, and in today’s piece he gives us a clear-eyed view of how the entire non-conforming mortgage finance sector has essentially stopped working in and around Asheville. Last down were Jumbo mortgages, which seized up dramatically in mid-month.
As always, Doomers should follow the link above and read the whole article. David gives us a run-through on how liquidity has dried up for all mortgages except those acceptible to Fannie and Freddie. Here are some of the highlights (my emphasis; Aaron should note that David is citing IOM and also that he cut his teeth in the business in Atlanta).
The world of mortgage finance is in total turmoil. From late 2006 to the present, at least 129 U.S. lenders have sought bankruptcy protection or ceased operations. There is even a Web site, www.mortgageimplode.com, that lists firms that have gone out of business and ones on the ailing “watch list.”
So what happened? In the mid-’90s, private investors other than banks were allowed to begin subsidizing mortgages. This produced companies that were not as regulated as banks and did not have to write loans that “conformed” to Fannie Mae and Freddie Mac guidelines. They could package mortgages as private investments on Wall Street and sell them as performance bonds in the secondary markets. These investors could borrow in cheap currency like the Japanese yen and sell the mortgages with a much higher rate of return.
…The game recently ended when subprime mortgages backed by bonds turned to “junk” investments because of all the foreclosures occurring nationwide. This disaster, mostly in the subprime arena, has bled over and made investors skittish about Alt-A (think lesser documentation) loans. …
… On the week of Aug. 8, we in the mortgage business were quoting “jumbo” full documentation 30-year fixed rates at 6.5 percent. By the following Monday jumbo rates had escalated to 8 percent because of the lack of funds by these private investors who had fueled the “bubble.” Simply put: there is no liquidity for mortgages in the secondary markets at this time for “nonconforming” money.
… Now, if you take away the availability of products, raise down payment requirements, demand more documentation of income and increase the credit score requirements, you limit much of the population’s ability to qualify for a loan. Where does this leave us? Well, as Warrene Williams of Preferred Properties put it: “Now that all this has happened, no one can figure out how to put Humpty Dumpty back together again”!
OK Doomers, lets find the back of an envelope and think about some numbers.
A bit less than $110 billion of stock seems like an awfully thin reed on which to rest so much of America’s conforming mortgage market. One trick is that almost the entire (nearly) one and a half trillion dollars worth of retained mortgages are off-balance-sheet deals that have been sold. The big question then is: Who Are The Counterparties? A good guess would be that many are the same financial sector companies that have been playing with high-yield paper and are now on the retreat.
Now political pressure is building to lift the caps on the retained portfolio and also have the big-two GSEs buy up more non-conforming paper (Alt-A, etc.) What’s wrong with this picture? I submit that at some point in the last few weeks, F&F ceased being just "implicit," and they are now explicitly backed by the full faith and credit of America. Heck, they’re all that most of the RE market has left. Sorry Congress, but it’s time to start budgeting like agency debt was sovereign US debt. Because … as of August 2007 … it is.
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Notes and References
[1]: "Getting easy money for ‘nonconforming’ mortgage loans not so easy anymore", by David Kanis, Asheville Citizen-Times, August 26, 2007.
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The stock prices of FNMA and FHLMC do not reflect this implicit Federal backing. Or do they? In a Federal bailout it is likely that the stock of both companies would be wiped out. Thus the companies are a high risk for stock investors but a sure things for those that buy thier securities. Remember the securities (bundled mortages)are backed by each company and are still enjoying relatively low discount rates. In theory these securities would be very risky if it were not for the implicit Federal backing.
Tobby -
The equity markets see F&F as political footballs sacred to the Democratic Party, almost all of whose risk is political. FNM & FRE rose late last year simply on the result of the mid-term election. The bond markets think that too-big-to-fail applies irrevocably to F&F, and that abrogating the implicit guarantee on their senior debt is unthinkable.
All those attitudes are mad. With the best will in the world, Congress simply doesn’t have the wherewithal to stop the landslide if one of these babies wants to start downhill.
This is still why I don’t think we’ve hit near the bottom of the market yet. Large lenders with established products literally scrambling to find a way to preserve some liquidity.
What happens when the next announcement comes over what can’t be sold or won’t be bought? Few banks can hold their own loans and even if they did, that’d push a majority of buyers out of the market.
Aren’t these investors a$$holes. They only want to loan money to people who will pay them back!! Fear not. Congress will figure a way around that!!
I have noticed that lenders are not in any hurry to sell the foreclosures. Yet, the Fed is having to give them loans. Apparently there is something very negative about selling these properties at losses NO ONE EXPECTS. When this finally starts happening, you’ll need to bring a financial statement into a convenience store to buy a candy bar with cash.
Today I looked at a home on South Mountain. In thirty years of real estate I have never been in a worse home. There was not one functional room. Nevertheless, buyers purchased the home in January for $540,000 with little or no down. They are already GONE. I wonder which appraiser gave the green light on that one.
Take a look at all the financial Web sites. Everyone is concerned the slowing housing market will affect the economy. I guess we need to get it cranked up again so that every listed home in the United States will be over one million dollars. These jerks at the Fed got us in this mess and people are actually depending on them to get us out!!
This is getting scary because we are talking about the Next Great Depression. In real terms this is a much larger problem than the Great Depression because more people own homes than owned stocks in the 1920′s.
I had the same feeling, Sequoia. I had just finished reading a book on how to position oneself financially for a deflationary depression, and gosh, a lot of those signs reminiscent of the first Great Depression are revealing themselves now. Of course things are somewhat different now then in 1929, but I don’t know for better or for worse. Are we headed for deflation or hyperinflation? Or even stagflation would be my guess. Then, I step back and think that the author was foreshadowing disaster back in 2002. Yet, the housing bubble has buoyed the economy since then. How long can it last?
I don’t see anyway this global financial environment can’t lead to at least a recession, yet powers are intervening to prolong the inevitable. Money manipulation can only take us so far.
It’s gloomy, but the potential reality we’re facing now scares the heck out of me.