http://www.chicagotribune.com/business/chi-0606270210jun27,1,7407568.story?coll=chi-business-hed

Buried in the happy talk here is the information that median prices are down in Chicago, and the YOY has been down for the last five months.

The “softness” of Chicago market sounds remarkably like the “softness” we are feeling in the West. I suspect that if you track sales:

http://www.chicagotribune.com/classified/realestate/transactions/transaction-search.jsp

You will find that things are adjusting faster than is generally reported. This is a great time to be sitting on the sidelines and letting the dust settle.

I added the “Moral Hazard” to the sidebar. There is a joke going around about the difference between Freddie Mac and Enron – The answer being that the Freddie Mac folks haven’t been convicted yet. I enjoyed it when I first heard it, but I worry that it will become tragically “unfunny.”

I have thought that for the most part the media has been awfully soft on this situation. In my mind, there is a big difference between “accounting error” (i.e.- missing a zero somewhere) and “accounting manipulation” (criminal behavior).

Oversight of Fannie Mae and Freddie Mac has been woefully inadequate for years. I wonder how big the can of worms must appear before Congress demands real accoutability.

Friday saw the posting of “Moral Hazard on Steroids” by Peter
Wallison, a lucid exploration of how some of the biggest mortgage
institutions have mismanaged interest rate risk. Mr. Wallison is the
team leader for The Housing GSEs Project at the neoconservative American Enterprise Institute.
He calls the present institutional stewardship of liquidity in the US
housing market “a classic example of privatizing profits while
socializing risk and loss.”

It is well to read this posting with critical attention, because the
neocons feel that Fannie Mae is a sort of Democrat party Enron.
Nevertheless, Mr. Wallison (White House counsel to President Ronald
Reagan around the time of the Iran Contra Affair) and his team have
produced many first rate studies on this issue for many years. Of
particular interest is a Wallison chaired February 3, 2005 roundtable discussion that yielded a unique insiders’ view of agency debt, the lifeblood of the US mortgage market.

Many formerly obscure parts of the housing market are becoming all too
clear. We do indeed “live in interesting times”.

regards, John

P.S. please discard the previous effort with the html error.

Friday saw the posting of “Moral Hazard on Steroids” by Peter Wallison, a lucid exploration of how some of the biggest mortgage institutions have mismanaged interest rate risk. Mr. Wallison is the team leader for The Housing GSEs Project at the neoconservative American Enterprise Institute. He calls the present institutional stewardship of liquidity in the US housing market “a classic example of privatizing profits while socializing risk and loss.”

It is well to read this posting with critical attention, because the neocons feel that Fannie Mae is a sort of Democrat party Enron. Nevertheless, Mr. Wallison (White House counsel to President Ronald Reagan around the time of the Iran Contra Affair) and his team have produced many first rate studies on this issue for many years. Of particular interest is a Wallison chaired February 3, 2005 roundtable discussion that yielded a unique insiders’ view of agency debt, the lifeblood of the US mortgage market.

I hope my experiment in HTML results in something other than mush. Many formerly obscure parts of the housing market are becoming all too clear. We do indeed “live in interesting times”.

regards, John

Thank you again.
Debi AKA Twist

About three and a half years ago, I became concerned about the soundness of mortgage financing in the US. The institutions that link the home owners to the ultimate investors seem to be making much more money than would be logical given their modest middle-man role. Since then, significant accounting scandals in the largest of these companies have resulted in there not being good financial numbers published over a period of years.

In particular, the robustness of the risk management for the largest players is unclear. Fannie Mae, the largest non-bank financial institution in the US, had to report new losses of about $11b last year, mostly having to do with derivatives contracts designed to hedge interest rate risk. A few analysts have also pointed out potential problems in the QSPE trust funds Fannie uses to manage pre-payment and default risk. Although the recent Rudman report suggested that only $0.6b new capital would be needed due to interpretations in accounting rule SFAS 140/156, this seems a bit low. The losses that will arise from ARM-reset driven defaults over the next while (aggravated by house prices falling and interest rates rising) have to go somewhere, and the rules are so complicated that assigning losses among QSPE counterparties may not be straightforward. More research in this area is urgently needed, because if the implicit guarantee on agency debt is called, much of the debt privatized by Freddie’s 1972 charter could come streaming back into the national debt figure. Not only could this have a negative effect on mortgage liquidity, it might even threaten the reserve status of the USD.

So your microeconomic research skills might be of use in assessing this macroeconomic effect. The large and small seem tangled in interesting ways in the present US housing finance system.

Yours truly, John McLeod, Halifax, Canada

Thank you for the post. I think the more “real world” posts we have, the better this site will be.

I must admit, I am not ready to rule out huge national fallout- there is no other point in time that we can look to with such a unique set of factors: (easy money, massive inventory, mounting debt) to compare the current situation to. In fact, the more I look at the global economy, and see the bubble markets of other nations, I realize the fallout could be global.

I have decided though,that rather than get involved in the “how big, how long, how deep” debate, I would try to focus on individuals. Selling a home is usually a personal experience. Even “investors” – which as you know from your own experience – generally are indivduals in real estate, not corporations. I am hoping that people will see that if their own small financial world comes crashing down, it is small consolation that the rest of the world is in better shape.