Housing Doom

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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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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Doom Transcripts: Index & Guide

Housing Doom is pleased to present a sixth 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.

This is the presentation by AEI’s Desmond Lachman.

Desmond Lachman: [1:08:20] Alex, thank-you very much again for organizing this conference at a 6-monthly interval.

I think one’s got to go through life counting one’s blessings, and one of the blessings that I’ve realized that I’ve got to count on now is that my name isn’t Tom Zimmerman, and that I come at the end of the presentation.

Because much of what is said, I really agree with. So I can walk through a presentation. I’ve entitled it "A False Dawn for the Housing Market?" [slide 1²]

In the interests of being optimistic I’ve put a question mark whereas I really meant putting an exclamation mark. [laughter]

Let me start just with the lessons that one can draw from this crisis, and I think that there are a whole bunch of lessons. We’re going to be writing books about this for many years to come, much like The Great Depression we’ll be looking through this crisis. And I very much agree with what both Nouriel and John have said, that one really needs to be paying attention to bubbles, that we’re just creating another bubble that is going to be bursting. But I think that there are just a whole bunch of other lessons to be learned.

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The Fed’s own MBS holdings slid by just $2.802 billion, while foreign central banks sold off a bit more MBS than that. Meanwhile, cenbanks bought a good amount of treasuries. Altogether a pretty ho-hum week on the US obligations front.

This week’s Reuters report¹ settled down significantly after last week’s excitement. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.² Here is Doom’s updated CSV version³ of the agencies and treasuries foreign central bank holdings data set.

The treasuries buy was a healthy $8.651 billion, but last week’s splurge had been over $20 billion higher.

Agencies have resumed their steady march down, dropping a significant $3.788 billion.

The net change of US obligations was just $4.863 billion. About twice that amount on a regular basis would be better.

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Doom Transcripts: Index & Guide

Housing Doom is pleased to present a second 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.

This is the presentation by UBS fixed income researcher Tom Zimmerman.  Tom’s the most moderate of AEI’s Six Bears but in my opinion the scariest, because he usually brings the hardest data to the table.

Tom Zimmerman: [0:11:43] Thanks a lot, Alex, it’s great to be here again. [slide 0²] What’s amazing about coming down here every 6 months is that I’m usually viewed as one of the more bearish people in my shop, and also when I speak at conferences around the country I’m usually sort of sitting on the bearish side of these discussions. But I come down here, [laughs] and I’m not … it’s a … I feel like I’m a raving bull about what’s going to happen in the world when you listen to some of these people talk. So anyway, that hasn’t changed, in the last 6 sessions, so …

We had lunch together today, and it’s exactly the same.

I see some green shoots here and there, but I think that it’s not something the other panelists see some real major problems down the road.

What I thought I’d do today is just continue some of the things I’ve talked about before in terms of the housing market, mortgage market. And then at the end talk about some of the lessons that we’ve learned from this bubble which isn’t over with yet, but we’ve learned some lessons or at least some take-aways from it.

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Doom Transcripts: Index & Guide

… It’s now [down] 40 percent as of the reports of the Moody’s index today. A peak to so-far for commercial property. And National Mortgage News had a nice article on this which they said this induces a strategy which might be described, they said, as "extend and pretend," but can also be described as "delay and pray." [no laughter]

Have a look at this preview of Alex’s slide #3 and you’ll see why Lingling at the WSJ has been spending so much time on CMBS stories lately.

Housing Doom is pleased to present a first 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.

This is the brief introductory presentation by moderator Alex Pollock.

Alex Pollock: [0:00:00] Good afternoon ladies and gentlemen. [slide 1²]

When in the course of financial events we have a huge bubble and the inevitable succeeding huge bust, a decent respect for the the opinions of mankind requires that we try to learn something useful from the painful experience. That’s the point of these deflating bubble series of AEI conferences, which you all have so kindly supported with your participation. So welcome to Deflating Bubble Roman numeral VI, "The Lessons of the Bubble and Crisis."

This conference, like its predecessors, is co-sponsored by AEI and by the Professional Risk Managers International Association, represented by Chris Whalen, who is here on the panel with us; and Chris, thank-you for your great partnership.

We have for you today our usual excellent and insightful panel, whom I will introduce in just a moment. But first, I’d like to try a brief setting of the stage for the current act of the intense financial drama which the bubble created.

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The Fed’s own MBS holdings rose by a relatively modest $13.878 billion, but this made the total Fed holdings of MBS larger than the total reported for foreign central banks, who recorded a very small reduction. Meanwhile after four weeks of quiet, and while the equity people were throwing a party over Dow 10k, the treasuries number surged by the 5th biggest amount ever. The amount of volatility in that number is becoming a little comical.

This week’s Reuters report¹ came in with a huge jolt to the treasuries number and the 3rd consecutive sub-billion move in agencies. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.² Here is Doom’s updated CSV version³ of the agencies and treasuries foreign central bank holdings data set.

The treasuries buy streaked up to a whopping $28.706, well up the table of Doom’s Top 10.

Agencies stalled completely, dropping a mere $0.070 billion.

The net change of US obligations was $28.636 billion, good enough to support US debt for a whole month, which is good because there hasn’t been much buying since the even bigger surge 5 weeks ago.

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Doom Transcripts: Index & Guide

Housing Doom is pleased to present a second selection from our under-construction transcript of the American Enterprise Institute’s October 9, 2009 event "No Way Out: Government Response to the Financial 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.

This is the Panel I  response to Vince Reinhart by Economist US economics editor Greg Ip.

Greg Ip: [0:31:42] … and thank-you Chris, [slide 1²] for turning on my microphone. [laughter]

Vincent’s paper that he asked me to comment on covers an amazing amount of ground, and so I can’t possibly comment with any intelligence on all of it. I’m not sure I can comment intelligently on any of it, but I’m going to try and tackle point number 4 in Vincent’s original list of factors, which was the role of international linkages in this crisis. [slide 2] Because, as he says in his own paper, most of the research so far has been narrow and focused inward to the United States, whereas one of the central mysteries or puzzles of this whole affair is how an initiating economic shock, which was essentially a decline in values of particular mortgages and real estate in the United States could wreak so much havoc around the world.

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Doom Transcripts: Index & Guide

Housing Doom is pleased to present a first selection from our under-construction transcript of the American Enterprise Institute’s October⁴ 9, 2009 event "No Way Out: Government Response to the Financial 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.

This is the Panel I  presentation by AEI’s  Vincent Reinhart.

Vincent Reinhart: [0:03:50] So I’d like to set the stage [slide 1²] for these guys’ conversation about what just happened to us, and what’s the way forward by asking 5 questions relevant to where we go from here. And those are [slide 2] …

1. Why are US households so undiversified?
2. How should we manage the crisis?
3. How should we deal with troubled financial institutions?
4. What has been the role of the international sector? and,
5. How should the Federal Reserve respond to asset prices?

And I’ll take those in turn.

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The boost in August capital flows to the U.S. appears to be driven by a stronger appetite for U.S. Treasury and agency debt. Also, Japan and the U.K. boosted their holdings of U.S. debt. Japan increased its holdings by $6.5 billion and the U.K. boosted its holdings by $5.9 billion. Still, some analysts say foreign demand for U.S. securities needs to be much stronger in order to offset downward pressure on the dollar. - WSJ⁴

UPDATE: The above was added mid-Friday.  Looking beyond August, you’ll note from the following charts that the strong foreign demand they’re talking about doesn’t seem to have materialized in the last couple of months, at least from official sources, except for the anomaly in the week Sept 10-16.

The Fed’s own MBS holdings leaped by $70.699 billion, but other than a return to billion dollar a day support for America’s debt markets, this week’s episode isn’t all that exciting. Funny the foreign central banks would choose to dip their toes into debt again while the Dow was on a tear.

This week’s Reuters report¹ documented a modest but healthy buy of treasuries, and a second consecutive positive sub-billion rise in agencies. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.² Here is Doom’s updated CSV version³ of the agencies and treasuries foreign central bank holdings data set.

The treasuries buy recovered this week, adding $7.148 billion after last week’s sub-billion selloff.

Agencies improved on last week’s even smaller result, nudging up $0.976 billion.

The net change of US obligations was a healthy $8.124 billion. That’s the first week in three to yield a significant increase.

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