Housing Doom

“The Fed is reminding the hyperventilating bond market that it needs to relax,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Inflation will be low for some time because the economic weakness will be with us for a time. They are not about to start to thinking about an exit strategy.” [1]

The above is an example of jawboning, the term a wonderful allusion to an Old Testament story. That, combined with an inability to actually do anything is what we at the Castle sometimes refer to as Ben’s state of Flexible Paralysis. Flexible, because when you’re immobilized you have the freedom to head-fake in any direction Notice, for example, that the Bloomberg story quoted above [1] features several obscure technical and mutually contradictory forecasts that serve different audiences. But doing that leads to the Two Constituencies Problem, and it’s why once a fiscal authority gets stuck on a number (like the present near-zero Fed target rate or the 6 month long maintenance of foreign central bank Agency Debt holdings within 1 percent of $810 billion) breaking either up or down from that number becomes a very serious business.

On the other hand, Brad sees cause for optimism [2] in the recent near-record growth in foreign central bank holdings of Treasury Debt, which is the climbing yellow line in the charts below. So it comes as a mild surprise that this week’s Reuters report [3] recorded very little net change in treasuries, along with almost none in agencies. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[4] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[5]

This week’s $1.890 billion net treasuries purchase is off more than 80 percent from last week’s figure, while agencies held their own with a sell-off of only $0.486 billion, cutting the size of last week’s modest dump by nearly 90 percent. The total increase of holdings was a mere $1.404 billion.

The agencies flatline continues to flirt with 6-month lows within the Tube of Bogosity.

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[43:00] … If we’re going to offer this new advantage to the homeowner, and allow him to borrow at today’s current market rates, but only because the government’s going to guarantee it, we should have full recourse to every borrower. [1]

Housing Doom is pleased to present an almost [12] complete unauthorized annotated transcript for the American Enterprise Institute’s disturbing [7] March 26, 2009 event "Can Elements of the Danish Mortgage System Fix Mortgage Securitization in the United States?" [1] The event site has a variety of resources including a summary and both an audio and a video of the proceedings. There is as yet no official transcript.

UPDATE 6/24: I’ve added a short summary and some comment here.

Peter Wallison [00:00]: We have a really interesting program today, and one [crosstalk] … That’s right. I’m sure you’re going to "tax" us up here.

We really have an interesting program today, and let me tell you how we’re going to work this. We’ll have a presentation by Alan Boyce about his plan, and then we’ll have each of the people on the panel here comment, and then some crosstalk in the panel, and then some questions from the audience.

So if things come up in the course of Alan’s presentation or elsewhere, please make a note so you’re able to ask some questions when the time comes.

I’ll start with a small introduction and then … I’ll introduce Alan, and then the members of the panel before they get started with their commentary.

Although members of Congress and the Obama Administration have sweeping ideas for how to regulate the US economy in the future, few of them, apparently have thought very deeply about how we finance mortgages. Yet at the root of the country’s current financial crisis is a dysfunctional mortgage system.

The central actors in that system are two bankrupt companies, Fannie and Freddie. And they are likely cost taxpayers $400 billion by the time all their losses are toted up, and their conservatorship brought to an end. Their lack of adequate regulation and their domination of housing finance were, more than any other factor, responsible for the financial crisis we now confront.

In light of this, one would think that, rather than planning to extend regulation to the farthest reaches of the financial system — regulation, incidentally, that has not worked, as we can see particularly well with the banking industry — policymakers would spend a little time thinking about how to reform a mortgage finance system that has obviously got major problems.

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Housing Doom is pleased to present the third installment of our unauthorized annotated transcript of the American Enterprise Institute’s March 17, 2009 seminar "The Deflating Bubble, Part V: Forecast and Policy Recommendations for the Next Six Months." [1] This is the presentation by Tom Zimmerman [scroll down]. The event site has several resources, including both an audio and a video recording of the 2 hour proceedings. There is a brief summary, but as yet no official transcript.

Zimmerman’s presentation makes use of a slide deck.[2]

Highlights

• … Because this does not get better as each time you turn around, what you thought was your worst case scenario turns out to be the average scenario. That’s the problem.
• What happens though is those loans that are in this pipeline, this delinctive pipeline, takes them 6 months, 9 months or a year to get through to the end where they come … on the market. So the real pressure in terms of the number of homes that end up in the marketplace and the pressure on the housing market is not going to come here, it’s going to come 6 months or a year later in here somewhere. ,,,
• ".. this, by the way is what’s killing real estate development firms, because they can’t roll … the terms to roll are basically liquidation terms, so they liquidate instead …" - Chris Whalen
• If you managed to really lie a lot on your first loan, and really are overburdened and cannot handle this, and you get your loan crammed down to your DTI — the interest rate down to the point where it’s only 31 percent, you’ve won.

back to AEI Subprime V transcript links

PREVIOUS: Lachman Presentation

Tom Zimmerman [24:26]: Hi, Good afternoon. [slide 0 -- refer to note [2] ] I’ll sort of pick up where Desmond left off … more on the housing market. But before I do that just real quickly in terms of a policy prescription …

As we sat here for the past 2 years every 6 months talking about this problem, none of us got it right 2 years ago. We thought … were all pretty bearish, but we had no concept of how bad it would be. My own personal experience in some of the securitized markets, whether it’s residential mortgage-backed securities [RMBS] or now commercial mortgaged-backed securities [CMBS], we always get it wrong. [25:00] And it’s always much, much, much worse than we anticipated.

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Brad and his merry band of readers at the CFR are having a lively discussion [1] on whether Chinese public opinion might turn against their government’s massive holdings of US debt. But meanwhile, this week’s Reuters report [2] documented a redoubling of the surge of foreign central banks into Treasury Debt. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[3] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[4]

Speaking of redoubling, the cenbanks’ large $15.757 billion treasuries buy was almost precisely twice last week’s figure. This was partly balanced by a modest $3.643 billion selloff in agencies, which sends the central banks’ Agency Debt holdings towards the lower range of their $810 billion plus-or-minus $7 billion Tube of Bogosity where that number has been living since the last day of 2008.

Two weeks ago Brad indulged in a bit of understatement [5] about the recent agencies anomaly.

The rise in Treasury holdings clearly no longer reflects a shift out of Agencies. Custodial holdings of Agencies have been flat recently.

Indeed, his 13-week change graph immediately following that quote clearly shows there were periods of stagnant Agency Debt holdings levels in late 2002 and 2004, but never immediately following such a historic bout of volatility. Frankly, this situation reeks. If the levels hold for 4 more weeks and we see a resumption of the late ‘08 downward trend starting with the July 8th number it would be just about an advertisement that someone contracted to keep the red line flat for the first half of ‘09.

Twist sends a link that makes this situation sound even weirder.  Yesterday the Fed was riding the Agency Debt market like it was a bucking bronco.[6] The flat cenbank number makes less sense every week.  Could the Federal Reserve itself be a "Foreign Central Bank?"

Well maybe not.  Twist thinks that a simpler explanation is that it’s not a foreign bank behaving oddly but the Fed lending them the money to do something they wouldn’t ordinarily consider. She points at this mid-February speech [7] where Ben himself seems to be hinting at wheels within wheels.

Because interbank markets are global in scope, the Federal Reserve has also approved temporary bilateral liquidity agreements with 14 foreign central banks. These so-called currency swap facilities have allowed these central banks to acquire dollars from the Federal Reserve that they may lend to financial institutions in their own jurisdictions. The purpose of these swaps is to ease conditions in dollar funding markets globally. …

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Housing Doom is pleased to present the second installment of our unauthorized annotated transcript of the American Enterprise Institute’s March 17, 2009 seminar "The Deflating Bubble, Part V: Forecast and Policy Recommendations for the Next Six Months." [1] This is the presentation by AEI Fellow Desmond Lachman. The event site has several resources, including both an audio and a video recording of the 2 hour proceedings. There is a brief summary, but as yet no official transcript.

Lachman’s presentation makes use of a slide deck.[2] He also contributed a copy of some recent Congressional testimony he gave [3] on these issues to the event site.

Highlights

• … And what they missed was that housing is a major component of household wealth, and the second point that they missed was that it’s a very important part of the balance sheets of banks. There’s a $10 trillion loan market, and if you get impairment on that, that can really cause real problems.
• … we look like you’ve got something like a million homes too many sitting there vacant, weighing down on the market.
• To be sure, the government has done something that I think is positive in a way, but my view is it doesn’t go far enough, because what it doesn’t do is it doesn’t deal with, for instance, the negative equity problem, …
• … it escapes me why, when we need the fiscal stimulus right now, more than half of it is back-loaded to 2010 to 2011.

back to AEI Subprime V transcript links

PREVIOUS: Pollock Introduction

Desmond Lachman [10:14]: Thank-you very much Alex. [slide 1 -- refer to the slide deck at note [2]] Thank-you for arranging this. I’m always struck by you foresight, having done this 2 years ago, to pick up that this was going to be the key topic, and you’ve done well this afternoon to start with Ireland.

There’s a joke circulating on Wall Street … Iceland, of course you know, had a huge financial crisis, and there’s a joke circulating now on Wall Street about what the difference might be between Ireland and Iceland. And the answer is: One consonant and six months. [laughter] So Ireland is one of the few places that causes me to be optimistic about the United States economy.

When we gathered last time I think that it was very clear-cut where the housing market was going to go. It was quite unambiguous, everything was pointing in a very negative direction. I think now, 6 months later, you can see that there are certain signs of improvement that one really wants to make note of, and that does indicate that this is going to pass like everything else. Maybe not in 2009, but you could see a bottoming sometime in the middle of 2010.

So there is some good news. The trouble in my view is that the bad news really dominates. And the bad news of course is the state of the United States economy, where we’re heading. And with a bad economy, one really can’t expect the housing market to be vigorous and rebound in any rapid or quick way.

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If there’s a technical term for what we’re presently seeing in this story arc it’s The Fog of Battle.[1] One thing is becoming clearer, though. Brad has found [2] that foreign central banks are increasingly at the short end of treasuries. That means if the yellow line ever starts to reverse, they’re mostly poised to get out of Dodge quite rapidly. This week’s Reuters report [3] waxed strangely poetic over the fact that foreign central banks are still buying Treasury Debt at all. Never mind that this week’s figure was down by nearly 2/3rds from last week’s. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[4] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[5]

Central banks still did manage to buy a half-way respectable $7.940 billion in treasuries, but dumped a modest $3.504 billion in agencies. In the week, they were well below the billion-a-day+ uptake needed to support the US stimulus. Perhaps just a "breather" from the last couple of huge weekly buys.

The red line is getting silly. The net move so far this year for cenbank holdings of Agency Debt is the size of a typical Yonkers NY strip mall. Agencies are down a microscopic $8 million since Dec 31st. If somebody’s been contracted to offset the actual foreign selling of agencies, they’d better put some variance into their counter-buys. Five months of perfectly flat results aren’t going to fool anyone.

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If this were a fireworks display, I’d sure be suspecting we’re near the climax. This week’s Reuters report [1] delivered a second consecutive Top Ten weekly rise in foreign central bank Treasury Debt holdings. 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 version of the agencies and treasuries foreign central bank holdings data set.[3]

Central banks bought a significant $21.581 billion dollars worth of Treasury Debt which, combined with last week’s huge move, puts the consecutive two-week total over $50 billion dollars, an unprecedented result. However, Agency Debt holdings increased by a meager $0.493 billion.

The graph of treasuries continues to streak upward, with the red agencies line starting to struggle up marginally.

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On Wednesday Nouriel Roubini posted a NYT Op-Ed [1] predicting that the US dollar was in danger of losing its world reserve currency status to the Chinese Renminbi. On the other hand, Brad Setser noted later that evening [2] that for the present foreign central banks seem to have a hearty appetite for T-Bills, regardless of what they’ve been saying about them. [UPDATE: Setser's response to Roubini [7] is now up.] I outlined my concerns about the constant agencies holdings value we’ve been following here in a comment under that second article, and Brad was kind enough to address that in a reply comment as follows:

May 14th, 2009 at 3:13 pm
bsetser responds:

John — Russia was a big seller, but it cannot sell more than it has, and it no longer has any agencies. Chinese sales seem to have slowed a bit (or Chinese sales are offset by someone else buying). I suspect that other central banks were comforted by the fed’s purchases — they know the us isn’t gonna default on something the fed holds a lot of. Signalling. And a dem congress and dem president aren’t hostile to the agencies in the way the Rs are, so there might be more confidence there as well.

And later twist contributed this find [3] that suggests a bubble forming in T-bill yields. Obviously the situation is still volatile.

Or volcanic. This week’s Reuters report [4] documented the 2nd largest increase in Treasury Debt holdings by foreign central banks recorded since the Feb 2000 start of this data set. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[5] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[6]

Central banks bought a huge $29.341 billion dollars worth of Treasury Debt, eclipsing the old second place figure, that you can see is only four weeks old. They also tucked into a hearty $5.393 billion of new Agency Debt.

The graph of treasuries is now starting to climb a wall again, while after 20 flat weeks the agencies line may be bending up just a bit.

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“This is a problem, …” [1]

Yes I have retired from posting on Doom, at least from contributing opinions, but there’s a potted series of articles or two that still require cycling once in a while. In the course of updating our H.4.1 series I don’t intend to do more than present the numbers (most of the real work is twist’s anyway  — and thanks for your continuing support all these months ) and point to the occasional interesting article like the above, which reports an uptick in T-bill yields.

UPDATE: charts now inserted, thanks twist

This week’s Reuters report [2] recorded a resurgent appetite for treasuries and a slight increase in agencies holdings. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[3] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[4]

Central banks bought a robust $12.983 billion dollars worth of Treasury Debt, but took on just $0.872 billion in new Agency Debt.

The graph of treasuries had been flat for just two weeks and is now ticking up, while the agencies line has now been going sideways for 19 weeks.

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The change to two accounting rules known as FAS 140 and FIN 46R would affect trillions of dollars in off-balance-sheet assets at banks and financial companies.

The FASB voted last year to eliminate a concept known as the "qualifying special-purpose entity," or QSPE, that banks used to keep assets like mortgage-backed securities and special investment vehicles off their books. [1]

Doomers who’ve been with us for a while will recall that FAS 140 has been my principle blogging concern since my first day with Doom. That great wave of balance sheet consolidation you are now seeing on the horizon is a big deal for this series of posts because the MBS that ultimately makes up much of Agency Debt has traditionally lived off-balance-sheet. Even with their present status as nearly-nationalized, Fannie Mae and Freddie Mac are going to feel this big-time.

Well, after complete pandemonium locally, nationally and internationally on both the financial and real life fronts, it was a bit eerie to read this week’s Reuters report [2] and find the numbers dead quiet for a second consecutive week. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[3] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[4]

Central banks sold off $1.241 billion of treasuries last week, which was just a quarter of the previous week’s modest purge, and they bought $1.523 billion in agencies, a bit more than half of last week’s figure. Total US obligations held by the cenbanks moved up by barely more than a billion dollars over the last two weeks.

The rising graph of treasuries has been flat for just two weeks, but the agencies have been almost perfectly horizontal now for 18.

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