Housing Doom

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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Final risk. The increasing asset prices we’ve seen since March for everything: global equities; in US, equities; EM [emerging market] asset classes; commodity; credit; everything around the world is driven by one factor.

Doom Transcripts: Index & Guide

The penultimate risk was merely the prospect of World War III breaking out.  Fortunately Nouriel was running overtime so Alex had to cut him short just before he got to the scary bit

UPDATE (11/6): Here’s Nouriel’s Nov 4th expansion on the idea

Housing Doom is pleased to present a fourth 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.

Dr. Doom was batting cleanup …

Nouriel Roubini: [0:37:03] OK. Tom spoke about housing and mortgages. What Chris spoke about — the banks. So I’ll try to speak about the economy and what’s going to happen to the economy looking ahead.

We’ve had the most severe recession and financial crisis since the Great Depression. Given the monetary and fiscal stimulus and the backstopping of the financial system now we’re close to the bottom, at least on a temporary basis.

And now the debate is, of course, on what’s going to happen — the shape of the recovery. Given what has happened in the markets I would say the markets are pricing now a V-shaped recovery with rapid return to potential growth, and that’s even what the macro forecasters’ consensus is.

There is a second view, which is the one I share, is that this recovery is going to be at best an anaemic, subpar, below trend, with growth well below trend for the next couple of years, much as in the US, but also in advanced economies. So more like a U-shaped recovery. That’s also the view of the IMF and the one of those folks at PIMCO who are talking about A New Normal.

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Doom Transcripts: Index & Guide

Housing Doom is pleased to present a third 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 IRA co-founder Chris Whalen.  I see Nouriel on deck, but this one’s going to be a tough act to follow.

So this is what the commenters at Calculated Risk have been going on about …

Chris Whalen: [0:27:02] I’m going to talk a little bit about the industry because we’re in the middle of earnings season, and I apologize for not preparing something, but I’ve been reading bank earnings statements, so I will share some of my impressions of that. And then I want to talk a little bit about not only lessons, but some of the enduring trends that I see that have not been affected by the extensive bailout that the government has put together for our largest financial institutions.

In general, when you look at the industry you have to recall the words of Mr. Feinberg, and I don’t mean the guy who was in the newspaper today, I mean my friend Bob Feinberg in the back of the room, who predicted several years ago in an interview we published that the GSE would become the business model of choice for the United States.

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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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Harold Brubaker of the Philadelphia Inquirer wrote this morning about the bankruptcy of Capmark Financial Group and how it tells us a lot about the future of commercial real estate:

Capmark Financial Group Inc.’s weekend bankruptcy filing surprised no one, but it was still a harsh reminder of the hard times ahead in the commercial real estate industry.

"It’s not a turning point. The problems are only starting," Dennis Yeskey, a senior adviser at AlixPartners L.L.P., a business-advisory firm in New York, said yesterday.

Yeskey and other experts warned that as long as the economy keeps shedding jobs, the commercial real estate market will be plagued by declining demand and falling property prices.

In its Chapter 11 bankruptcy filing Sunday, the commercial-property lender listed assets of $20.1 billion and debts of $21 billion.

What happened to Capmark?

[It] relied heavily on selling loans it had made into the secondary market. When that froze and property values fell, the company got stuck owing more to its own lenders than its loans were worth.

"It’s a template that you will see multiply itself many times over over the next three years," said Matthew McManus, chairman of NAI BlueStone Real Estate Capital, a real estate investment bank in Philadelphia.

Why will we be seeing more problems?

The problem for the industry is that between now and 2013, more than $2 trillion in commercial mortgages, which typically have a five- to 10-year term, will need to be refinanced, according to a July report by Richard Parkus, head of commercial mortgage-backed securities at Deutsche Bank AG. It is not turmoil in the capital markets that is causing the bottleneck, but rather the fact that properties are not worth enough to retire the old debt in a refinancing, Parkus said.

The value of commercial properties has fallen 40 percent from their peak in October 2007 through August, according the Moodys/REAL Commercial Property Price Index.

But we’ve been told that the smaller banks that did the commercial loans were in better shape than the big guys, right?

Regulators expect closures to ripple through hundreds of small banks over the next couple of years, especially in the Midwest and Southeast, where lenders have been hard hit by the recession.

These banks loaded their balance sheets with loans to home builders and other property developers to make up for lost business in credit card and mortgage lending that bigger competitors wrested away. They eased their lending standards during the boom years and made big bets on new housing developments, strip malls and office projects. Now, many of those deals are falling apart, and the lenders are scrambling to raise capital to cushion the losses.

“These banks were big enough that they could do loans that were fairly sizable,” said John R. Chrin, a former investment banker who is now an executive in residence at Lehigh University. “If they go bad, they are toast.”

Burned toast.

Doom Transcripts: Index & Guide

Housing Doom is pleased to present a fourth 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 Tudor Investment Corporation’s Angel Ubide.

Angel Ubide: [1:02:45] I think Vincent forgot to mention at the beginning of his presentation of something he says in his introduction. That is, the narrative of this crisis will be the most permanent impact over the global economy, above and beyond the very sharp recession we have suffered, and the increasing unemployment, and everything else. Because it is those narratives that then will define the policy reaction to it and the way the markets and the economies will operate over the next — probably decades.

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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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In it’s attempt to stabilize the housing market, there is an 800 pound gorilla in the room that government is not adequately addressing. What is not being addressed is the answer to this question:  "What should be our priority? Do we want to fill empty houses with "homeowners" or keep people in their homes?" It is critical to answer this question because we cannot do both.

There are estimates that there is a shadow inventory of seven million units out there- that’s a lot of homes to fill.  During the boom the housing industry cranked out  more than enough homes for all the credit worthy buyers- and more than enough for those that weren’t.  Now a poor economy has hurt the incomes and net worth of many Americans- limiting the pool of credit worthy buyers still further. 

The government has a stated goal of wanting to stabilize home prices, and that can’t be done with a massive supply on the market.  Government backed lending has basically taken over the mortgage market in by providing easier [therefore riskier] loans than private lenders are willing to provide. As Federal Reserve chairman Ben Bernanke said yesterday:

[I]t is true that the FHA de facto has replaced … the riskier part of the mortgage market. It’s got a very high share now of new mortgages because it’s the only source of mortgages where down payments can be less than basically 20%. And so it is providing mortgage access to a large number of people who could not otherwise buy homes.

There’s a price to be paid for getting all those people into homes though- they can’t seem to hold onto them.  According to the Mortgage Banker’s Association:

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There are some who think it’s time for the central bank to exit the market. Others say such an abrupt end would undo the Fed’s efforts to keep mortgage rates low and instead suggest a gradual wind down of its purchases and an extension of the program into the early months of next year. - Nasdaq¹

A year ago last Friday, exactly 7 years and 7 days after 9/11, the US became a command economy.

Now, in a "fit of absent-mindedness," key agencies of American financial policy find themselves with side-businesses as Soviet-era economic secretariats, and they don’t quite know what to do about it.

Starting from zero eight and a half months ago, the Federal Reserve Board has gorged on $685 billion worth of mortgage-backed securities, making "the Fred" America’s dominant player in residential real estate.

Meanwhile, thanks to the 9/11 ‘09 collapse of Corus, the Federal Deposit Insurance Agency has suddenly been propelled into a leading role in commercial RE.

Dow Jones is covering both aspects of the story, framing it as an effort to return to capitalist business-as-usual, but Murdoch’s deploying his bigger guns² against the commercial side, as Ms Bair prepares to impersonate Jesse Jones, hopefully without "discovering" prices for strip malls in the Ghost Towns in the desert around Las Vegas that will send CMBS asset prices (and the holders of such assets) straight into the tank.

The Corus transaction is being structured as a partnership between the agency and winning bidder. The FDIC will hold a 60% stake and provide financing, according to people familiar with the matter. While seven other FDIC deals since 2008 have had similar partnership structures, the Corus deal is by far the largest. A similar arrangement was made in last week’s sale of $1.3 billion in residential mortgages to a venture between the FDIC and Residential Credit Solutions Inc., these people said.

The public-private partnership structure is modeled on about 70 such deals pioneered by Resolution Trust Corp., a federal agency formed to clean up the savings-and-loan mess of the late 1980s and early 1990s. Rising property values in the mid- and late-1990s enabled the RTC to reduce taxpayer losses.

Still, the partnerships expose the U.S. to more financial risk than it might face by selling assets completely to private investors. The Corus auction also is complicated by an oversupply of condos in some of the same states where Corus concentrated its lending, such as Florida, California and Nevada.

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