Housing Doom

So what happens when government steps in to revitalize neighborhoods and make more people homeowners? Sometimes neighborhoods are hurt and homeowners go into foreclosure. Example number one is from Buffalo, NY where the city decided to subsidize new homes:

"Foreclosures weakened the effort, but overall, not all the housing that was put up was well thought out," said Michael K. Clarke, head of the Buffalo office for Local Initiatives Support Corp., a nonprofit agency that promotes community development. "There was insufficient coordination with the need for rental housing, and not enough emphasis on target areas that might demonstrate a more stable return. You can't sell new homes next to vacant ones, or sell houses to people who only qualify for financing by the skin of their teeth, and expect to have much success."

 

"We played musical houses with the housing in Buffalo," added Joseph E. Ryan, the former strategic planning director under former Mayor Anthony M. Masiello. "We have more houses than we need. People are coming from existing neighborhoods. It's not like they've been coming from out of town. It helps to destabilize neighborhoods."

It's not only communities that are hurt, but the taxpayers that end up paying for these mistakes: [Thanks John!]

Home ownership in the United States ranks up there with motherhood and apple pie. The government has championed it for decades through tax breaks, mortgage guarantees and, most recently, the herculean task of keeping Americans in their homes after the housing market collapse. But government subsidies of the American Dream also have a darker side: when things head south, taxpayers end up stuck with the costs.

The government-run mortgage finance agencies Fannie Mae and Freddie Mac owned more than 131,000 properties between them at the end of 2009, according to recent annual filings. That’s roughly the equivalent of San Francisco’s owner-occupied housing stock. The two companies sold off nearly 200,000 units last year that they took over after owners defaulted. But despite those efforts, Fannie and Freddie owned substantially more units at the end of 2009 than they did a year earlier.

And things are set to get worse. Barclays Capital estimates the pipeline of severely troubled loans at around five million across the United States. Modification programs, which should help some borrowers stay in their homes, have also delayed the inevitable forfeiture of many others.

Fannie and Freddie end up owning properties because they provided guarantees for the benefit of mortgage investors. Between them, they back around $5 trillion of American home loans. Such support — once implicitly and now explicitly backstopped by the Treasury — has handed borrowers relatively low financing costs for years.

Now, though, the result is that aside from the huge financial burden they place on taxpayers, the two companies have been amassing foreclosed properties and, in a few cases, have become landlords.

But the Treasury wants to intervene in the effects of all this intervention:

Today we are providing a program update, including additional details on Foreclosure Alternatives and Home Price Decline Protection Incentives. Foreclosure Alternatives will help to prevent costly foreclosures by providing incentives for servicers and borrowers to pursue short sales and deeds-in-lieu of foreclosure in cases where a borrower is eligible for a MHA modification but unable to complete the modification process. This program will assist homeowners who cannot afford to stay in their homes by helping them to avoid foreclosure and relocate to a home they can afford. Building on insights developed by the FDIC, Home Price Decline Protection Incentives will provide additional payments based on recent home price declines, and therefore will incentivize additional modifications in areas where home prices have been falling. By increasing MHA modifications and the use of alternatives to foreclosure, we will reduce the negative impact of foreclosure, minimizing damaging costs for financial institutions, borrowers and communities.

This is to be accomplished by: Read the rest of this entry »

March 9 (Bloomberg) — The Regional Bond Dealers Association asked the Financial Industry Regulatory Authority and Federal Reserve to end reporting of so-called agency debt trades until bank-affiliated brokers also must comply, saying some are seeking to avoid disclosures. – BL&BW¹

I don't think anything straightforward has happened on this story arc in almost two years.  The GSEs themselves have been quasi-nationalized.  Their debt now enjoys a  semi-explicit guarantee, so that when the Chairman of the House Banking Committee suggests that bondholders may have to take a haircut anyway spreads tighten to a multi-year record, which is just a bit counter-intuitive.

Meanwhile Treasury apparently can't legally offer support to the debt, but what they can do is offer the Enterprises unlimited support to some classes of their equity until the end of '12, which is conveniently after the next presidential election so their next move won't have to take into account, like voters … but heck, it's a totally risk free strategy.  Why? Because they won't have to actually do anything more until 10 days after the world ends on Dec 21st

But closer to home, the Fed's MBS purchase program is scheduled at the end of this month.  Now that sounds simple enough, right? Think again …

Reuters: "Fed to linger in agency MBS market after exit"

LATER: the cat said, "I never get involved in politics," and it's easy to see why. Hat tip to Implode-O-Land for this 3/9 MW-hosted press release from Judicial Watch:

"Obama Administration Tells Court Government-Run Fannie Mae and Freddie Mac Not Subject to Open Records FOIA Law"

"Apparently, American taxpayers are paying the tab for the collapse of Fannie and Freddie, but are not allowed to ask any questions about why it happened. When it comes to Fannie and Freddie, the Obama administration is saying, in effect, 'None of your business,'" said Judicial Watch President Tom Fitton. "Obama administration officials and their lawyers can argue until they are blue in the face that Fannie and Freddie are not federal agencies, but their reasoning is straight out of Alice in Wonderland. [hmmm... Igor thinks he's starting to see a trend here] There is nothing ambiguous about the government's absolute control of Fannie and Freddie. Which raises the question: What does the Obama administration have to hide?"

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Fresh out of the oven …

Doom friend (and occasional antagonist) Bill is always worth a look, especially when he speaks to the GSEs and politics.  This is right in his wheelhouse.

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"Barney?"

by Bill Maloni

What is Barney Frank (D-Mass) thinking?

I’m sure I’m not the first person to wonder what, beyond his legendary intelligence and quick wittedness, causes the cerebral and sometime volatile Chairman of the House Banking Committee to stake out the policy positions he takes.

Recently, as the world now knows, Frank called for “abolishing” Fannie Mae and Freddie Mac. He soon will initiate congressional hearings to produce that desired legislative result.

The fact that the Obama Administration hasn’t reached the same fever pitched conclusion as Barney likely means that this atomization will not occur in an already volatile political year. Since moving forward in this regard—with no idea what to employ as a mortgage finance system replacement–is fraught with huge political and systemic mortgage business risk for the Democrats and the mortgage industry.

Last week, Barney’s took it upon himself to lob another grenade at the former GSEs and reminded investors that Fannie/Freddie debt and MBS securities were not the equal to Treasuries and that those who bought company securities could end up getting a financial “haircut,” or less money than they expected when they bought the bonds.

While legally and technically correct, what Barney said flies in the face of what the Treasury sales campaign to assure markets, i.e. that the former GSEs debt and securities are safe and the Treasury does stand with them, since the United States mortgage market—which right now is standing on Fannie’s and Freddie’s shoulders—relies on the two companies largely unfettered access to credit market.

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The old definition of banks, "take demand deposits and make commercial loans," has been changed in practice to a new one: "borrow money guaranteed by the government and make real estate loans." The implications of this structural shift for systemic financial risk have yet to be worked out. – Alex Pollock¹

Pollock's merry band of alarmists (very much a minority view at the American Enterprise Institute) became seriously concerned about subprime in late '06, just about the time the penny dropped for "Crispy" in Bakersfield CA, Aaron Krowne, Russ Winter and a few others among our blogging colleagues, readers and to be fair some MSM types and analysts.  Indeed I've spent more hours than I care to contemplate since March 28, 2007 documenting their AEI-based seminars on the issue.  Although they often display some right-wing / conservative bias this is largely offset by the little matters of training, long experience and access to some pretty heavy resources.

This latest short article is fairly important in that it summarizes what is almost certainly a key element of our present dilemma, the long-term change of banking away from a business model that used deposits to fund productive activity.  Pollock summarizes this with a single chart (go to original for sharper image).

Doomers should stare at that chart in its original context and read the whole article.  We have landed in a systemic configuration that can't possibly be sustained, and it's not going to be pretty when it starts to revert.

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While debt from Fannie and Freddie does not carry an explicit government guarantee, the Treasury has taken numerous steps to reassure investors that the government will keep the companies running. Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie. So far, the companies have needed $126 billion in taxpayer aid. – AP¹

Today's comedy has had the side effect of smoking out one of Treasury's key contingencies.  By steadfastly avoiding any mention of support for Agency Debt itself and only stressing their time-limited support for the Enterprises, Geithner's crew is signaling that they have created an option to GSE-ize agencies down the road.

Timmy is anticipating the action of just walking away from this whole mess exactly 6 weeks after the next presidential election.  You have been warned (further to that one — 3/8 — it just struck me what week that is; Doom should probably send Igor off to the H. W. Armstrong gang at The Trumpet or something ).

LATER: BI had this CNBC video embedded in a post titled: "Barney Frank Has No Clue What He's Talking About When It Comes To Fannie Mae And Freddie Mac." Don't miss the moment towards the end when interviewer Maria Bartiromo nearly drives her own eyebrows into her brain as Barney asserts that there are different levels of Agency Debt guarantee depending on when the stuff was bought.

UPDATE 3/8: CNBC transcript of the above now available here.

Blogger Bruce Krasting² has some choice comments on the "when bought" question.

At several points in the interview Frank makes clear his view that securities issued by either Fannie and Freddie prior to the August 2008 (conservatorship) were tainted and there was no certainty that these would be paid in full.
…

These comments prove that Congressman Frank has no clue of what he is talking about. There is no basis for a different treatment of Agency securities based on issue date. There has been no bankruptcy that would establish seniority on new issues of debt.

Later reader MattJ at Krasting's blog added this to which all I can say is, like he said …

The dangerous thing is that people in and out of the government allowed the belief that the GSEs were backed by the full faith and credit to persist, despite the clear statement that they were not on every issuance. The Treasury still has not guaranteed them, simply because they do not have any legal ability to do so; and Congress will never give it to them. Of course GSE bonds do not have the same guarantee as Treasuries; if they did, there would be no justification for them to have a higher yield.

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A “whole range” of options is being considered for investors in the two government-seized companies, “from paying nothing to a haircut to whatever,” said Frank, whose committee oversees Fannie Mae and Freddie Mac. Congress will maintain the “status quo” and won’t make drastic changes to Fannie Mae and Freddie Mac until a new system for housing finance is in place, Frank said. – BL¹

Housing Doom is delighted to report that Barney is now on the job and the urgently required agencies undisambiguation project is now well underway.  Indeed Warren Gamaliel Harding himself could not have come up with a more compelling demonstration of utter cluelessness.  It's exactly what America needed to support its T-bill sales.

Here's more from WaPo.² Igor is already off to the House with Doom's bill for consulting services.  This was our original idea after all

The comments by Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, come despite the assumption of many investors that investments in the two mortgage finance giants are risk-free. Until now, federal officials — who took over Fannie and Freddie two years ago to save them from collapse — have signaled to the market that lending the companies money is just about as safe as lending to the U.S. government itself.
…

Fannie Mae and Freddie Mac use the proceeds of money raised from investors around the world to funnel cash to the housing market, providing a fresh supply of funds to make more home loans. [a one-way flow, it would seem; who knew?]

Of course the next step is for Acting FHooFAh Ed DeMarco to get up and contradict everything Barney just said, which will raise the level of doubt even further.

Holy confidence builder, Batman!  Timmy's gang reiterates support to the Enterprises, but take exquisite care to avoid mentioning their bonds.³

"As we said in December, there should be no uncertainty about Treasury's commitment to support Fannie Mae and Freddie Mac as they continue to play a vital role in the housing market during this current crisis," the statement from the Treasury said.

This story is moving really fast. Fellow blogger and Doom reader W.C. Varones sends additional info which pointed at this "clarification" in BI of all places by Barney himself. Note we're still talking support for the Companies not the Bonds.

Come on you people, someone get Ed back from lunch. If someone responsible doesn't balance Frank with a firm statement of support for the debt as opposed to the firms there's going to be total pandemonium in world bond markets inside another couple of hours.⁴

Margaret Kerins of RBS Securities said Frank's assessment that so-called agency debt is not fully backed by the government is incorrect. // "Regardless of the ultimate outcome for the GSEs, we expect all agency debt outstanding and issued under GSE status to remain related to the government. Reducing support is contrary to all of the actions takes by the administration and Treasury," Kerins said in a research note.

Great headline from Calculated Risk — lots of non-definitive statements happening …

"Frank: Fannie Freddie Investments not Risk Free, Treasury Clarifies"

So now Barney's retracting and non-retracting at the same time.⁵

House Financial Services Chairman Barney Frank on Friday said he agrees with the Obama administration's decision to fully back Fannie Mae and Freddie Mac bondholders to provide stability to the housing market and broader financial system.

At the same time, the powerful committee chairman said it would be a mistake to give Fannie and Freddie bondholders the same legal status as holder of US government debt by putting their obligations on the federal books.

Then FHooFAh Jim Lockhart did exactly the same thing (but with opposite polarity) on October 22, 2008 in clarifying away remarks that an explicit guarantee was in.  That time Ben Bernanke himself ended up looking silly explaining the resulting "effective" guarantee.  I wonder if the bond vigilantes are really going to swallow the same double-speak pabulum just a year and a half later.

I think this makes a nice summary …

CRisk commenter Rob Dawg: Treasury wants people to think there is a guarantee. Treasury needs to be able to claim there is no guarantee. Should either be tested; game over.

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Effective Jan. 1, 2010, Fannie Mae brought an additional $2.4 trillion of its guaranty book of business on to the balance sheet under SFAS 166/167. // Therefore, Fannie Mae expects to reflect approximately 18 million loans on its books compared with approximately two million loans as of Dec. 31, 2009. Management estimates that the cumulative effect of adopting FAS 166/167 will boost its net worth by $2 billion to $4 billion in its first-quarter 2010 results. – S&P¹

This story arc gets weirder every day.  So on Xmas eve Timmy lifts the cap on aid to the GSEs for the next three years.  One week later that's "eight maids a milking" in case you're keeping count , Fannie winds up all its QSPE trust funds.  Of the nominal nearly 2-and-a-half terabucks that lands on its balance sheet, about 0.083% of it is added to the Enterprise's net worth — which doubles it.

UPDATE (3/7): HuffyPo's got a fascinating article² which starts off a bit suspiciously with a couple of the talking points from the above, but then redeems itself with a comprehensive Cook's Tour of some key points of the crisis to now.

Stop! Hold the phone. What this statement indicates is that Fannie Mae, the largest mortgage company in the entire world, was holding eight times the amount of mortgages off-book than it had on-book.

And indeed I stand corrected, the title should have quoted 800 percent, not 900. (I must be a genuine mathematician to do something like that )

Must be comforting for the GSEs that the Treasury's got their backs on this one.  Obviously they're the world's worst offenders on this kind of exposure, but just about every large financial institution used these sorts of vehicles to juice risk up during The Great Moderation.  If everyone had pulled the 166/167 plug on New Years Day it's entirely possible that enough financial dominoes could have fallen over to have taken the whole private system with it due to the resulting counterparty chaos.

Funny how there's so little MSM chatter on consolidation …

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… [Bill Gross] continued that if core sovereigns such as the U.S., Germany, U.K., and Japan "absorb" more credit risk, then their credit spreads and yields should look more and more like the markets that they guarantee. – WSJ¹

The Treasury's strategy of postponing any substantive announcements concerning Fannie Mae and Freddie Mac until at least '11 combined with Congressional dithering on the future of US mortgage finance has failed utterly to generate an adequate level of confusion.  Markets are wringing unambiguity out of the continuing silence and now regard the top tiers of America's debt structure to be converging, so that an explicit guarantee on agencies is nearly a fait accompli.

Business Insider notes² that this month's Pimco letter is a milestone on this dangerous road to clarity.

What's happening, according to Mr. Gross, is that government bonds are starting to look just like corporate bonds, rather than existing on some privileged less-risky peer as in the past. …

Now more than ever, the legislative, executive, heck maybe even judicial branches need to get on the job and do something inscrutable.  Real Estate's new mantra? Obfuscate! Obfuscate! Obfuscate!

Doom recently posted on Rep. Frank delaying for another 3 weeks what would have been today's hearings on the future of the GSEs to take everyone on the road to MA for an urgently required investigation into commercial fishing.

Apparently we aren't the only ones who noticed …

Filming Of Congressional Reality Show Disrupts Committee Meeting

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Fannie Mae has made what could be a very significant change to their mission statement.  For those who are wondering the direction of mortgage rates this year, this may be a clue.

In January 2008 with the help of the Wayback Machine, I noticed what I thought was a significant change in how Fannie Mae described itself on its About Fannie Mae page.  The 2005 version:

“Our public mission, and our defining goal, is to help more families achieve the American Dream of homeownership. We do that by providing financial products and services that make it possible for low-, moderate-, and middle-income families to buy homes of their own.”

And the 2008 version: [No longer available.]

“We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America’s secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates. Our job is to help those who house America.”

Did you note the difference?  Their focus changed from helping families to helping those who house America.  [Helping those who house America being mortgage bankers and other lenders.]

The About Fannie Mae page has changed again and the paragraph from 2008 is gone.  I did however see the 2008 paragraph at the bottom of a press release last week, but with a significant difference:

Fannie Mae exists to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America's secondary mortgage market to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers. Our job is to help those who house America.

Here are the phrases side by side:

2008:  …to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates.

2010:  …to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers.

So in 2008 Fannie Mae was "ensuring funds". Now they are "enhancing liquidity". In 2008 they were also ensuring low rates. In the 2010 version there is no mention of rates at all.

Mission statements are often just meaningless platitudes used for filling space on company websites and on the back of business cards.  In this case however, I suspect we can take a message away from the changes.

Given the current state of the markets, it's easy to see why Fannie wouldn't want to ensure anything. Enhancing is the safer promise. Additionally, it is unlikely that the removal of the "at low rates" comment was an oversight. It is more likely that Fannie sees the direction of mortgage rates and isn't even promising to enhance them.

In a recent interview Edward DeMarco, acting director of the FHFA declined to speculate on the direction of mortgage rates.  Fannie seems to be speculating however, and has come to the conclusion that rates aren't going to be low.

No pressure

There's always a good reason¹ to put off for three more weeks considering what to do with the $5-odd trillion of dodgy paper the big GSEs have balanced on their little slivers of capital.

WASHINGTON, Feb 25 (Reuters) – U.S. Rep. Barney Frank said on Thursday he would postpone a hearing on the future structure of U.S. housing finance and mortgage funding giants Fannie Mae and Freddie Mac until March 23.

… he rescheduled the hearing from March 2 to allow for a field hearing on commercial fishing issues in Massachusetts, and …

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