Housing Doom

Banks have been going under at a rate not seen in years, leaving the FDIC short of funds and long on assets.  They are trying to alleviate the problem by auctioning off these assets, but that's leaving surviving banks unhappy: [Thanks L!]

March 8 (Bloomberg) — A Federal Deposit Insurance Corp. plan to auction more than $1 billion in assets seized from failed banks next month, including a loan to build a W Hotel in Atlanta, may trigger writedowns that weaken lenders nationwide.

Almost half of the loans were originated by Silverton Bank N.A., whose collapse last May was the biggest in Georgia history. Community banks that joined Silverton in providing $80 million for the 237-room hotel and condominium complex, as well as backing for 39 other projects, could be forced to write down their stakes to reflect sale prices.

The auctions may have wider repercussions. Of the $41 billion in assets seized from failed banks held by the FDIC as of the end of January, $15.6 billion are real estate loans and about 4 percent of those involve participations by other lenders, according to agency spokesman Andrew Gray.

“These banks can’t believe that the regulator they pay to protect them is going to sell these loans to someone who can flip them and cause them serious losses,” said Robert Reynolds, a lawyer at Reynolds Reynolds & Duncan LLC in Tuscaloosa, Alabama, who represents 25 lenders that took part in financing the W Hotel. “Our banks just cannot believe they’re being treated in a way that ultimately hurts the FDIC’s insurance fund, because some of them are right on the edge.”

It's easy to understand the position of the lenders, who've been fighting writedowns ever since the housing market started to fizzle.  Auctions in this market are unlikely to fetch top dollar.

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… Historically, the New York Fed has been among the most profitable shareholder-owned corporations in the world. Yet it keeps the details of its shareholders’ ownership information private. What we do know is that its owners include precisely those institutions it is tasked to regulate and supervise and those [it] has obviously failed to adequately supervise. Unlike the other District Banks of the Federal Reserve system, which have overseen their banks quite well, the New York Fed’s concentration of the largest banks, coupled with its unique role of managing the market operations of the entire Fed system, has built a culture where it sees itself as a market participant and peer to those firms it regulates. – Josh Rosner¹

Who owns the Federal Reserve Bank of New York?  The answer to that question isn't even controversial.  Heck, it's the law.²

… The question of ownership can still be addressed, however, by examining the legal rules for acquisition of such stock. The Federal Reserve Act requires national banks and participating state banks to purchase shares of their regional Federal Reserve Bank upon joining the System, thereby becoming "member banks" (12 USCA 282). …

So it's basically owned by the banks of the Second District, which comprises NY, some bits of NJ & CT bordering NYC and just for laughs a couple of honest to gosh American colonies, one of which has a population slightly larger than the State of Oregon (they don't call it the Empire State for nothing ).  Heck, Jamie Dimon is presently on the Board of Directors.

We're talking about the institutions of Wall Street, presently the most important concentration of financial and market muscle on the planet.  They're involved in everything from HFT / CoLo operations in the equities markets to the PPT to cooperation with the US intelligence community.  It's not even obvious that any mere bank regulator could even start to control this fratricidal inbred hairball.

Doomers learned in the course of an update to yesterday's Crack of Doom that five years ago Fed Governor Susan Bies was blocked in her efforts to centralize the Fed's bank supervision by then NY Fed Pres Tim Geithner.  Ben Bernanke is providing moral leadership but seems to have very little clout to rein in the Second District.  It's almost like he was a late 15th Century pope dealing with the Medici Bank in Florence.

Congress isn't having much more luck.³

The Fed could retain oversight of large bank holding companies under a scaled-back regulatory reform plan being considered in the Senate Banking Committee, lobbyists said.

So Chris Dodd's last ditch effort to impose independent bank regulation on Wall Street appears doomed which, as the folks at ZeroHedge are pointing out,⁴ is an international scandal and embarrassment.

[Nobel Prize winning economist Joseph] Stiglitz stressed that the Fed banks have clear conflicts of interest, since the banks are largely governed by a board of directors that includes officers of the very banks they're supposed to be overseeing …

And just to top it off, it was the banks of Wall Street that were disproportionately represented as recipients of support in the great bailout; a bailout largely orchestrated by … (three guesses) …. Has there ever been a bigger demonstration of Moral Hazard?

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But in recent weeks, President Barack Obama has proposed regulating health-insurance rate increases, separating commercial banking from investment banking and prohibiting commercial banks from owning or investing in private-equity firms or hedge funds. – WSJ¹

I don't know whether it was the sudden realization that 8.8 earthquakes actually happen or what, but over the last few weeks there's been a major outbreak of sober people brushing aside the Panglossian fluff bunnies who have been dominating the discourse until now.

A post² at SeekingAlpha, for example, neatly encapsulates this new realism in just a pair of bullet points:

• We have spent more than we have earned, and one day will have to pay back the borrowed money we spent.
• Someone has to pay for the borrowing (unless we default), and those people will, at some point in the future, not have money to spend.

Greed is still king in the markets, but it's hard to see how this can last much longer.

UPDATE: except for³ …

Five years ago, one Fed governor sought to centralize supervision of the biggest banks in Washington. "I felt we were not being as effective as we could be," says Susan Bies, who has since left the board. "We didn't have a strong enough overall view of what was going on throughout the system." According to several people involved in the discussions, her effort was beaten back by Timothy Geithner, then president of the Fed bank in New York, which oversees some of the largest banks. Mr. Geithner, now Treasury secretary, declined to comment.

Wall Street's "let's be our own regulator" configuration still holds the gold medal in Moral Hazard (care to guess who are the NY Fed's secret shareholders?)

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If you think we here at the castle are "doomish", we have nothing on mortgage broker Michael David White. Here are some highlights from his assessment of the 2009 real estate market and what it means for 2010:

We have just in the last year had the largest annual fall in real estate prices, hit the highest number of delinquent mortgages measured, witnessed a record 918,000 homes taken in foreclosure, and 11.3 million home owners now own negative-equity.

 

Case Shiller prices fell a record 19.1 percent versus the previous year in Q1 2009. Mortgage delinquencies are at a record high 15.02 percent (Q4 2009) according to the Mortgage Bankers Association — meaning an estimated 8.4 million families do not pay their most important bill. RealtyTrac reported a record of over 900,000 foreclosure repossessions in 2009, and estimates a record 3 million homes will experience a foreclosure event this year. First American counts 11.3 million homes with negative equity, and sees an additional 2.3 million homeowners on the edge of going overboard and under water.

 

Every element — falling prices, mortgage delinquencies, repossessed homes, negative equity — they all hit records in 2009.

. . .

Mortgages rates hit a record low in 2009 on Freddie’s index for a 30-year fixed rate and the average 4.9% in Q4 2009 is outstanding for affordability (please see the chart above). The Fed won with low rates what Robert Shiller called in the Wall Street Journal “the most dramatic turnaround” he has seen in home-prices since starting to watch them in 1987. The year-over-year loss in values shrank last year from a monster 19% in Q1 to a mousy 2.5% in Q4.

 

Fannie and Freddie now own the mother-of-all helocs. They can write themselves checks without consideration of their losses – an important fact given they will lose more money than anybody in the aftermath of the financial crisis.

 

Can the Fed and Fred and Fannie and Ben and Tim be beaten in their mission? Will they have the power to support current real estate prices even if only half of the bubble blow-up value has disappeared?

. . .

A twin train wreck of negative equity and mortgage delinquencies will collide with real estate prices. They deflate values. No one can predict the consequences. Strategic default will be a smart choice for many. Some will discover a home can be returned to the bank. Will the madness of equity-free crowds take arms against a sea of manic bubble prices?

 

If you want to refinance and the appraised value could be an issue, get your mortgage done now. This is especially true in the jumbo market.

 

If you want to buy real estate, beware and be warned. Your financial massacre may follow your purchase. You cannot reasonably buy in this environment except with aggressive price negotiations, a close study of national and local price trends, intelligent courage, and your eye lids burned off by what you read here. Fools rush in where wise men fear to buy.

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Igor's wondering why I'm not just watching the Oscars.

… but is this bubble humor or what?

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NYT: "Bloomberg Says a Soda Tax ‘Makes Sense’ "

As the battle over the state budget and the looming multibillion-dollar gap becomes more intense, Mayor Michael R. Bloomberg has stepped up his call for the Legislature to pass a penny-per-ounce tax on soda to stave off major service cuts to education and health care.

Heh, Mike — What about 1/10,000th of a cent applied to the HFT guys instead?

All I can say about this weekend is … thank heavens it's almost over:

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MediaIte: "HBO to Dramatize The Financial Meltdown In All Its Gory Details"

Like those who enjoy their car-chases, their full-frontal nudes, their dance-and-song ensembles, the strip of the populace tickled by the thought of Hank Paulson cringing over a toilet is now, evidently, sufficient to launch a movie.

So you didn't buy too much house and decided to just fix the old place up? Once more it is shown that no good deed goes unpunished:

If you have not lost your home to foreclosure, get ready to pay up. Hernando County, Florida has announced plans to raise fees on homeowners who make repairs to their property or do home improvements. Everything from roof repairs to replacing an old hot water heater will be hit with higher fees.

In his plea to the BOCC for more money, the county's business development director, Michael McHugh said, "We've been operating in fiscal distress,'' according to the St.Petersburg Times.

The reason for the budget shortfall is the foreclosure epidemic that has reduced the county’s tax rolls by some $5 million dollars.

Homeowners who have so far survived the crisis, have made home maintenance and improvement a priority. So while new construction permits have slowed to less than a dozen during some months, repair and improvement permits have risen to about 800 a month.

The Hernando County Builders Association is in favor of the higher fees, which will benefit the county's building department budget.

The impact on property owners will be widespread. In addition to the new fees, the full cost of repairs and improvements will be added to tax assessments, which increase a homes property taxes for years to come.

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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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