The Coming Housing Finance Train Wreck

The interaction of immovable objects and inexorable forces is seldom pretty. One example is housing finance in the US. If no one blinks, an ugly situation could get even worse.

One the one hand, we have the complete lack of resolve on the part of the officialdom to fix the abuses in the private label securitization market, which prior to the crisis, accounted for 60% of mortgage financing. The weak risk retention rules in Dodd Frank don’t cut it, and the sell side (the major banks) have been completely unwilling to consider reforms, such as those proposed by the FDIC in early 2010, that would have addressed enough of the problems to entice investors back into the pool. (The FDIC’s plan include one year seasoning before a loan could be sold into a securitization, 5% risk retention, loan level disclosure, and no CDOs.)

Instead, we have wishful thinking from what Matt Stoller has called the hope and change school of “how we fix housing”. I got a call from a very earnest financial reporter a few weeks ago, and he seemed quite convinced that covered bonds, a conservative structure with a long history in Germany, would solve the problem. Given that securitization contracts proved to be meaningless – originators lied about what they were selling, trustees refused to intervene as required to do by contract in the light of clear problems with the loans (and are now trying to get their own get out of jail free cards per the example of Bank of New York in its settlement with Bank of America), and servicers scam borrower and investors – it is hard to fathom would anyone with an operating brain cell have anything to do with this market. I called an investor, who confirmed my dour views: “It isn’t the structure that the problem, it’s the people behind the structure.”

Private capital is on strike until better regulations are in place or memories fade, and the losses are so great that market participants say it will be a decade before there is another private securitization market in the US. This has more serious implications that you might think.

We now have a housing finance market that is almost totally on government life support. One private label was done last year. Administration officials complain that lending standards (which are a reflection of Fannie, Freddie and FHA standards) are too restrictive, as reflected in average FICO scores and down payment requirements (note I’m not entirely sympathetic, borrowers should have more in the way of down payments than was the norm in the housing bubble era. As Josh Rosner has said, a home with no equity is a rental with debt). Maybe they should have been a little more supportive of tougher requirements for mortgage securitizations when Dodd Frank was being crafted.

Banking expert Chris Whalen reports that even with the caviling by Obama loyalists that mortgage credit is being offered to too few, some banks are managing to make loans they will come to regret:

…banks such as Wells Fargo (“WFC”) are behaving irrationally in the conforming residential mortgage market, writing loans simply to buy market share and at least some earning assets. Other large banks are doing similar stupid things in the markets for 1-4 family housing and commercial real estate, using shoddy underwriting standards and non-existent credit analysis to simply put assets on the book. These particular chickens won’t come home to roost for about two years, notes one veteran banker.

Now consider how this looks in a few years. Whalen reports that is pretty much impossible to get a mortgage of $1 million , which is consistent with an absence of lending outside the “conforming” mortgage market (loans bigger than the GSE ceiling of $625,000 in certain high cost areas).

Now consider where this is all going. The latest FHFA inspector report said that Fannie and Freddie could not be privatized, despite conservative fantasies to the contrary. Under the conservatorship, they are required to shrink their balance sheets over time. The Administration released trial balloons of creating what amount to new GSEs that supposedly will work better (by virtue of having more of them and requiring each to be better capitalized). That plan encountered more vociferous pushback than the Administration expected and appears to be on hold. The FHA has been steeping into the breach as the Administration has increasingly relied on it to serve as a major source of mortgage funding.

Consider how this plays out: Republicans are hostile to “affordable housing.” Some of this is ideological (they hate lower income people) and some is political (the GSEs were a Democratic pork operation, and they assume, probably correctly, that any successors will boost Democratic party interests). There is some merit to this view, since using housing finance to implement housing policy simply makes residential real estate more, not less, costly over time. And it is inefficient: you can’t measure the impact of finance-related subsidies with great precision, and the benefits accrue to a significant degree to non-targeted groups (for instance, the Fed’s efforts to help the housing market via targeting QE at mortgage backed securities helped lower mortgage financing costs, which led to refis almost entirely by the sort of people who refi whenever mortgage rates drop, those with good balance sheets and incomes. That did nothing to help people in high interest rate loans who were at risk of default. In the overwhelming majority of cases, their credit wasn’t good enough for them to refi into a conforming mortgage).

The Democrats are much more eager to Do Something but Obama is keen to cut the deficit. That will play into the Republican’s hands, since they hate the GSEs and will likely start getting agitated about the FHA, since its capital reserve has fallen below the Congressionally stipulated minimum of 2%. And the Republican are completely unrealistic as to private market alternatives ex serious regulatory reform (not that the Democrats have any more appetite for sufficiently tough regulation, mind you).

So how may this turn out? It’s a no-brainer that we will continue to have a housing market dependent on the willingness of the Federal government to continue to guarantee pretty much all mortgages. The GSE wind-down is on auto pilot. It is not inconceivable that the Republicans will try to rein in FHA lending, either in terms of tightening quality standards or imposing limits on the total guaranteed per year, which will further limit overall mortgage credit, again relying on the mistaken belief that if the government “got out of the way,” private sector lending would resume. While there is a price at which private loans would get done ex better investor protections, it’s at a much bigger premium than borrowers can stomach (one investor said he’d lend at a 5% premium to Fannie and Freddie rates. He’s greedy, so let’s reduce that by 50%. That’s still a deal-killer for most prospective buyers).

In other words, mortgage financing is likely to become even more politicized, and the results have high odds of constraining government involvement in this sector, which would be a plus ex the failure to take reform of the private market seriously. So if you are of the school that mortgage finance it too restricted now, don’t bet on it getting better any time soon.

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  1. Squeaky Clean

    “US Added Only 120000 Jobs in March” — uh oh.
    With Mr Fraud up in the ‘House it could be a long, hot summer.

    “it’s happening right now with the Dodd-Frank Wall Street Reform and Consumer Protection Act — passed two years ago in the wake of our disastrous financial meltdown. Just last week, for example, both parties in the House overwhelmingly approved two bills that already would change Dodd-Frank’s rules on derivatives — those convoluted trading deals recently described by the chairman of the Commodity Futures Trading Commission as “the largest dark pool in our financial markets.”

  2. Jack M.Hoff

    Mortgage finance isn’t too restricted. Its the continued slide in values that gets borrowers in trouble. I believe the end result of it all will be to reduce housing to renting for the most part. There is way too much volatility in everything for 30 year mortgage terms. Its like you say Ives, the private investors want more return and can you blame them? The govt as much as people like to think so, really isn’t positioned to be a lender. Last I had heard they were the worlds largest debtor.

    1. F. Beard

      The govt as much as people like to think so, really isn’t positioned to be a lender. Jack M.Hoff

      The US Government is monetarily sovereign; it has no need to borrow and should not.

      Last I had heard they were the worlds largest debtor. Jack M.Hoff

      The debt of a monetarily sovereign nation is ITSELF money with the added privilege that it pays interest. For the US to pay off its national debt would simply mean to create new, non-interest paying fiat and exchange it for that debt. Big deal …

  3. Moe Tkacik

    Hi, I don’t think the idea of Fannie/Freddie as a predominantly Democratic Party slush fund is fair to perpetuate at this point. Republicans took massive amounts of money from the GSEs and my sense is that the animosity that remained toward them in 2008 was largely fixated on their role funding ACORN etc. With ACORN gone do they care anymore?

    1. Predators

      And you’ll notice something else about the top 10 criminal companies receiving government contracts: they’re all recipients of military contracts. They’ve sold weapons to national enemies, leaked radiation, poisoned the environment, defrauded the government, bribed officials, recklessly endangered soldiers, and dozens of other offenses. But they’ve also all been part of our largest illegal enterprise: wars of aggression, during which various contractors have engaged in rendition, torture, murder, assassination, prostitution, the production and use of illegal weapons, and a variety of other serious crimes.

    1. Silly Person

      Go to your bank, ask for a home loan. Say you have 20% down and can pay 5% interest based on your income and home price. Tell your bank they don’t have to securitize your loan. They are a bank aren’t they?

      1. Richard

        The question was what changes would Yves make that would revive the private label mortgage backed securities market.

        So the first change would be to require 20% down … Strikes me that this a) prevents a certain percentage of the populace from ever getting a mortgage and b) doesn’t reflect the simple fact that some investors are willing to take on more risk for a higher return – say 5% down carries 1% higher interest rate.

        The reason I asked is this market has to be revived because banks do not have enough capital to support the dollar value of mortgages outstanding. Hence, there is a need for private capital.

        1. Silly Person

          Ah, but why would private capital want a deal a bank won’t take? Ask if a bank would even offer as low as 5% fixed for 30 years with the inflation risk over that time frame?

          Ask me why as “private capital” I would want to buy everyone a house at whatever price someone wants to sell a house for to my benificiary no matter how bad their credit and income is? Even if I did have “enough” money. Like a rich uncle named Sam, or something.

          Ask if this all sounds familiar somehow.

          1. Richard

            I think we can both agree that the fact that you think 5% for 30 years is not a reasonable return given the risk of inflation does not mean that all investors share your view.

            So it is in fact not unreasonable that to think that some investor might want to fund that mortgage.

            Is the bank that investor? A community bank might say yes to that question while a TBTF might say no.

            Unless I am missing something, the goal of RMBS market should be to match up mortgages with investors who are looking for the combination of risk and return offered by the mortgages.

            Which gets me back to my question for Yves. What 5 reforms would she make?

    2. Lune


      I think the presence of private money in the mortgage system is part of the problem, not part of the solution. Mainly because the presence of a securitization market inevitably means the loan originator (the bank) no longer cares about writing quality loans since it’s not really his money on the line. This is what got us into the trouble we have today. If banks actually had to keep all those crappy loans on their books, there’s no way they would have made them in the first place. They’re not that stupid.

      Similarly, I disagree with your premise that banks don’t have enough capital to make the loans themselves. While currently bank balance sheets may be impaired, the Fed is basically begging banks to take on reserves and restore lending. It’s just that there are no good borrowers or good investments at this time.

      You’re right that there is private capital available, but at what rate are they willing to lend? The current 30 year treasury yield is ~3-3.5%/yr. Given that risk-free base, what risk premium would you require to lend if you were a bank and could personally verify the house’s value and the borrower’s ability to pay? How about if you were a private investor who had no ability to verify any of the underlying data on the loan and also knew that everyone up and down the chain was actively trying to steal your money with the full assistance of the current government?

      I’m not sure any reforms short of keeping the original lender responsible for the loan (i.e. removing securitization and private investors) removes that intrinsic weaknesses of the securitization model.

      1. Silly Person

        If banks are short of capital, they can get it from private capital thru stock or bond sales and paying attractive dividends ,or paying attractive interest rates on deposits, or accessing money money markets and paying attractive rates, or accessing repo markets and paying attractive rates.

        They would have to manage maturity transformation risk when they lend at long term fixed rates and fund at short term rates, but that’s what makes banking something more than child’s play and that’s why they make the big bucks!

        1. Richard

          Lune, your observation “How about if you were a private investor who had no ability to verify any of the underlying data on the loan and also knew that everyone up and down the chain was actively trying to steal your money with the full assistance of the current government?” cuts to the heart of the issue of what it will take to end the buyers’ strike.

          It takes loan level disclosure that allows the investor to verify compliance with underwriting standards, the current performance of the loans and that the servicers are complying with the Pooling and Servicing Agreements.

          Without this data, investors may as well simply give their money to the big banks. It will be a lot less painful than watching them systematically steal it over a number of years.

      2. Yves Smith Post author

        Please reread the FDIC recommendations above.

        One year seasoning (the bank has to hold the mortgage a full year before it can securitize it) produces serious skin in the game. Most badly underwritten mortgages miss payments in the first year. That plus the 5% risk retention would make a big difference in incentives. Ditto no CDOs. The riskiest tranche (the BBB) becomes hard to sell if investors are worried about credit risk. That was circumvented in the 1990s subprime bubble and the one just past by bundling them into CDOs.

        1. Richard

          If risk retention is going to focus banks on underwriting good loans, the logical conclusion is the banks should retain the riskiest 5% of the structure (as oppose to 5% of each part of the security). Absorbing the first loss really puts their skin in the game.

          The counter to this argument is that for a lot of the really bad first mortgages out there the banks are holding second mortgages. At first blush, it would seem the banks have far more than 5% first loss skin in the game and that didn’t stop them from underwriting junk.

          Given this track record, I am not comfortable that risk retention is the solution. I prefer something along the lines of a 5% holdback of the proceeds of the deal at the time of closing. Then, over the next twelve months, if mortgages go bad, the cash is used to buyback the mortgage from the deal. At the end of the 12 months, any remaining cash goes to the issuer. This seems more direct at putting the emphasis on good underwriting and deals with the issue of ‘seasoning’ the loans.

          Next, we have left the elephant in the room, crooked servicing, out of the conversation. What can be done here?

          1. Richard

            I absolutely don’t.

            I think there needs to be current detailed data on the underlying mortgage loans. That way market participants have the data they need to analyze the securities, compare the quality of the loans to what the issuer claims was put into the trust, monitor the ongoing performance, monitor the behavior of the servicer to ensure compliance with the deal PSA, …

            The only way the buyers’ strike is going to end is if there is real transparency and the buyers are in a position to confirm and monitor everything.

  4. Susan the other

    As long as the Fed is willing to take mortgages and even MBS as quality collateral from the banks, the market will limp along, no? It is the only “quality” collateral the banks have these days. Everything else they are involved in is a mirage. Just one more reason why the Congress should find a way to create jobs. It is ironic to think that the only remaining thing underpinning the banks is mortgages.

    1. Yves Smith Post author


      1. The Fed is now buying MBS only to replace refis.

      2. The MBS that are being created are only government guaranteed debt.

      3. As part of the conservatorship, Fannie and Freddie are subject to balance sheet size limits that get smaller over time (my recollection is 10% per year)

      4. Per above, that will contract unless FHA can at least fully take up the shrinkage in the GSE’s balance sheets. And it won’t “improve” unless you have FHA providing more loans than the GSE shrinkage.

      1. Doug Terpstra

        As of April Fools Day, the FHA added a new hurdle by hiking its mortgage insurance premium and rates for loans at less than 20% down. The upfront premium increased 75%, from 1% to 1.75% and the monthly fee from 1.15% to 1.25%. Upfront fee for a $150K loan:

        Old rates: New Rates:
        $1,500.00 $2,625.00

        This will put a damper on sales and prices, because only a fool would catch a falling knife in this market with 20% down.

      2. Mark P.

        Yves –

        Great post. This is along the lines I was asking people to consider the other day.

        Because I agree. The private securitization market will stay broken and people won’t take on new mortgages till prices become way more affordable — to where it’s inarguably cheaper to buy than to rent — except that this can’t happen because, as you say, the Federal government will continue trying to prop up the mortgage market as currently constituted.

        And things could still conceivably look this way come 2016-2020: a continent-wide zombified real estate market.

  5. Jim Haygood

    ‘Using housing finance to implement housing policy simply makes residential real estate more, not less, costly over time.’

    Yes! Exactly. Thank you. Just as federal financing for college has driven tuition sky-high, thanks to academia’s de facto exemption from antitrust enforcement.

    In both cases, distorted price signals have fueled large-scale malinvestment, by convincing people that houses and higher education are ‘great investments.’

    Actually, in many cases they aren’t, when you’re paying an inflated price for them with the aid of what appears to be ‘free’ financing.

    All evidence suggests that government is even more worse than banks at lending, and that’s a mighty low hurdle to meet.

    1. F. Beard

      To summarize/extrapolate your point: “Credit” creation creates the need for more credit in a vicious cycle.

      But why not? Credit creation is a form of counterfeiting regardless whether it is done by private lenders or the government.

      But people persist in believing one can magically borrow from the future.

    2. SidFinster

      Of course, and every effort to “make housing more affordable for hard working families” ends up making hard working families take on more debt as prices rise and wages stagnate.

      Now the problem for the government is to balance its schizophrenic policy of “keeping housing affordable” with supporting real estate prices.

      n.b. This is also why I have sympathy for many of the homedebtors who took out mortgages that they could not afford in the last bubble years. They probably did not have any other choice if they wanted to give their kids a yard in a semi-decent school district, as there were plenty of other people willing to do so and lenders who would give them the papers to sign.

      If others are willing to sign a neg-am loan to get into a house, either you have to be paid like a hedge fund manager or be ready to take on a neg-am loan as well. Otherwise, you will be outbid. You might as well bring a knife to a gunfight.

  6. Paul Tioxon

    The chart of bankruptcies since 1980 shows a rise to the 900,000/yr mark by 1990, and except for a brief dip in the late 1990’s, an upward annual 1 million/yr personal bankruptcies, 1/3 of which are joint husband and wife filings. The numbers are devastating. Over 20 million bankrupted individuals in the past 2 decades.

    We just can’t get it up anymore due to long term wage suppression, downsizing and general political pulverization keeping us from acting as the optimistic consumers from the hey day of Fordism with mass production, mass consumption and a massive middle class that allowed prosperity to be widely enjoyed, even if you were just a mail man/lady.

    It is no wonder that a subprime market in mortgages developed. People could no longer count on job stability and steady wages to mirror a 30 year mortgage commitment. It is no wonder that as American industry became the rust belt, that corporate America downsized the desk jobs, as wages were suppressed and unions membership and the political power it had to retain economic gains diminished, that Wall St turned to the financialized economy to make money. And if the consumers were not credit worthy, due to inadequate income, not enough down payment, low fico scores, or just one or another underwriting no nos, well then financial innovation took over to allow the market to keep making money.

    But as the ongoing Krugman/Keen debate seems to illuminate, banks have reserves and liquidity but not enough capital put aside to pay for the mistakes they make in lending. There are not enough credit worthy business left operating in America to lend to. So, they don’t lend and do not lower their underwriting standards. They don’t take undue risk and refuse to boost capital to allow for expanded lending criteria. They don’t lend mortgage money, because so many people can’t qualify since a bankruptcy stays on your credit report for a decade. They also inquire about deeds in lieu of foreclosure. The next housing crisis will only happen if they repeat the fantasy that there is a vast consumer middle class market capable of paying back what they borrow. Well, there isn’t. What ever the politicians or the Wall ST innovators do or don’t do, they need customers with steady paychecks and a willingness to take on debt for 3 decades in a society which erupts into financialized violence against the populace on regular basis.

    There is no longer a viable economy with good commercial or residential lending prospects, because they have been hollowed and out and diminished to the point of economic poverty that they can not function. Wall St tried to paper this over by hiding bad loans as part of AAA rated pools of loans. But then, they stopped trading with one another because they knew everyone was cheating everyone else. It all ground to a halt. The problem of housing and securities in small potatoes compared to the larger event of a social order that depends on an economic system that no longer works.

    1. John Regan

      So cogent. So simple.

      Especially insightful is noting that this is not a recent out of the blue development, but an end game decades in the making. Instead of paying people, the PTB aided and abetted by the government and a long list of accomplices LENT to them. Of course, sooner or later this results in people who can’t pay back what they have borrowed. Paying back loans wouldn’t be so hard if incomes were 3-4 times what they are now, but of course that sounds ridiculous and maybe it is, since it’s a labor “market” after all.

      I’ve talked to Keen about this and he doesn’t agree with me, but still it’s my opinion that people should not borrow to meet personal expenses, and that includes borrowing to buy a home. People should meet their personal expenses with their income, not through borrowing. Then we might have a better idea what people should be paid. As it is we have no idea, because borrowing distorts it all.

      In any case, paying people more is not feasible, but a debt jubilee is.

      1. F. Beard

        From your blog:

        You see, it is misleading when people derisively refer to “paper” money or even “debt” money. Neither of those is the problem in and of itself. The problem is that the debt or paper or computer digit – that is, no matter what form it takes – is irredeemable. John Regan

        Government money is redeemable; it is the only means by which you can redeem your tax obligations. Also, it can redeem your private debts in government money.

        That can never be the case, not even for the government. John Regan

        Wrong. English Tally Sticks lasted for over 800 years.

        Which brings us to the second component of saving the world:

        2. Money will henceforth be redeemable in gold. John Regan

        Why not my hair and toenail clippings? They are scarce and impossible to counterfeit. Also they grow at a slow rate.

        What the heck is gold but someone’s favorite shiny metal? And if it is valuable then why waste it in bank vaults or coins?

        Begone silly gold-bug!

        1. Silly Person

          “Why not my hair and toenail clippings? They are scarce and impossible to counterfeit. Also they grow at a slow rate.”

          Perhaps because they are not in great demand?

          1. F. Beard

            Perhaps because they are not in great demand? Silly Person

            That’s the plan of gold standard advocates – to require that taxes be paid with gold. That same scam would work with my hair and toenail clippings.

          2. Silly Person

            Sure but, would Tim Geithner accept your hair and toenail clippings in payment for taxes? Can we settle international payments for oil, chinese stuff and BMWs with your hair and toenail clippings?

            One of the things gold has going for it is that it is pretty and it doesn’t rust.

            Just say’n. Lots of people have to go along with the scam.

          3. F. Beard

            Can we settle international payments for oil, chinese stuff and BMWs with your hair and toenail clippings? Silly Person

            Sure – if they were the only accepted payment for US taxes. They would even be valuable to the Chinese because US wheat farmers have taxes to pay and would add those taxes on to their export price. That’s why fiat ANYTHING works – it is the only acceptable payment for taxes.

        2. John Regan

          Beard, I know you don’t like the gold thing, but maybe we agree on the debt jubilee.

          Although that would frankly worry me.

          You have to think about these things soberly and rationally, if understanding is important to you at all. If you just want to grind an axe and bloviate of course I can’t stop you, but your efforts would be better spent learning, thinking, and trying to understand.

          1. F. Beard


            Look in the mirror chump! Conceit drips off you!

            Think you will save the world with a shiny metal?

          2. F. Beard

            but your efforts would be better spent learning, thinking, and trying to understand. John Regan

            What is there to learn from someone who believes in a government enforced gold standard?

            Not only is that stupid it is also fascist and hypocritical if you claim to be a libertarian.

            As for debt forgiveness, a universal bailout is more just. In any event, a gold standard is NOT required for either. Why try to sneak that poison in?

  7. Conscience of a Conservative

    Yes, housing is still a mess for a multitude of reasons.

    Zero interest rates mean that there’s just no spread to rationalize lending. No private loan can be justified at 4% and cover the risk of default

    The Loss adjusted yields available by investing in pre-2008 private mortgage pools is better than what can be accomplished by going into the few new deals coming to market.

    We still haven’t fixed MERS and the rules regarding PSA’s and investor protection. Kudos to you for pointing this out.

    Information on MBS pools is better but we still have the non-sense associated with issuer purchased ratings from companies that don’t even audit the data(How can you rate anything when you don’t know if the data the ratings are based on is correct?)

    We have way too much gov’t meddling in the mortgage market, via modifications, and the foreclosure settlment. How can an investor rationally decide to buy a Fannie 6 at a premium if the gov’t can just come up with HAMP 3 or do a Quantitative easing 4?

    But frankly the four biggest banks have grown to love the new model. As Whalen points out Citi,Wells, BAC & JPM are the new GSE’s as they capture half the profit of all loans being underwritten and delivered to Fanne & Freddie while offloading the credit risk to the tax-payer and the prepayment and interest rate risk to investors in MBS.

    So ultimately we need to destroy Fannie & Freddie so we can save the housing market, which ironically means more pain down the road when we make the adjustment.

    1. F. Beard

      which ironically means more pain down the road when we make the adjustment. Conscience of a Conservative

      Ya know, pain isn’t aways necessary and when it is inflicted on innocents it isn’t just either.

      But conservatives are wed to pain so long as it does not involve them, it seems.

      My reading of the Bible informs me that we should leave the misery dispensing to God and even to stand before Him to avert judgment as Abraham did for Sodom and Gomorrah.

      1. nonclassical

        one could just junk the “austerity” vs. “stimulus” dialogue, for accountability-
        as William K Black did S & L scandal…then re-regulate and start over…

        1. F. Beard

          I have no problem with vigorous pursuit of the guilty but their victims need help too. Let’s do both.

    2. Mark P.

      “Citi,Wells, BAC & JPM are the new GSE’s as they capture half the profit of all loans being underwritten and delivered to Fanne & Freddie

      “So ultimately we need to destroy Fannie & Freddie.”

      No. We need to destroy Citi, Wells Fargo, BAC and JPM as those monsters are currently constituted. Destroying Fannie and Freddie on the way there would only be a means to that end.

    1. Yves Smith Post author

      One city does not represent the nation. You know better. And the Denver market is not as strong as this article suggests. SomeoneI know in Denver who has a lovely home and bought before the bubble is still unwilling to sell. There are a lot of shadow sellers, as well as shadow inventory (foreclosures in process that have not turned into REOs).

      In addition, in case you forgot, spring arrived early. People tend to start looking when the weather gets nice. There has been discussion that a lot of year to year comparisons, primarily retail sales and home sales, will be distorted by the unusually warm February and March, that they will later to be found to just have moved activity forward.

      1. Breton

        All you say is accurate, Yves.

        I “posted” this as an example of the Hope and Change School of RE cheerleaders.

        Was sent to me by a friend who is a remnant Boutique Snall Home Builder who has survived on discounted(almost FREE) Lots from FOREST CITY and subsidized Financing from an element of Denver Housing Authority

        The area mentioned in the Article is an anomaly; I know, I own one of the best Retail Centers in the area (and have for 12 years)
        Activity picks up but at what costs or for what reason, no one knows!


        1. Doug Terpstra

          I’m glad you qualified the link. It reads like a NAR article. Funny that it never mentions the percentage of all cash investor sales nor the reasons for eerily low inventory. In Phoenix, investor sales are back to 33% (last seen in 2005, though at much lower total volume).

          The recurrence of bubble bidding wars is mostly based on contrived scarcity, at least in Phoenix, with a huge overhang of shadow inventory about to get bigger following the fraud amnesty settlement, and as the 40% of non-paying pending foreclosures can no longer be held back for extend and pretend asset values.

          “The Second Foreclosure Tsunami Is Coming, And Is About To Kill Any Hopes Of A ‘Housing Bottom'”

          So, banksters are sitting on defaulted loans (and strip-mined houses) so that they can book fantasy capital assets (they can hang onto these for years and continue booking them at bubble values); they’ve temporarily slowed the fraudclosure mills pending blanket amnesty for forgery and perjury, now secured; and Fannie is starting bulk auctions to hegdehog vulture capitalists to create plantation housing rentals.

          From Dr. Housing Bubble, shadow inventory is right at the 8 million mark as reported here at NC. We ain’t seen nuthin’ yet; housing is far from the bottom.

          “The monster lurking in the shadow inventory – 12 million Americans underwater with nearly 6 million delinquent or in foreclosure with their mortgages. The hidden benefit of not paying your mortgage.”

        2. Anonymous Jones

          Seriously! There are no “risks to the upside” that we could possibly be missing. Any shred of evidence from any corner of the country that anything positive could ever come from the cesspool of corruption in this country (even though it’s hardly any different than it really ever has been, unless you were either naive or inexperienced before) is obviously false.

          I mean, it could not be more “obvious” that anything that seems positive can easily be dismissed as juked stats or otherwise distinguished on the basis of early springs, etc.

          By the way, I can’t wait for the Mr. Market stories to come back. It’s been so long. I guess it has nothing to do with Mr. Market being “happy”; it must just be random coincidence that we never hear about him anymore.

          [N.B. I can’t stand people who are always positive and are never willing to see the manifold risks to the downside that are inherent in any particular thing. I’d never much thought about the opposite scenario, but I’m finding my distaste for it grow as it has become such a relentless force on this site over the past few months. And this is coming from someone who was almost shouting “housing bubble(!)” in 2005-2007 and still has the general impression that the NASDAQ is 50% overvalued. Whatever, I guess it’s time to decamp with so many of the others. I know it shouldn’t, but it saddens me.]

          1. Yves Smith Post author

            Ahem, to chastise this blog for trying to act as a dose of reality in contrast to the relentless cheerleading from the Administration and media seems a bit churlish. The people putting happy faces on the news are far more numerous and persistent than we are.

  8. Rehabber

    5 points over gov’t subsidized fannie rates is “greedy”? So a fixed rate 15 yr term mortgage at 8.5% is “greedy” when real inflation is 10%+ per year? With that attitude, the “fixers” get what they deserve from the gov’t supported mortgage mill.

  9. Herman Sniffles

    “(one investor said he’d lend at a 5% premium to Fannie and Freddie rates. He’s greedy, so let’s reduce that by 50%. That’s still a deal-killer for most prospective buyers).”

    Now let’s see here. F&F rates are about 4%. Add half of a 5% premium (2 1/2%) and you’ve got a fixed 30 year loan at 6 1/2%. Deal killer? Hogwash.

    1. Yves Smith Post author

      Did you bother running a mortgage calculator? The 6.5% mortgage results in payments on a 30 year fixed that are nearly 1/3 higher. Most people (particularly first time buyers) stretch to buy a home. 1/3 more means a lot less house for the same mortgage balance. Most people do see that as a deal killer.

      1. Rehabber

        And that makes housing more expensive than it should be. Remove the FDR era gov’t support, and housing prices come into line with real consumer purchasing power.

        1. Yves Smith Post author

          If this was universally true re access to mortgage finance, yes, But government-subsidized loans are not going away. So having to pay a serious premium to government guaranteed rates puts those bidders at a major disadvantage.

  10. Jay

    When one person steals, it’s the person. When a thousand people steal, it’s the structure.

    Unfortunately, when it’s the structure, you usually have to get rid of the people too. They’ve internalized the structure, gotten used to its rules, and will recreate it if they have the chance.

  11. beowulf

    “We now have a housing finance market that is almost totally on government life support.”

    I don’t think anything’s going to happen until banks return to mark to market accounting (wasn’t the post-08 nostalgia-based accounting only supposed to be temporary?). That isn’t happening anytime soon but even then, housing finance is as unlikely to come off off govt life support as the Boy in the Plastic Bubble going outside to play catch with Mike Brady.

    I don’t see any way to un-wreck the train short of Congress shifting from loan guarantees to a mortgage equivalent of the Federal Direct Student Loan Program. The budgetary cost of bad Student Loans was cut by 90% once Uncle Sam started collecting all the interest in addition to all losses. For mortgages, a direct loan program gives the govt a tool to cut the deficit with interest income and/or raise home prices by unilaterally lowering interest rate (capitalization and all that). Of course not a single one of the bank lobbyists that brought so much serenity to Stoller’s life will like that.

    1. bluntobj

      Federal student loans are a large part of why the cost of education has skyrocketed. Credit inflation in this sector was around long before the “for profit” universities were in the vogue. Credit inflation begets the massive debt bubble in education.

      Health insurance programs of all types, and medicare and medicaid play a huge role here, act as credit inflation on the healthcare market, and begets the massive bubble in healthcare.

      The same happened in the housing market when the originators of mortgage debt could sell off the risk, and had no concern about what happened on the back end.

      Allowing the Federal Government to directly make mortgage loans is simply an attempt to re-inflate the bubble, but with the added nightmare of bureaucracy added in.

      I opine that risk avoidance is the prime culprit in all of these. Health insurance, school loans, and federally insured mortgages are all risk shifting mechanisms, and leave the originator (the school, the healthcare user, or the banker) far less exposed to their immediate, middle, or long term actions.

      Cash basis in all things is going to be the only way to avoid the mass risk and money transfer we have now. Yes, there will be immediate suffering and inequality for some. Conversely, how is generalized suffering and inequality for all but the 1% better?

      1. Ranch Mold

        Another difference with edu and housing, is that housing exploded in price, edu went up, but not as much as deregulated “tulip hysteria” housing. Prices are insane still.

        1. bluntobj

          Another difference: Tuition is still rising. Credit is still very much available. The bubble has not popped.

          Another difference: You can never default or walk away from student loan debt.

          Student loans are more pernicious than mortgages.

          1. Johnny Mers Burlington

            Yes you can default on student loans, alternatively you can leave the country. Royalty set up prisons, not physical jails yet, but because they own the legislature via lobby n’ bribe they basically were able to rewrite and overturn anything that could keep people out of debt hell. It’s not at all ironic major changes were written into the Bankruptcy code during the height of the housing loot festival. Many bastard regulators let it happen, now they pull big money at nearby lawfirms. Fucking crooks.

          2. Yves Smith Post author


            Please do some research. Student loan defaulters get their wages garnished. There is no escape. And have you tried leaving the country? Becoming an expat is not trivial, most foreign countries where American want to live do due diligence and look for a reasonable net worth or other attributes they consider positive

          3. Johnny Mers Burlington

            [reply to yves]
            Default doesn’t mean escape. Yes, negative consequences.
            The point is – we need to change the way things are, agree?

      2. different clue

        Isn’t another part of the rising price of colleges, especially state and community colleges, due to several decades of steady reduction of state-taxpayer-funded support
        to those state universities and colleges and community colleges? As taxpayer money was withheld from them, they were left to make up the difference by raising tuition as tax support dropped. Am I wrong about that?

        Perhaps that created the funding-difference vacuum first which was then filled after-the-fact by increased lending to students who had to borrow to meet the tuition prices which were raised to make up for ever-reduced taxpayer support to those colleges? Perhaps that vacuum was created on purpose to among-other-things stop so many people from going to college by pricing them out of college? So as to restore an upper-middle-class-and-above monopoly-privilege on access to college?

  12. bluntobj

    “Some of this is ideological (they hate lower income people)”

    Red Card.

    Generalized false statement that besmirches an otherwise compelling analysis.

    “The Democrats are much more eager to Do Something but Obama is keen to cut the deficit.”

    I’d like to link a Jpeg of the O RLY owl here. Let’s not cheerlead for a government that has been captured entirely by the plutocratic elite. The president is not “keen” to cut the deficit, and Democrats are not “eager” to Do Something. These fictional memes are easy to propagate through willing media and ideological consumers. The near daily revelations of the favors and money flowing to the elite donors and corporations out of an ostensibly “99% friendly” administration make it hard to drink that kool-aid.

    On the other side:

    I shake my head at all the republicans who are going to vote for Romney. The dollar amounts of the largess flowing out of the government will simply have some different names on them if he is elected, and the banksters will have control under either situation.


    Why is it that the Sports Team framing of the political playfield cannot be shaken off? The public and media focus on the actions on the field, and not once look into the owners box. Both teams have owners, and those owners are raking in the cheddar. They may often be the same owners. After all, if you own both teams then it’s entertainment. Good entertainment needs drama and conflict. All the owners need to do is stage the arena and ensure the players are polarized and fanatic; then the owners are walking away with all the money.

  13. reslez

    Red Card.

    If it looks like a duck, walks like a duck, quacks like a duck, has duck children, and enacts duck legislation with its rented duck representatives in Congress, IT’S A FREAKING DUCK.

    Obviously nobody admits they hate poor people. Frequently they don’t even admit it to themselves. (Self deception is how you get sociopathic behavior from non-sociopaths.) At any rate, there is zero functional difference so Yves’ observation remains completely valid.

    Let’s not cheerlead

    That wasn’t cheerleading. You appear to be one of those driveby commenters who make assumptions that blind them to whatever has been actually said.

    Obama is extremely keen to appear to cut the deficit, but only if it is done on the backs of the poor and middle class (because this is “responsible”) and only because it will free up additional cash to be funneled to his Wall Street contributors. He wants to neutralize Republican criticisms. He wants to be Deeply Serious. Of course Republicans will criticize him no matter what he does. This is how they differentiate the brand.

    As for Democrats, they are slightly more likely than Republicans to want to Do Something to help the housing situation, but mostly this is an exercise in brand differentiation…

    1. roaring mouse

      Why would the elites hate the poor when they are so useful? For starvation wages, they can clean my McMansion, pick my kids up from school, and iron my underwear.

    2. bluntobj



      Red Card to you. Generalizing statements like “XXXX group hates XXXX group because of XXXXX characteristic” is not a rational statement. It is opinion, which we all are allowed to have, not a fact. As such, I flagged it as unworthy of the otherwise excellent analysis.

      “That wasn’t cheerleading. You appear to be one of those driveby commenters who make assumptions that blind them to whatever has been actually said.”

      Thanks for making the assumption.

      “Obama is extremely keen to appear to cut the deficit, but only if it is done on the backs of the poor and middle class”

      That’s not what Yves said. I think you may be making assumptions about what she means. I’m simply taking her at face value, which was stated in language that was negative to republicans and favorable to democrats. Such is her prerogative. I point out that Dems are equally negative.

      As a last word about eagerness, whose budget has been voted on, and whose budget is desperately being avoided? Eagerness is indeed a cheerleading term, in this context.

      I do like your points on brand differentiation. “Tastes great or less filling” would be appropriate, or the Pepsi Challenge. They’re both light beers, or high fructose colas, marketed as different teams, but not much different.

  14. roaring mouse

    In addition to the points made by the author, US housing prices will continue to be challenged by a mix of 2013 factors, including increasing taxes (Federal, State, local, capital gains, dividends), limited job growth, and limited real wage growth. I chuckle when the MSMers all squawk about how the US housing market is taking off again and how buyers should act today while they still have a chance.

    1. Rcoutme

      Dividends and Capital Gains? Really? You think that housing sales would suffer due to the marginal taxation rate of dividends and capital gains going up?

      I have some nice, red Koolaid for you to drink. Don’t worry about the children who are crying. It’s just because the taste is a little bitter.

  15. financial matters

    High interest rates seem needed for several reasons. They will help get prices of houses down to more reasonable levels in addition to making the loan risk more accurate to the credit worthiness of buyers.

    They will help deflate the stock market and quit robbing from people with fixed income investments and enticing them to invest in riskier instruments.

    It will increase the value of the dollar leading to better wage strength and less commodity inflation.

  16. Crazy Horse

    What do you mean there are no solutions?

    1- Cut the military budget in half. Not ten years from now. Tomorrow. Close all overseas military bases immediately and return them to the occupied countries. Cancel all new weapons contracts. Put all the spare soldiers to work filling potholes and rehabbing coal strip mine disasters.

    2- Put a financial transactions tax in place sufficient to kill the profitability of all high speed trading. Tomorrow.

    3- Place a 100% tax on all unreported derivatives trades. Tax the now-above table derivative profits at the same rate as any other gambling windfall– lets say twice the corporate tax rate.

    3- Start with Clinton-era tax rates for the rich and progress toward the Eisenhower standard.

    re housing.

    1- Spend something like the amount of the military savings fund on a public works rehab project to double the energy efficiency of existing housing and put millions of unemployed construction workers to work.

    2- Require every unoccupied foreclosed house to be subject to immediate homesteading by anyone who doesn’t already own a home. And provide a zero interest long-term loan for its rehab by the public work brigades.

    3- Re-set all loan balances, both private and Fannie/Freddie to reflect current market values and mark them to market on the books of the lenders.

    4- Nationalize all the resultant bankrupt zombie banks and replace them with state chartered publicly owned state banks, funded through a US Central Bank issuing US Dollars.

    5- Drive a stake through the heart of the private Federal Reserve Bank, after first lining up Jamie Dimon and Lloyd Blankfein on top. Burn all the old counterfeit Federal Reserve Notes.

    Might require a few minor tweaks here and there, like instituting the death penalty for moving American corporations offshore, but that’s progress!

    1. F. Beard

      Yes there are solutions and yours would not make things any worse than what they are, I’d bet, because we are far from ideal.

  17. bob

    “As Josh Rosner has said, a home with no equity is a rental with debt)”

    As per other posts here, a house with substatial equity is a target for forclosure. Ring up the fees, suck the equity out, and, if picked correctly, sell the house without a loss.

    Houses with equity, in a stable market, are much more valuable forclosure targets.

  18. Crocodile Chuck

    re: Covered Bonds

    Westpac and Commonwealth here had two issues of these (recently approved by the Federal gov’t & APRA, the regulator). Westpac raised A$3.1 B, to retire ‘AAA’ debt guaranteed by the government from the ’08 crisis. They had to pay a premium-165 bp over the benchmark swap rate for five year term funding.

    Covered bonds’ holders are now senior to depositors, should the issuer encounter financial difficulties.

    1. Yves Smith Post author

      You don’t have crooked servicers in Australia, when the are central to securitizations here. That makes all the difference in the world as far as investors are concerned.

  19. mac

    If banks are “selling” loans for some “investor” in the form of these securitized deals than the bank are just consignment houses. It is not unlike placing an item to be sold by someone for a fee.
    So they maybe should not be allowed to do that and loans should be “sold by “loan consignment houses”, not Banks.
    Why play Lets pretend that the Banks are making loans when they are just selling fotrothers.

  20. falun bong

    Seems to me we continually conflate political goals with investment realities. The government backed home mortgages because of a political calculation that said home ownership was desirable. A nice way to control people and be sure they show up for work each day, make sure they have a huge debt, plus maybe the price might even go up someday. Now it’s received wisdom that home ownership is a good thing. But it’s politi-cultural, the Swiss for example aren’t afflicted and have just 22% home ownership and a pretty prosperous and functional society. Without excess capital mis-allocated to this asset class, however, home prices would only rise with incomes and the replacement costs of materials, 2-3% annually if you’re lucky. Maybe private investors would like those kinds of returns. But government involvement just distorts that price signal and encourages bubbles. Now government and bank coffers are full of bubblicious mortgages, and we’re like a drunk at a party at 2AM, the only way to avoid feeling terrible is to keep drinking.
    The Fed, for its part, also distorts normal market price signals on interest rates. Instead of allowing us the fruits of progress (declining prices and increasing innovation and productivity), the Fed has decided to try and inflate no matter what. This of course helps their two main constituencies, the 1% and the over-indebted government.
    So maybe the right answer is to stop all the meddling? Investors would get transparency, and prices (of houses and credit) could seek their natural levels.

  21. Wendy

    One minor quibble – mortgages over $1 million are definitely not impossible to get. Here in Brownstone Brooklyn the real estate market is positively ON FIRE, lots of sales in the multi-millions, all with large, over-gov’t-limit mortgages. Look up property records for any recent sale on ACRIS, none of them are cash, all have large mortgages – all these buyers are iBankers and consider it anathema to pay cash for this type of purchase, if they had that type of cash to begin with.
    So there is still a private mortgage market out there. They are just not securitizing, apparently.

  22. Very Serious Sam

    The conservative financing structures in Germany, including the covered bonds, did for instance prevent so far a housing bubble in Germany. Not to bad, I’d say, especially if I look at the US, Spain, Ireland…

    Then there are some other major differences. In Germany, you normally must have 20% of the price of the house in cash (by savings or so). Since financing usually doesn’t go beyond 80%.

    Also, you can’t just leave the house with the key on the kitchen table and let the bank deal with it. Because you are liable to serve the mortgage with all and everything you earn and have (minus a few hundred Euro per month for basic needs like food and electricity).

    No, I don’t say everything is fine in Germany! But some rules over here are certainly better for the people than in the Anglo-American finance industry core playing fields.

  23. Paretofp

    Very Serious Sam, the 20% of the value of a mortgage seems like a good rule as it ensures that a bank can recoup their losses. It also prevents shortcuts and loop holes that some property owners use. That said, it also creates a closed market with people renting rather than investing their money in a property, which could be disastrous for banks.

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