Category: housing

Housing recovery?

Over the past year, more and more of the housing pundits, circa 2006, have resurfaced on Bloomberg and CNBC.  Many claim the bottom in housing is in as the US recovery continues due to low interest rates and a healing consumer.  Like any story, the devil is in the details so let’s parse the facts and make our own diagnosis.

Beginning in 2009 the new administration, assisted by the new wards of the state Fannie Mae and Freddie Mac (thank you Hank Paulson), began a series of mortgage moratoriums -aka “mortgage modifications.”  Essentially, the government would entertain a variety of mortgage defaults/delinquency cases with the intention of keeping bodies in their homes.  Can’t let the home ownership (or should I say “lease”) program go to waste now.  Since then we note the following facts provided by housing analyst Mark Hanson:

Mods are greater in number by 50% than legacy Sub prime loans in 2006. And they are worse in structure.

– There have been 9.953 MILLION loans “tampered with” through trials, mods and workouts based on OTS data through Q4 2012.  

– Bank “proprietary” Alt-A, high-risk mods outnumber HAMP (Home affordable modification program) mods by over 200%.   Banks have had a field day re-leveraging millions of bad loans into structures that would make Angelo Mozillo blush.  

– Mods are why banks brought back $10s of billions in loan loss reserves as revenue. And why they will have to add back reserves.  

– Mods are where all that housing “supply” went.

– Mods are why foreclosures are at pre-crisis lows.

– Mods turn people into underwater, over-levered renters of their own house.

– Mods prevent the deleveraging process needed for housing to achieve a “durable” recovery with “escape velocity”. 

– Mods compete fiercely with all those new-era buy and rent “investors” (Blackrock, Och-Ziff, Tom Barrack) whose top demand theme when raising opportunity capital a couple of years ago was all of the “millions of homeowners displaced through foreclosure who will need a place to rent until they can buy again”. 

If you look at mods structurally — sky-high DTI, LTV, CLTV and low credit score — they make legacy Subprime loans look sane.  People say “banks aren’t lending”. I say ‘go look at their loan mods volume’.  Loan mods are nothing more than low rate, exotic refi’s for people who can’t do a traditional refi. But they are so exotic they make Pay Option ARMs look structurally sound.  

To put this in context there were only about 4 million legacy Sub-prime loans in existence in 2007 when the wheels came off the sector spurred by the ‘Sub-prime Implosion”.

– Four million Sub-prime loans ignited the mortgage meltdown. So, six million or more ‘worse-than-Sub-prime’ loans hanging over housings’, banks’, and MBS investors’ heads probably isn’t a great thing. 

-HAMP mod redefaults are surging…but banks and servicers have been making much more risky “proprietary” mods than HAMP in much larger volume.   Thus, expect redefaults across ALL loan mods to increase significantly over the next year.  Obviously, this means more distressed supply and for many banks this could mean higher loan loss reserves, etc.  See picture below:

My Comment: So one should ask the question “How long can the government continue to hide inventory from the public”?  Or as importantly, since the public bailed out the banks shouldn’t they be entitled to purchase homes at reasonable price levels, not the artificially inflated kind?

Minyanville: Long term view of housing says sell

Lee Adler has put together a piece on the housing “recovery” over at Minyanville that highlights several disconcerting statistical trends related to the housing and labor markets. Below is a brief synopsis of that piece as well as some of the most telling charts:

  • As of 4Q 2010, 6.1 million vacant housing units available for rent or sale in the US
  • Another 3.6 million were held off the market (likely as bank REOs)
  • This shadow inventory could be released onto the market at any time
  • Together, 9.7 million vacant units
  • NY Fed estimates 4.5% of all 100 million US mortgages are “seriously delinquent”
  • This is an additional 4.5 million units that could be shadow inventory, bringing total available housing inventory to 14.2 million
  • Absorption rate of rental units has averaged 600,000 since 2006 and is tied to employment; even generous employment growth assumptions and a 1 million unit annual absorption rate means there is a 9.7 year supply of housing units on the market, not including the 4.5 million seriously delinquent mortgages

Some telling charts to accompany this data:

For the full story, please consult the rest of the article by Lee Adler, linked to above.

Paulson’s gift to the bears

It’s official: The U.S. economy is headed for its worst recession in three decades. Henry Paulson’s scheme to keep Fannie Mae and Freddie Mac on government life support and bail out its creditors (i.e. Wall Street, Big Banks, and Bill Gross at PIMCO) removes any doubt. The only question remaining: Will this downturn rival the Big Kahuna of the 1930s?

Paulson was interviewed today on Bloomberg. Here is the money quote:

“No one likes to put the taxpayer into situations like this. No one does; I certainly don’t. Government intervention is not something I came down here wanting to espouse, but it sure is better than the alternative.”

The alternative, of course, is that Paulson’s friends are actually forced to take huge losses on their reckless, ill-fated loans to Fannie and Freddie. Unthinkable! Paulson assures the naïve interviewer that the taxpayer will come before the shareholder, forgetting to mention the shareholder has already been wiped out, putting the taxpayer last in line behind the creditors. Under Hanky Pank’s scheme, the taxpayer is simply the bagholder of last resort. Paulson was obviously a quick study under former Goldman Sachs CEO and Treasury Secretary, “Mr. Bailout” himself, Robert Rubin.

The initial reaction of the stock market was to celebrate with a 300 point rally in the DJIA. Our guess is the euphoria will fade quickly as investors realize bailout money does not grow on trees, and the cash will either be taxed, borrowed or printed. The only question: How much will the final tab run?

The more pressing concern, however, is the economy. This economy needs to break its addiction to cheap credit, remove the waste of the previous credit binge, shed its political parasites (e.g., friends of Hank), and rebuild on a solid foundation. Every intervention prolongs the process and deepens the malaise. A wholesale government takeover of the mortgage market virtually guarantees the economy will be mired in deep recession for years.

The only winners (besides whiners like Bill Gross)? Those who are short the market.

Note to self: Move those inflation hedges from the attic to the front hall closet.

GSE bailout bill may cost taxpayer over $1 trillion

When President Bush named Hank Paulson treasury secretary several years ago the media welcomed the free market supporter with open arms. Today we see the man’s true colors as both he and Bush have now capitulated by endorsing the most recent GSE bailout bill potentially costing you and I over $1 trillion!

The reversal upends admonitions Bush made starting almost a year ago. “A federal bailout of lenders would only encourage a recurrence of the problem,” Bush said Aug. 31, 2007. No way, he said May 6, would he allow “a costly bailout for lenders and speculators.” The warning was repeated several times this month.

Enactment constitutes “a very important message that we are sending to investors around the world” that would play a key role in “turning the corner” on the housing crisis, Paulson told reporters. “This is about not only our housing markets, but it’s about our capital markets more broadly,” Paulson, 62, said today in a Bloomberg Television interview. “This goes well beyond the two institutions — Fannie and Freddie — it has to do with investors in the United States and investors all over the world.”

In detail the bill added over 700 pages in the past 24 hours, which included several shocking inclusions:

– Fannie Mae and Freddie Mac already own $6.9 billion of foreclosed homes. Almost as much property as the entire rest of the other 8,500 commercial banks – combined.

– Assuming the default rate stops rising immediately, it’s likely that around 10% of Fannie and Freddie’s owned and guaranteed mortgages will end up in foreclosure. Assuming a 50% recovery rate, that’s a $250 billion loss.

– $2.5B line of credit to the Treasury (Fannie & Freddie) is “open-ended”

– Unlimited– Treasury now allowed to buy all ‘F & F’ housing securities

– Congress no longer involved in appropriating funds (Treasury now does)

– New housing trust fund totalling $500-700 billion which resembles a similar proposal submitted by Bank of America months ago.

– No changes in existing GSE model

– Ultimate cost to US taxpayer $1.1 trillion according to S&P

My Comments: The ongoing intervention comes as no surprise yet this bill all but guarantees a nationalization in residential lending. Equity holders and taxpayers will bear the cost while Wall Street benefits. Have the US citizens learned anything from government intervention?

Fannie Mae losses spike

Fannie Mae reported earnings this morning where losses exceeded street estimates by a wide margin.

The first-quarter net loss was $2.57 a share, Fannie Mae said in a statement today. Analysts were anticipating a loss of 64 cents, the average of 12 estimates from a Bloomberg survey.

Based on comments from several analysts many predict losses will actually increase going forward as home price decline estimates were raised for the second time in 4 months today.

Fannie Mae told analysts to expect bigger credit losses in 2009 and said it sees U.S. home prices falling 7 percent to 9 percent this year, up from its previous estimate of 5 percent to 7 percent. Executives see U.S. home prices eventually tumbling by an average of as much as 19 percent before starting to recover.

“There are certain things that we can’t control, like home prices and the overall condition of the economy, and until they improve, they will be a drag on our old book,” Chief Business Operator Rob Levin told analysts during a conference call today. `

`They are now starting to realize the fact that their credit losses will be considerably higher than they were in 2007,” said Ajay Rajadhyaksha, head of fixed-income strategy for Barclays Capital, who is based in New York. “Things in the housing and credit markets are deteriorating very fast.”

Of course none of this matters to OFHEO, the regulatory body for the government sponsored entities, as they lowered capital requirements from 20% to 15% today, assuming Fannie can raise another $6 billion in fresh capital.

Office of Federal Housing Enterprise Oversight said it will lower surplus capital requirements to 15 percent from 20 percent to allow the company to buy and guarantee more mortgages, its biggest source of profit.

Wouldn’t it be prudent to raise capital requirements for the GSEs since balance sheets are actually becoming more precarious?

Fannie Mae boosted estimates for credit losses this year to a range of 13 basis points to 17 basis points, up from a range of 11 basis points to 15 basis points. Every basis point, or 0.01 percentage point, is equivalent to 15 cents of earnings a share, according to Morgan Stanley analysts.

The fair value of assets dropped to $12.2 billion last quarter from $35.8 billion in December. Shareholder equity, which measures how much money would be left to stockholders after Fannie Mae pays all its bills, dropped to less than zero for common stockholders for the first time in at least 15 years, from $20.5 billion in the fourth quarter.

Fannie Mae listed $56.1 billion in so-called Level 3 assets, a category which indicates the holdings are so illiquid that they can only be priced using the firm’s own valuation models.

My Comments: So the playbook is now readily apparent for the mortgage fiasco conclusion: Fannie, Freddie and the FHLB will continue to soak up most of the $12 trillion mortgage market while shareholders will be left holding the bag. Another successful mission for the interventionists.

St. Valentine’s day massacre

Latest figures out of the Mortgage Bankers Asscociation clearly rang the alarm bells this week on Capital Hill.

The Mortgage Bankers Association says default rates on all outstanding home loans in the US have reached 7.3%, the highest level since modern records began in the 1970s.
The default rate in America’s ‘prime’ mortgage market has hit a record 4%, prompting fears of house prices crashing by 25%. Arrears on “prime” mortgages have reached a record 4%, confounding expectations that middle-class Americans with good credit records would be able to weather the storm.
While sub-prime and close kin “Alt A” total $2,000bn of debt, the prime market in all its forms is roughly $8,000bn. If prime default rates rise on their current trajectory, they could ultimately cause huge financial damage.

Across the pond our friends in Switzerland were obviously drinking excess mortgage koolaid circa 2002-2006:

UBS reported a fourth-quarter net loss of 12.45 billion Swiss francs ($11.23 billion), including a $13.7 billion write-down on investments tied to U.S. mortgage investments. The bank posted its first full-year net loss — 4.4 billion francs — in the 10 years since it emerged from a megamerger between Swiss Bank Corp. and Union Bank of Switzerland in 1997. Write-downs for 2007 were $18.4 billion.
For the first time, UBS provided details of nearly $70 billion in holdings of subprime-mortgage and other problematic securities — an exposure that led analysts to predict more trouble.

Finally, as Rome continues to burn the noise on Capital Hill sounds more and more like a coordinated bailout is in the works:

Bank of America Corp., Citigroup Inc. and four other U.S. lenders will announce steps today to help borrowers in danger of default stay in their homes, according to three people familiar with the plans.

Encouraged by Treasury Secretary Henry Paulson, the banks will offer a 30-day freeze on foreclosures while loan modifications are considered, two people said on condition of anonymity. The initiative, which follows a week of talks with Bush administration officials, will apply to customers who are at least three months late on payments and include prime borrowers, as well as those with poorer credit histories.

Make sure the Swiss are included in the bailout mission.

The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.

One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers.
Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policy makers to discuss the proposal. The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss.

My comments: Record mortgage defaults of prime residential mortgages will continue to impede commercial bank lending for many quarters to come. And to think most analysts and money managers believed the fiduciaries back in December when they echoed “the worst is behind us”. Fool me once shame on you, fool me twice shame on me.

Foreclosures almost double in October

US foreclosures continue to increase primarily due to ARM resets. As mentioned in earlier posts the ARM increases will peak over the next several quarters so additional pressures on housing should persist.

Bank repossessions increased 35 percent, providing “evidence that more homeowners who enter foreclosure are losing their homes,” James Saccacio, chief executive officer of RealtyTrac, said in a statement. The Irvine, California-based seller of foreclosure data has a database of more than 1 million U.S. properties.

Foreclosures are adding to an 11-month supply of unsold homes, the highest in more than eight years, in the worst U.S. housing slump in 16 years. The declines in home sales and prices have raised concerns consumer spending may drop and push the world’s biggest economy into recession.

Existing home sales fell to the lowest annual rate since 1999 while home prices declined in the third quarter. The decline in home prices was the first since 1994 as a combination of foreclosures and ongoing mortgage tightening impact the consumer. Home delinquencies have risen to a five-year high and 40 percent of U.S. lenders have raised their standards on mortgages for prime borrowers, their most creditworthy customers, according to Federal Reserve data.

My comments: Expect home equity withdrawals to contract significantly as collateral values decline in 2008. Since the consumer is 70% of the economy is it fair to say a recession is upon us?

Fannie Mae on life support

Several weeks ago Fed Chairman Ben Bernanke floated the idea of allowing Fannie and Freddie to temporarily lift loan limits with the assistance of the US taxpayer, I mean government. Charles Schumer of course took to this like a horse to water and immediately worked on a bill to stem foreclosures. Since that time, the ever so punctual Fannie Mae corporation finally filed quarterly financials using some past accounting from ex CEO Franklin Raines. According to a recent Fortune article written by our friend Peter Eavis, Fannie has quietly changed the way they compute their credit loss ratio or the number of bad loans as percentage of total.

In August, Fannie Mae predicted its credit loss ratio would be 0.04-0.06 of a percentage point for all of 2007. A range of four to six basis points may not sound like a big deal for an institution involved in mortgages, but for Fannie Mae it is the norm. What matters is if Fannie Mae goes above that range. And Fannie Mae appears to have already done that this year.

Last week, as part of its earnings report, Fannie Mae revealed that the company had changed the way it calculates the credit loss ratio. Under the new method, Fannie Mae’s annualized credit loss ratio was just 4 basis points in the first nine months of the year.

So what would have happened if the company had compared apples to apples — and stuck with the old method of calculating its loss ratio? Under the previous method, Fannie Mae would have been well outside of its range. The company would have reported an annualized loss ratio of 7.5 basis points in the first nine months of this year.

Management acknowledges that credit losses are mounting. During an analyst call last week, Fannie Mae CEO Daniel Mudd warned that the company’s loss ratio could rise to eight to 10 basis points in 2008, due to a worsening housing market. It’s not clear whether that forecast is based on the old or new methodology.

Ominous signs of the house of cards built by former CEO Franklin Raines?

The company may already be exceeding that 2008 guidance. Based on the old methodology for calculating the loss ratio for the third-quarter alone, the company’s annualized loss ratio is already at 14 basis points.

So what could a soaring loss ratio mean for Fannie Mae? Consider these numbers: At Sept. 30, Fannie Mae had exposure to $74 billion of loans with a FICO credit score below 620. Loans scored below 620 are generally classified as subprime. In addition, Fannie Mae has exposure to $196 billion of Alt-A mortgages, home loans for which the borrower doesn’t have to submit complete documentation for basic criteria like income. At the same time, Fannie Mae has only $40 billion of capital.

My comments: This week Deutsche Bank analyst Mike Mayo estimated a default rate of 30-40% and a loss rate of 40-50% on subprime mortgages. Using the midpoint of both ranges, this implies a realized loss rate of 15.75% of principal (0.35 x 0.45). If Mayo is accurate the subprime/Alt-A exposure alone wipes out Fannie Mae’s equity.

Bernanke floats jumbo loan trial balloon

Today on Capital Hill Federal Reserve Chairman Benjamin Bernanke suggested the US government may want to work with GSEs in alleviating jumbo mortgage market bottlenecks.

As an alternative to lifting that $417,000 cap, Mr. Bernanke offered a surprise answer to questions on Capitol Hill. He suggested that Congress could consider allowing the companies, known as “government sponsored enterprises,” buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investors.

“That would be, I think, of some assistance to the mortgage market,” the Fed chairman said. “From the federal government’s point of view, it would be taking on some credit risk, which you may or may not be willing to do.” He added, “It would be a good idea to make the GSEs ultimately responsible for some, any excess losses, or some part of excess losses, relative to the premiums that are paid.”

My Comments: The desperation continues to unfold as this Summers credit crunch morphs into crisis mode. Several weeks back President Bush assured investors the US government would not bail out the mortgage market while today’s comments from Gentle Ben suggest otherwise.

Lenders of last resort

Since the implosion of asset backed commercial paper market 11 weeks ago lenders have implemented contingency plans for future funding requirements. According to a recent Bloomberg article, the 12 regional Federal Home Loan Banks came to the rescue as other government sponsored agencies moved to the background.

Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.

Of course the funding was subsidized by the American taxpayer…

To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September, according to the FHLBs’ Office of Finance. The sales pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009.

The government is “taking a lot of risks through the Federal Home Loan Banks that are unnecessary,” according to Peter Wallison, a fellow at the American Enterprise Institute, a Washington-based organization that analyzes public policy, and general counsel at the Treasury Department from 1981 until 1985.

More moral hazard?

A loss of confidence in the companies could prompt investors to dump FHLB debt, potentially causing the collapse of one or more banks, according to Wallison and lawmakers including Representative Richard Baker of Louisiana. If others were unable to meet the liabilities, taxpayers would be on the hook, they said.

U.S. lawmakers need to ensure “the institutions don’t blow up in the taxpayer’s face,” Representative Christopher Shays of Connecticut, a Republican on the House Financial Services Committee that is responsible for oversight of the system, said in an interview.

My comments: Where will the marginal mortgage companies go for future funding since all government entities have hit a wall? Looks like Bernanke will be fielding lots of phone calls this holiday season.

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