Posts Tagged ‘FHLMC’
Housing — and today’s WSJ
The front page of the Wall Street Journal today is plastered with the story of the continued problems with house prices, courtesy of info from the S&P-Case Shiller Index. I’ve commented on this several times before in this blog, but it bears further investigation.
Prior post-WWII real estate recessions (if we can call them that) have been quickly self-correcting. Stagnation in house prices lead to increased investment, as buyers look for deals and bankers need to make loans. As such, real estate recessions rarely have actual price declines, but instead are marked with volume slow-downs or price stagnation.
This recession is very different. Bankers are highly reluctant to make loans, in stark contrast to prior recession-exits. Regulatory problems, lack of bank capital, a doubling of REO portfolios, lack of cash from retail buyers, and a real fear (by both bankers and buyers) that collateral values will continue to decline puts the market in a continued downward spiral. To make matters worse, since many owner/sellers (particularly the most fragile ones — in the “zero down payment” starter homes) are themselves faced with economic travail and often the need to move to find work, the potential for further foreclosures down-the-road is very real, thus further driving down prices. Add to this the fact that a very big chuck of the U.S. economy is housing-related (contractors, developers, bankers, realtors, and many other intermediaries), it’s easy to see that a sustainable jobs market is hard to envision without “fixing” the housing problem.
We can re-examine the causes of this crisis over and over, but very few analysts are focused on the cure. Pilots are taught that when airplanes stall and go into a spin or a downward spiral, after “pulling the power” the pilot has to do something that’s rather counter-intuitive: point the nose downward and actually fly INTO the stall to get out of it. It’s like steering a car INTO the skid on an icy road. It’s very counter-intuitive, but it’s necessary. (The “black box” — it’s actually orange — recently recovered from the Air France 447 crash showed that the two very junior co-pilots who were at the controls when the plane went into a stall tried to pull BACK on the stick, when they should have pushed FORWARD. If they’d thought back to “Flying 101” they might be alive today.)
The “thing missing” from today’s market is the national policy in favor of affordable housing, which was manifested through Fannie-Mae and Freddie-Mac. Pulling the plug on the secondary market (which was at the core of the housing bubble) basically took our financial markets out of the housing business. Now that the price-bubble has bursts, our financial markets need to step back up to the plate and provide some liquidity. Admittedly, a “fixed” market will need to provide better risk-measures and possibly some hedging tools, but these are details that can be worked out once we get the plane flying again. I hate to say this — I’m generally a “free-market” kinda libertarian guy — but the government will need to step up to the plate as a guarantor of last resort…. and yes, I know the U.S. government is effectively broke. However, until it gets the housing market back on its feet, it’s going to stay broke. At some point, they need to steer the car into the skid.
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The death of the fixed rate mortgage
It might also be called the “death of the easy mortgage”, and will almost certainly be the death of the small-town lender….
The Obama Administration today outlined the broad-stroke strategy for dealing with Fannie Mae and Freddie Mac. They suggest three solutions, all of which basically call for a multi-year wind-down of the two troubled institutions, which have cost taxpayers about $150 Billion in recent years to bail out.
How we got this way has been covered in thousands of articles, blog posts, and even text books. FNMA and FHLMC were set up to provide liquidity to small mortgage lenders (primarily, small-town S&L’s, of which there aren’t many now-a-days). A small-town S&L had a fairly finite pool of deposits, and once they made a few home loans (which were very long in duration), they simply couldn’t loan anymore until those mortgages were paid-off. Worse still, in times of rapidly changing interest rates, low-rate, fixed-rate mortgages didn’t get paid off, but depositors ran for higher-rate money funds. S&L’s were caught in a liquidity trap, and crisis after crisis ensued.
Today, of course, the mortgage lending business is filled with several thosand-pound gorillas with names like Wells Fargo, BofA, and JPMorgan/Chase. These institutions have the muscle to package mortgage pools and sell them off to investors. Why, then, do we have/need FNMA and FHLMC?
Congress is firmly on the hook for this one. Over the past decade and a half, the F’s were encouraged by Congress to morph into investors of last resort for mortgages that the securities market didn’t want. (It was actually a lot more complicated than that, but you get the general picture, right?) Why didn’t the private sector want these mortgages? Because they knew eventually many of them would go bad — and they did. Congress essentially got what it wanted, a subsidy of home ownership which, unfortunately, wasn’t sustainable.
This deal isn’t done yet, of course. Wait for the long-knives to come out from the Realtors and Home Builder’s lobbies. The current proposal would privatize all housing lending with the exception of FHA/VA lending. To put this in a bit of perspective, today, FHA loans constitute over 50% of housing lending. Back in the “hey-day” of the liquidity run-up, FHA loans were down around 4%. Without the F’s, we’re looking at a privatized mortgage market not far different from what we see out there right now, and that’s fairly unsustainable for the homebuilding industry.
From a small northwestern observatory... 